Bitcoin and Crypto Technical Analysis For Beginners

Crypto traders have several tools to assess the cryptocurrency market. One of them is an approach known as Technical Analysis. Using this method, traders can gain a better understanding of the market sentiment and isolate significant trends in the market. This data can be used to make more educated predictions and wiser trades.

Technical analysis considers the history of a coin with price charts and trading volumes, no matter what the coin or project is doing. Unlike technical analysis, fundamental analysis is more focused on determining whether a coin is overvalued or undervalued.

To get a better idea of ​​technical analysis, it is essential to understand the fundamental ideas of Dow theory on which technical analysis is based:

The market takes everything into account in its prices. All existing, past and upcoming details are already integrated into current asset prices. Regarding Bitcoin and crypto, this will consist of multiple variables such as current, past and future demand, and any regulations that affect the crypto market. The existing price is a response to all the current details, which includes the expectations and knowledge of each coin traded in the market. Technicians interpret what the price suggests about market sentiment to make calculated predictions about future prices. Price movement is not random. Rather, they often follow trends, which can be either long-term or short-term. After a trend is formed by a coin, it is likely to follow that trend to counter it. Technicians try to isolate trends and profit from them using technical analysis. ‘What’ is more important than ‘Why’. Technicians are more focused on the price of a coin than every variable that causes a movement in its price. Although various aspects could have influenced the price of a coin to move in a particular direction, Technicians review supply and demand assertively. History tends to repeat itself. It is possible to predict market psychology. Traders sometimes respond in the same way when presented with similar stimuli.

Trend lines

Trendlines, or the typical direction a coin is moving, can be most beneficial to traders of crypto. That said, isolating these trends can be easier said than done. Crypto assets can be significantly volatile, and looking at a Bitcoin or crypto price movement chart is likely to reveal a variety of highs and lows that form a linear pattern. With this in mind, technicians understand that they can overlook volatility and find an uptrend when they see a series of higher highs, and conversely – they can identify a downtrend when they see a series of lower lows.

Additionally, there are trends that move sideways, and in these cases a coin does not move significantly in either direction. Traders should note that trends come in many forms, including intermediate, long-term, and short-term trend lines.

Important tip: you must be accurate when drawing these trend lines! How to do it perfectly? As you move over each candle, you will see its lowest price marked as “L” in the top bar (or the highest price, “H” if the line’s direction is down). Now place your line exactly there. Then roughly extend the line, as it touches the next candle in the trend line, do the same – watch exactly the “L” for that candle. Now fix your rule. Last step is to automatically extend the line using line’s Settings – Line Extend to desired side (probably right). This explanation was for Coinigy charts, but should work well with other charting apps.

Resistance and support levels

As there are trend lines, there are also horizontal lines that express levels of support and resistance. By identifying the values ​​of these levels, we can draw conclusions about the current supply and demand of the coin. At a support level, there appears to be a significant amount of traders willing to buy the coin (high demand), that is, those traders believe that the currency is underpriced at this level and will therefore seek to sell it for sale at that. price. Once the coin reaches near that level, a “floor” of buyers is created. The large demand usually stops the decline and sometimes even changes the momentum to an uptrend. A resistance level is the exact opposite – an area where many sellers are patiently waiting with their orders, forming a large supply zone. Every time the coin approaches that “ceiling” it meets the stock stacks and goes back.

There is often a situation in which there can be trade-offs between support and resistance levels: rally near support lines and sell around the resistance level. This opportunity usually occurs when lateral movement is identified.

So what happens during the breakout of resistance or support level? There is a high probability that this is an indicator that reinforces the existing trend. Further strengthening of the trend is obtained when the resistance level becomes support level, and is tested from above shortly after the breakout.

Note: False breakouts occur when a breakout occurs but the trend does not change. Therefore, we need to use some more indicators, such as trading volume, to identify the trend.

Moving averages

Another technical analysis tool for cryptocurrencies and technical analysis in general, to simplify trend recognition, is called moving averages. A moving average is based on the average price of the coin over a certain period of time. For example, a moving average of a given day will be calculated according to the price of the coin for each of the 20 trading days prior to that day. Connect all moving averages form a line.

It is also important to recognize the exponential moving average (EMA), a moving average that gives more weight in its calculation to the price values ​​of the last few days than the previous days. An example is the calculation coefficient of the last five trading days of EMA 15 days will be twice that of the previous ten days.

In the following chart we can see a practical example: If a 10-day moving average crosses above a 30-day moving average, it can tell us that a positive trend is coming.

Trading volume

Trading volume plays an important role in identifying trends. Significant trends are accompanied by high trading volume, while weak trends are accompanied by low trading volume. When a coin drops, it is advisable to check the volume that accompanied the drop. A long-term trend of healthy growth is accompanied by high volume rises and low volume declines. It is also important to see that volume increases over time. If the volume decreases during uptrends, the uptrend is likely to end, and vice versa during a downtrend.

Not on the technical analysis alone

By using technical analysis, traders can identify trends and market sentiment and they also have the ability to make wiser investment decisions. However, there are a number of key points to consider:

Technical analysis is a practical method that weighs past prices of certain coins and their trading volume. If you are considering entering a trade, it is not recommended that you rely solely on technical analysis. Especially in the field of crypto, a field that often generates news, there are fundamental factors that have a significant impact on the market (such as regulations, ETF certificates, mining hash, etc.). Technical analysis only ignores and cannot predict these factors, therefore the recommendation is to mix the technical analysis and the fundamentals analysis together to make wise investment decisions.

An analyst who makes a decision to buy a particular coin due to fundamental reasons can get technical support or find a good technical entry point, thus enhancing the trade’s ROI.

From theory to implementation: How to initiate and identify trends?

To get started, we need an analysis tool that draws graphs quickly and easily. You can use the existing charts of the crypto exchanges, but they do not provide trend lines and they only provide partial indicators.

TradingView: The famous charting and charting service, with a wide variety of options. Mostly free, except for premium paid features.

Coinigy offers a comprehensive charting service among all trading coins and crypto exchanges. You can register by following this link and get 30 days free trial.

This guide presented the basic concepts in technical analysis under crypto. It is recommended that you deepen your knowledge in the field if you want to implement technology analysis: indicators, Fibonacci levels, patterns (triangles, for example), and more. In our next article you will read about 8 tips for trading crypto. Some touch on the technical aspect.

December 2017 Update: We recently published an advanced guide to crypto-technical analysis.