Understanding Cryptocurrency Technical Analysis

Technical analysis establishes potential trends and patterns in crypto markets, allowing traders to judge how they think the markets will perform.

While there are no certainties, using one of the many technical analysis approaches relies on mathematical indicators that use previous price data to predict the future.

The premise is that markets conform to cyclical or repeating patterns, and a previously established pattern is more likely to repeat itself than to take a new direction.

Traders use these methods to estimate the best time to buy and sell, aiming to maximise profits.

Crypto Technical Analysis Assumptions

Three standard expectations underpin technical analysis, regardless of which technique you use.

Market prices preclude external influences

Traders assume that the market has already discounted the price of a particular crypto token to account for external factors. Token values are taken at face value without further analysis to unpick underlying considerations that could further influence the real-time saleable value of a crypto coin.

Although market movements in isolation may look random, technical analysis presumes that they form part of a broader pattern and prices follow trends. However, the timeframe of that emerging pattern may vary considerably. Nevertheless, future price movements are expected to follow previous directions, whether the activity is positive or negative.

The crypto market moves in a loop

Crypto tokens are expected to perform repetitively, so previous patterns are assumed to represent future changes fairly. Consequently, traders will apply equal significance to older chart patterns as newer results with the anticipation that they will, at some point, repeat.

Crypto Technical Analysis Methods

Cryptocurrency traders use a variety of approaches to perform a technical analysis when making decisions about their position.

Candlestick charts

Candlestick charts display high-level price movement detail, adjusted to show the relevant time frame selected for analysis.

For example, analysis over six hours will display price movements every six hours.

Four price levels are displayed for each interval analysed – the high and low prices and the opening and closing prices.

Each candlestick chart includes a bar with two wicks representing:

  • The peak of the higher wick: high price
  • Tip of the lower wick: the low price
  • Top of a green candlestick body: the closing price
  • Bottom of a green candlestick body: the opening price
  • Top of a red candlestick body: the opening price
  • Bottom of a red candlestick body: the closing price

If the candlestick is red, it indicates that the prices have closed lower than the opening price, and green candlestick charts represent the opposite.

The relative strength index

The relative strength index (RSI) is a simplified technical analysis tool produced as a line graph shown underneath a pricing chart.

Each graph has values of zero to 100, where 50 is a neutral position. If the line is higher, the crypto asset is being overbought, and a lower metric indicates overselling.

Most traders consider an RSI value of over 70 or below 30 significant enough to prompt action, such as a buy opportunity or a signal to sell.

As with most technical indicators, the RSI is not often used as a standalone method to make decisions. Still, alongside other indicators, it can help to gain a picture of market conditions.

Moving averages

A moving average analysis (MA) determines the direction a trend follows. The calculation uses average data points over a defined period and divides that figure by the number of data points.

MA will change continually as pricing data is updated, although traders use MA to analyse long- and short-term trends.

There are several types of MA, assessment periods, and interpretations are used to extract meaningful information from this technical analysis.

Support and resistance

Support and resistance are specific price levels that indicate the maximum or minimum price the market is likely to reach.

The support level is the stage where prices will not move any lower, whereas the resistance level is where the price point cannot climb higher.

There are many ways to determine the support and resistance thresholds for a crypto asset, such as reviewing historical data and pinpointing where prices have bottomed out or rebounded before.

A trader will use identified support and resistance markers to predict market prices by assessing when they think prices will plateau and when it is best to buy or sell.

The support level is viewed as a ‘springboard’ from which prices will pick up again.

Average directional index

The average directional index (ADX) is used over the short term to assess the strength of a trend, with a high ADX indicating greater momentum.

ADX is calculated by averaging directional movements over a specific period, computing low and high prices. The ADX value can be between zero and 100.

Technical analysis with ADX differs from other methods because the value rarely reaches over 60. However, an ADX of 25 or above shows a stronger trend.

If the ADX is climbing, it shows that the current trend is becoming increasingly stronger.

Trend line analysis

Trend lines are a basic analysis that can be structured in various ways, possibly with multiple trend lines combined on one chart to try and ascertain more intricate patterns.

A simpler trend line connects high and low price points, with more connected points reflecting a stronger trend.

Cup-and-handle analysis

The cup-and-handle technical analysis involves overlaying a price chart with the bottom half of a circle, the cup, and a downward 45-degree line, the handle.

For the price chart to match the pattern, prices need to follow a pre-set movement, falling, trading sideways, rising and then falling sharply.

The handle represents the final price drop, at which point the pattern is considered true, and traders plan for expected price rises.

Traders can also look for the same pattern but in reverse, with the cup upside down, which is a sign of falling prices.

Limitations Of Crypto Technical Analysis

Critics feel technical analysis is inaccurate since trends do not always repeat, and price patterns are not always replicated.

Buying or selling crypto solely based on one technical analysis method is also considered inadvisable since the results may be inconsistent.

The limitation is that traders must study market trends and chart patterns but disregard any other factors that could impact on market values.

No technical indicator is infallible, but where multiple indicators arrive at the same outcome, it is more likely that crypto prices will react as expected, although this is still not guaranteed.

Technical analysis differs from fundamental analysis, which takes an opposite approach to inspecting short-term market appetites, providing information to steer long-term investment strategies.

Conventional wisdom is that the best option is to blend technical and fundamental analysis as a rational trading style.

Understanding Cryptocurrency Technical Analysis FAQ

Which technical analysis is the best option for crypto trading?

There isn’t a right or wrong technical analysis tool. The most suitable solutions will depend on the metrics you have available to track and the information you’re trying to analyse.

Moving averages and relative strength indices are among the most commonly used since they are easy to apply and provide fairly reliable trading signals.

How do crypto indicators work?

Technical indicators use mathematical equations to predict potential market movements, display price patterns, and help traders develop a strategy.

Traders also use technical indicators to remain updated with current market developments or trends that could impact future prices.

What is the difference between technical and fundamental analysis for crypto?

Fundamental analysis looks at non-monetary information, such as the company behind a crypto token, the utility of the token, and the size of the development community supporting the blockchain.

It is a big-picture approach that examines external factors that could influence the future progression, use and development of a particular crypto token.

Technical analysis solely looks at pricing data and previous movements, using records to try and estimate future changes.

When is crypto technical analysis favourable over fundamental analysis?

The challenge with fundamental analysis is that it commands a great deal of time for crypto enthusiasts who wish to understand the scope of factors impacting price trends, movements and potential changes.

One of the challenges for average investors is that the diversity of assets within the crypto market is vast, and it may not be viable to conduct sufficient research into every aspect to gain comprehensive knowledge.

What are Bollinger Bands in crypto technical analysis?

John Bollinger created Bollinger Bands in the 80s. The financial analyst developed the indicator to measure the degree of market volatility.

The basic idea is that the bands display prices dispersed over average values, which show the extreme highs and lows compared to market price fluctuations.

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