What is technical analysis, and how to use it

Technical and fundamental analysis form the core pillars of investment research. Fundamental analysis focuses on assessing an asset's value through macroeconomic trends, microeconomic factors, industry conditions, and competitive positioning. Conversely, technical analysis seeks to gauge market sentiment by identifying patterns and trends, using historical price and volume data to forecast future price movements.

What is technical analysis in crypto?

Technical analysis is a method that is used to forecast the price movement of an asset (in our case cryptocurrency) based on its previous behavior. It studies crypto charts and data of the crypto market such as recent price fluctuations of a crypto asset, high-volume areas, support and resistance areas, and other technical indicators.

Despite plenty of minor price fluctuations, price movements are not random, they follow specific chart patterns. The main aim of traders who use technical analysis is to identify these patterns and use them to earn.

All prices in the financial market are also not formed randomly. They are driven by market sentiment. That’s why it is expected that in repeated market conditions, traders will feel the same emotions, and this will impact the digital currency prices in the same way.

Where Technical Analysis Can Be Used?

Technical analysis is applicable across all markets, including stocks, commodities, and cryptocurrencies.

How to do technical analysis in crypto?

The following steps will help you to use the basic technical analysis to build your trading strategy.

Identifying market trends 

A trend is defined as a direction in which the market is moving:

• Uptrend - when the prices are growing
• Downtrend - when the prices are declining
• Sideways trend - when the prices fluctuate between two levels.

You can identify the trend by drawing a line on the highs and lows. 

In an uptrend, traders usually trade long, and in a downtrend, short trading may bring profit. 

Support and resistance levels for crypto

Support and resistance level shows whether the prices are going to grow or decline. 

The area where demand for a coin is higher than its supply is called support. When the coin's current price reaches the support level, it is likely to start growing.

The area where the coin supply is higher than the demand for it is called resistance. When the coin price reaches that area, it is likely to start declining. 

How to determine where the support level is?

When you see that the prices go at least twice higher than the same level, you deal with the support level.

And on the contrary, when you see that the prices drop at least twice below the same level, you deal with a resistance level.

Price & volume

Volume is one of the major indicators in technical analysis. If the trading volume increases, it leads to price growth even if there is a downtrend.

And on the contrary, if the trading volume decreases, it may lead to a price decrease even if there was an uptrend.

Candlestick Charts in Cryptocurrency Trading

Candlestick charts form an important part of crypto technical analysis. These charts tell us whether a trend is going to continue or it is expected to reverse. There are over 30 main candlestick patterns, and it is important to understand how to read them if you want to trade profitably. More about each type of chart you can read here. 

Main Technical Indicators

Technical indicators confirm the signals that charts give us. The main types of technical indicators are:

• Trend
• Momentum
• Volume
• Volatility

The most popular technical indicators are the following.

Moving averages

A moving average is a trend-following indicator. It is built based on the data that were in the past. So, it is rarely used for forecasts. Instead, it tells us what trend is in the market. 

When a moving average crosses the price line from below, it generates a buy signal - the asset price is expected to grow. And on the contrary, when a moving average crosses the price line from above, it generates a sell signal - the price is expected to drop.

Once more, a moving average is a trend-following indicator, so it generates more or less reliable signals in a trending market only and shall be avoided during the market breakout.

Super trend indicator

Super trend indicator shows the price movements in an upward or downward trending market. When the prices fall, the candlesticks are coloured red, when the prices grow, they are coloured green.

The best time to sell or to buy an asset is when the trend changes its direction. 

Relative Strength Index (RSI)

RSI is a momentum indicator. It measures the range of the recent price changes and shows whether the asset is overbought or oversold. This indicator moves within the range from 0 to 100. When it moves above 70, it means that the asset is overbought. So, the price may start moving downward.

When the indicator moves below 30, it means that the asset is oversold. The price may start moving upwards.

Bollinger Bands

Bollinger bands is a market volatility indicator. It consists of three bands: a lower, an upper, and a middle.

The middle band is a Simple Moving Average, the upper band is a plus-two standard deviation, and the lower band is a minus-two standard deviation from the middle band.

When the band becomes wider, it means that the market movements have increased. When the band narrows, it means that the volatility level has decreased.

How to identify trend reversal with Candlestick patterns

Candlestick patterns are used to identify when a trend is going to reverse and thus discover more trading opportunities. The candlestick patterns can be divided into bullish and bearish.

Bullish patterns are formed after the market has been in a downtrend. These patterns mean that soon, the average price of an asset may start growing. Some of the popular bullish candlesticks patterns are Bullish Harami, Hammer and Inverted Hammer, Morning Star, and so on.

Bearish patterns are formed after an uptrend in the market. They indicate that the price may start declining. The most common bearish candlesticks patterns are Hanging Man, Evening Star, and similar.

Limitations of Technical Analysis

Technical Analysis Charts may be subject to misinterpretation. The patterns observed could be based on insufficient trading volume. Additionally, the timeframes selected for moving averages might not be ideally suited for the specific trade you intend to execute.

Technical analysis in crypto is not enough to make wise trading decisions, combine it with fundamental analysis

Understanding technical analysis is important, but it is not enough to start earning on trading. Only if you combine technical analysis in crypto with fundamental analysis and verify all the theoretical knowledge in practice, you can expect that trading will start bringing more profit than losses.