What is technical analysis, and how to use it

Technical analysis is a method used to forecast the price movement of an asset based on its previous behavior. It studies charts and data such as recent price fluctuations, high-volume areas, support and resistance areas, and other technical indicators. If you're new to trading, you might want to start with our guide on what is trading and how to earn from it.

Technical and fundamental analysis form the core pillars of investment research. While fundamental analysis focuses on assessing an asset's value through macroeconomic trends, microeconomic factors, industry conditions, and competitive positioning, technical analysis seeks to gauge market sentiment by identifying patterns and trends. Learn more about different types of analysis in our comprehensive guide on market analysis in trading.

Historical Context and Assumptions

Technical analysis has a rich history dating back to the 17th century, when Joseph de la Vega first documented trading patterns in his book "Confusión de Confusiones." The modern foundation of technical analysis was largely established in the early 20th century by pioneers like Charles Dow, who developed the Dow Theory, and later refined by practitioners such as Edwards and Magee.

The core assumptions underlying technical analysis include:

1. Market price reflects all relevant information
2. Price movements follow identifiable patterns
3. History tends to repeat itself in market behavior
4. Market psychology influences trading patterns

These principles have been studied and validated by numerous researchers, including G. Caginalp and H. Laurent, who have provided statistical evidence for the effectiveness of certain technical patterns. Steve Nison's work on Japanese candlestick patterns has also significantly contributed to modern technical analysis methods.

What is technical analysis in crypto?

Technical analysis in cryptocurrency trading applies these traditional principles to digital assets. For crypto traders, this approach is particularly valuable due to the market's high volatility and 24/7 trading nature. Check out our guide on crypto trading strategies for beginners to learn more about applying these concepts.

Despite plenty of minor price fluctuations, price movements are not random; they follow specific chart patterns. This is especially relevant in day trading crypto, where short-term patterns can be particularly profitable.

All prices in the financial market are 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, including emerging markets like memecoin trading.

How to do technical analysis in crypto?

Technical analysis combines various methods and tools to analyze market behavior and predict potential price movements. Let's explore the key approaches and techniques that will help you build a comprehensive trading strategy.

Technical Analysis Methods

1. Chart Pattern Analysis

Chart patterns are geometric shapes found in price charts that can help predict future market behavior. Common patterns include:

• Head and Shoulders
• Double Tops and Bottoms
• Triangle Patterns (Ascending, Descending, Symmetric)
• Flag and Pennant Patterns
• Cup and Handle

2. Trend Analysis

A trend analysis helps identify the general direction of the market and potential reversal points. This includes:

• Trend Lines and Channels
• Higher Highs and Lower Lows identification
• Price Action Analysis
• Breakout and Breakdown points

3. Volume Analysis

Volume confirms price movements and helps validate trends:

• Volume Trends and Patterns
• Volume Price Analysis (VPA)
• On-Balance Volume (OBV)
• Volume-Weighted Average Price (VWAP)

4. Mathematical Indicators

These tools provide objective market analysis:

• Moving Average Convergence Divergence (MACD)
• Average Directional Index (ADX)
• Money Flow Index (MFI)
• Implied Volatility Analysis
• Put/Call Ratio for market sentiment

5. Mean Reversion Strategies

Based on the principle that prices tend to return to their average:

• Bollinger Bands trading
• RSI divergence trading
• Statistical arbitrage
• Price oscillation analysis

Building Your Analysis Framework

1. Choose Your Timeframe

• Define your trading horizon (day trading, swing trading, position trading)
• Select appropriate chart intervals
• Align indicators with your timeframe

2. Combine Multiple Methods

• Use trend analysis for direction
• Confirm with volume analysis
• Apply technical indicators for timing
• Validate with pattern recognition

3. Implement Risk Management

• Set clear entry and exit points
• Use stop-loss orders
• Monitor position sizing
• Track risk-reward ratios

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.

Main Technical Indicators

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

• Momentum
• 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.

Advantages and Limitations

Advantages:

• Provides clear entry and exit points
• Applicable across multiple timeframes
• Helps identify market trends early
• Useful for risk management
• Works well with automated trading systems

Limitations:

• Subject to interpretation
• Can produce false signals
• May not account for fundamental changes
• Requires significant practice to master
• Past patterns don't guarantee future results
• Technical Analysis Charts may be subject to misinterpretation
• The patterns observed could be based on insufficient trading volume
• The timeframes selected for moving averages might not be ideally suited for the specific trade you intend to execute

Using Technical Analysis on Bidsbee

At Bidsbee, we provide traders with advanced tools for technical analysis through our comprehensive trading terminal. Our platform includes:

• Real-time charting tools with multiple timeframes
• Advanced technical indicators

• Volume analysis tools
• Automated trading capabilities through our trading bots

Remember that while technical analysis is a powerful tool, it's most effective when combined with fundamental analysis and proper risk management strategies. Bidsbee's educational resources and trading tools are designed to help both beginners and experienced traders make informed decisions in the crypto market.

Technical analysis in crypto is not enough to make wise trading decisions - combine it with fundamental analysis and verify all theoretical knowledge in practice. Only by using a comprehensive approach can you expect trading to bring more profit than losses.