Technical analysis is a tool to guide your trading through the highly volatile crypto market. Traders are using it to predict future movements of cryptocurrencies by looking at past statistics.
You can conduct technical analysis for one cryptocurrency, as well as for pairs. E.g., you can watch etn to btc price history and predict their further movement.
We could give you a current technical analysis, but it will not be up to date at the time of reading. That is why you have to learn to do it yourself. Charting programs usually have some built-in tools to make technical analysis easier for you.
There are factors like mining hash and regulations that also influence the currency’s price, yet the technical analysis does not include them. That is why it is always best to combine different methods to make your predictions precise. If you are new to crypto trading – technical analysis is a great place to start.
The process of technical analysis is very similar to the one used for stocks, currencies, futures, etc. The Dow Theory states that pricing includes consideration of all the factors that affected it. In our case, that means the history of demand, regulations, what traders expect and know about the cryptocurrency, etc. That way, technical analysis doesn’t need to account for dozens of variables and focuses only on what is happening, not why it happens.
Also Read: Forex Trading for Beginners in 2021
Candlestick chart consists of rectangles that are either green, red, or pink. There is a line coming out of their top or bottom that resembles a wick of a candle. You can read the candlestick charts with the help of the sizes and colors of the rectangles.
The top and bottom levels signify the opening and closing prices for that day.
The green color indicates that the currency grew: the opening price is at the bottom, and the closing price is at the top.
Red (or pink) candlesticks show that the currency fell in price: the opening price is at the top, and the closing price is at the bottom.
Long wicks will indicate a highly volatile market. And high volatility means the market may correct the price. Long wick at the top means that the coin had reached a significantly higher price before traders sold it. It can indicate an upcoming bearish market that will go down.
A longer wick means the price previously dropped and is not expected to get lower. I.e., the traders feel that this is the moment to buy the currency at its lowest price. That can start an upward trend.
A short wick may indicate a potential change to the market.
If the top wick was short, it could mean that the top price was significant for the coin’s history. Short wick on the bottom indicates people continue to sell the coin. The more people sell – the bigger the supply, the more the price will drop.
The more accurate your trend line is, the more precise the predictions will be.
You start by placing the trend line precisely on the candlestick’s lowest price. Then you extend the line to the next candlestick’s lowest point. From there, typically, the line will expand automatically.
Support and Resistance Levels
Support and resistance are both horizontal lines that are difficult to cross.
The support is the price level at which the demand is growing due to the low price. This demand can halt the decline or even start the upward movement.
The resistance is quite the opposite – too much supply without significant demand. The currency is overpriced at this point, and traders resist buying it. Approaching the resistance level will push the price back down.
Breaking of support or resistance levels means the current trend has reinforced. Even more so if the resistance level turns into the support level. But keep in mind that false breakouts will not affect trends. You can use other figures to be sure of your trends.
The trading volume will help you determine whether a trend is significant. High trading volume indicates a significant trend, and low trading volume can indicate a trend that may pass quickly.
If the price is dropping – look for a low volume in the declines and higher volumes in the increases. This would indicate a healthy trend with long-term growth.
If the volume goes up in the time of decline, then the upward trend will probably end soon. And vice versa in the case of a downtrend.
In technical analysis, the coin’s market cap helps assess its stability. The larger the market cap is – the more stable the currency is. You can calculate it by multiplying the total circulating supply by the price of a coin.
Relative Strength Index
Relative Strength Index measures the magnitude of recent price changes. The RSI is a number between 0 and 100.
RSIs < 30 – the currency is undervalued, and the price is likely to rise.
RSIs > 70 – the currency is overbought, and the price may fall.
RSI=100 – (100/(1-RS)
In this formula, RS is the ratio separating the average number of days when a coin was up to the average of how many days it was down.
The moving average is calculated with a currency’s price average over the chosen period. You can connect all of the moving averages to create a line and extend it to predict future movements.
Exponential moving averages (EMAs) are a type of moving averages where you can give increased weight to the most recent price values. E.g., in an EMA over 15 days you may split the timeframe into 10 days + 5 recent days, and you give the five days double coefficient.
You can also use several of them, each with a different timeframe. If the shorter moving average crosses over a longer-term one, this might indicate an upcoming positive trend.