As a crypto trader, you would want to analyse the market before making a decision on whETHer to buy or sell certain coins so as to earn a profit. This is called technical analysis. So you may wonder: how to do technical analysis on cryptocurrency?
What is technical analysis?
Crypto technical analysis involves using mathematical indicators based on previous price action data to try to predict future trends. The basic idea is that markets behave according to certain patterns and that once established, trends heading in a certain direction often continue along the same course for some time.
Typically, investors want to buy when markets are low so they can sell higher at some point in the future, and thus make a profit. Conducting technical analysis before entering a position is one way identify price levels that may be low
How to do technical analysis on cryptocurrency?
There are several ways to do technical analysis on cryptocurrency. Here we will show you the main ways to do so.
Candlestick Charts
Traders often prefer candlestick charts for their high level of detail. Rather than condensing data into one point for each time interval, candlesticks display four different price levels for each interval. These include (in order of top to bottom, visually):
• High price
• Opening price
• Closing price
• Low price
Candlesticks show this information in the form of a bar and two wicks. The peak of the top wick is the high price and the tip of the bottom wick is the low price.
The body of the candlestick can appear either green or red. Red indicates that prices ended the day lower than they opened; green indicates that prices ended the day higher.
On green candlesticks, the top indicates the closing price and the bottom the opening price. For red candlesticks, the top indicates the opening price and the bottom the closing price.
Each candlestick is read in the context of surrounding data points, and offers a detailed insight at how investors are buying and selling crypto during a certain period of time.
Support and Resistance Levels
The terms support and resistance refer to levels where prices tend to bottom or peak, respectively. Traders might identify these levels and then use them to try and make informed trading decisions.
Support and resistance can be determined by simply looking at a chart and pointing out where prices have repeatedly pulled back (in the case of resistance) or bottomed out (in the case of support).
Once identified, traders might use these price levels to inform their trading strategy. For example, stop-loss orders might be placed at support, while sell orders to take profits might be placed at or above resistance.
There are many different ways to use support and resistance, because these levels can either be used to try to predict price reversals or, if prices continue beyond them, indicate that a new trend has emerged. If prices keep rising above resistance, this might indicate sustained momentum to the upside. Likewise, if prices continue falling beneath support, they might continue falling even more.
Relative Strength Index (RSI)
The Relative Strength Index is a very common indicator. This indicator presents itself as a simple line graph below a price chart.
The line oscillates between the values of 0 and 100, with 50 being neutral. A higher value is thought to indicate overbought conditions, while a lower value is thought to indicate oversold conditions.
Like many technical analysis tools, the RSI is best used with other indicators. For example, if prices for a cryptocurrency were approaching a well-established support level at the same time that the RSI was giving a low reading of 20, then the odds of an upcoming price rally could be higher than usual.
Average Directional Index (ADX)
The average directional index is a short-term indicator used to help investors determine how strong a trend is. The higher the ADX, the more momentum there might be behind current trends.
ADX is the average of the values of directional movement lines over a particular period. These lines are calculated with current low and high prices. Similar to the RSI, ADX can have a value between 0 and 100.
But unlike many other indicators, the ADX seldom rises above 60. Chart analysts generally believe that an ADX of 25 and up indicates trend strength and a reading below 20 means there is no trend. Between 20 and 25 is considered neutral, or no trend.
When the ADX line is rising, it’s a sign that the current trend is growing stronger.
Moving Averages (MAs)
While the ADX helps investors determine the strength of a trend, moving averages can be used as a tool to help determine the direction of a trend. A moving average summarizes data points of a cryptocurrency over a set period and divides the total by the number of data points to create an average. The term “moving” average is used because the number is constantly updated using the latest price data.
Long-term moving averages are thought to be stronger indicators, as they contain more data. But MAs can also be tracked in the short term.
There are different types of moving averages, different time lengths for them, and different ways they can be used to provide clues to the direction of a trend.
One famous bullish setup based on MAs is referred to as the “golden cross.” This occurs when a short-term moving average moves above a long-term moving average, most commonly the 50-day MA above the 200-day MA.
Cup and Handle Pattern
The cup-and-handle pattern is a famous bullish set-up. It consists of a price chart over which a cup (the bottom half of a circle) and a handle (a downward-slanting line at about a 45-degree angle) can be drawn.
For this to happen, prices generally must fall, briefly trade sideways, rise for about the same length of time as they originally fell for, and then have a steep but brief drop. The final drop creates the handle, at which point the pattern is thought to be confirmed, and prices could rise.
The inverse of this pattern can also happen and is thought to be bearish. If an upside-down cup and handle happens, watch out, as prices could fall.
In Conclusion
How to do technical analysis on cryptocurrency? We hope that this article has provided you with some mETHods and insights on how to do your own technical analysis. Technical analysis is important in making sure that you know the trend of a market before investing.
