What is technical analysis and how does it work?
Technical analysis is the study of trading patterns and the interpretation of these movements. When traders or investors analyse cryptocurrency charts, they are looking for trends in prices – up, down, or sideways. They will also look at cryptocurrency charts to try and identify any changes in how a cryptocurrency is being traded (e.g., more buyers than sellers).
Some people might think that cryptocurrency technical analysis only applies to buy/sell decisions within a day (or less). But it can be used when you’re trying to decide whether cryptocurrencies have long-term potential, too!
A good example would be bitcoin’s price action during 2017. There were plenty of moments where the market experienced an increase followed by a sharp decrease because it was starting a new trend.
You can use technical indicators, charts patterns, candlestick formations, or even past price information in order to help you make more informed cryptocurrency trades with less risk.
How to use technical analysis in your day-to-day trading
When you trade, you shouldn’t place trades based on gut feeling or guesswork. Instead, you should use technical analysis. It helps you make cryptocurrency trades based on past price data.
Technical analysis looks at previous cryptocurrency trends to predict future cryptocurrency prices, and it’s a good tool for traders who want to minimize their risks in cryptocurrency trading.
It can help you spot patterns that might happen again. For example, if you find out that there were certain types of candlestick formations before the price action of a coin drops (or rises), you could have made more informed decisions to enter (or exit) trades. This type of data also helps to reduce your trading risks.
You can also use technical indicators with other forms of analysis such as fundamental or sentiment analysis. These additional data can aid in predictions about where the market is headed. For instance, pin bar signals tend to be correlated with bullish market momentum according to technical analysis.
There are lots of different charts to choose from to make your analyses. So it’s best to have a broader understanding in order to make sense of the data that is available. For example, you might want to look at RSI or Bollinger bands before making any decisions about whether stocks should go up or down.
What are some types of cryptocurrency charts?
There are a number of cryptocurrency charts that would be useful to an investor. You could analyse charts by looking at price action, volume, or dozens or other data on the chart.
For example, you may wish to track how many trades were made on a crypto exchange over time so as to get an understanding of sentiment and trading activity.
A candle chart is another type of cryptocurrency chart that displays changes in market prices over different periods – for instance, one day, week, or month.
The patterns can differ depending on what kind of pattern it’s but generally, they’re used for forecasting future trends based on past performance data.
Chart patterns are often read by analysing past price data to predict future trends which may involve understanding what type of pattern it is (i.e., whether this is an inverted or ascending triangle) so that predictions can be made from historical performance data with some degree of accuracy.
Now we will look at different types of crypto-related charts available depending on your trading strategy:
Candlestick Charts
These types of graphs show each candlestick as either completely filled (black) or empty (white) and are mainly used to show the cryptocurrency price and its movement over time.
Candlesticks show price action over different time periods and can be used in both short-term trading as well as long-term analysis. They are best when analysing an intraday trend, while plotting out trends when one point is above another so it’s useful because you can see how things change over time.
Candlesticks can be broken down into smaller components for more information, such as:
Body – The white or black space between open-close
Wick – The upper or lower part of a candlestick
Shadows – Shadows on either side of a candlestick.
The body represents open prices; wicks represent high or low prices during that day; shadows show where price closes with respect to previous close. This gives us a sense of a cryptocurrency’s range.
Line Charts
These charts plot data points using lines instead of candles like in other types charting software. A line is plotted when one point is above another point so this type of graph also reveals trends by plotting them out with an up trending line going from left to right, while downtrends go from right to left. These graphs are not commonly used due their lack of detail.
Line Charts are best for showing long-term performance in cryptocurrencies as opposed to Candlesticks which are better for short term analysis (such as intraday trading).
Bar Charts
These charts plot data points using bars that represent the open, high low and close values. The bars are then stacked on top of each other and the space between them is equal to their size.
How to read a chart to trade cryptocurrency
In order to read cryptocurrency market trends, you will need some time-series data on price action.
You’ll then use visual methods like plotting lines (candles) across different intervals in order to draw conclusions about future predictions.
When looking at currency pairs using candlestick graphs – which look like candles with wicks and a line across the top – you want to focus on two things:
The opening and closing prices of each time interval
How long it takes for them to get there (known as “candlestick close”)
Next, you’ll want to look at the cryptocurrency lines plotted on a line graph.
In this example, we’re using Bitcoin prices and plotting them in intervals of one hour each:
You can see that during periods with high volatility, trading momentum is strong;
Trading volume will be higher than regular times when there are lower price fluctuations.
This means that cryptocurrency traders who have a strategy for making predictions based on cryptocurrency charts – like predicting where market sentiment may lead cryptocurrency prices over time – should buy into cryptocurrency markets (or “take risk”) during these moments.
How to draw trend lines and channels to make technical analysis
You can draw trend lines (a.k.a., “support” or “resistance”) to help you see whether cryptocurrency prices are trending up, down, or sideways:
A cryptocurrency’s price will usually climb if it has been consistently going in an upward direction and might be a good time to sell your cryptocurrency at that point;
When the cryptocurrency is trading within a range of higher highs and lower lows with no change for several days – this could be indicative of market sentiment being evenly distributed which would mean there is low risk involved when buying into these markets.
A channel works similarly but instead should indicate periods where traders tend to trade more frequently than others.
This means those strategies can be applied to cryptocurrency charts, especially when they are trending sideways.
The basics of support and resistance levels
Support and resistance levels are indicators that are used to determine possible price levels where a cryptocurrency might reverse its trend.
Support is created when traders purchase the cryptocurrency at an area of lower lows, while resistance occurs when they sell off more at higher highs.
When support and resistance levels collide with one another, it can present some interesting opportunities for trading techniques.
For example, if you believe there will be strong buying pressure in the cryptocurrency market then this would be a good time to buy as prices should break through those resistances quicker than usual. But expect volatility though!
It’s important to always set stop losses on trades so you don’t end up losing all your cryptocurrency investment capital by getting carried away.
A coin is considered oversold when the price has fallen below a support level – this could be indicative of an impending recovery in cryptocurrency markets
The opposite can be said about cryptocurrency trading near resistance. It’s likely that if you are able to trade successfully on breakouts from those areas, profits will come with less risk involved.
It should also be noted that technical analysis works best when applied to coins with high liquidity so you can look into trading coins like Bitcoin (BTC), Ethereum (ETH) or Ripple (XRP).
An example of a potential trade using only charts for guidance
Here is how you can trade crypto by analysing charts.
Cryptocurrency charts have a lot of information, such as general market conditions and individual statistics for coins like volume or stocks that make it up in percentage terms.
To analyse these charts you will need to identify the trend – whether upward (bullish) or downward (bearish). You can do this by looking at past peaks on the graph for long-term trends and focusing on shorter periods with regard to short-term trends.
When identifying an upward trend we would recommend waiting until there is consolidation near the top of the current bull run before making your trade. Alternatively, when identifying a downward trend wait for price to return back down from its peak before initiating any trades towards lower levels.
Why you should always analyse charts when trading crypto
There’s so much information available at the click of a button that it doesn’t make sense not to use it. As with any form of investing – the more time you put into researching before buying or selling then less risk you will have in making mistakes which could cost you dearly!
Always remember: don’t trade more than you can afford to lose. The cryptocurrency market can potentially be very volatile. But by being able to analyse charts and use technical analysis, you should be able to trade better, mitigate risks, and potentially close trades at a profit on a more regular basis.
The cryptocurrency market has seen some crazy ups and downs over the past couple years but never forget that we are still in its infancy stage as an emerging market.