.
Many traders are quite critical about using technical analysis to trade cryptocurrencies. You have to admit, it makes sense.. But other no less experienced traders believe that technical analysis remains a relevant tool to work with such a specific tool. It applies to Bitcoin as well as to any other currency and stock market. But due to low liquidity on cryptocurrency exchanges, the use of thechanalysis has its own peculiarities.
In some situations, technical analysis can be even more useful for Bitcoin than for other assets. Since this market has a very dynamic news flow and high volatility. In addition, a series of the highest highs and lows of prices on the chart emphasize the mood of the market. As the experience of previous years shows, price changes in the digital currency market can be very powerful. Now we can say that the Bitcoin exchange rate is highly dependent on the headlines in the mainstream media and crypto-traders often make decisions only depending on positive or negative news. Therefore, the “technical” trader has a chance to react in a more balanced way and independent of other people’s opinions.
Technical Analysis Techniques
The number of methods used by technical analysis is very large. But they fall into a few fairly defined classes:
- Resistance and support levels and lines
- Technical indicators
- Figures (patterns) on large parts of the chart
- “Candlestick analysis” – patterns on the Japanese candlesticks or bars on the short sections
- Trading statistics – volumes, glasses etc.
.
.
.
.
Let’s take a closer look at each of them. As a rule, experienced traders combine several different techniques in their methods and wait for their mutual confirmation – such a joint signal can be considered more reliable for transactions in the market.
Resistance and support lines (levels)
The price is constantly changing, forming a chart with highs and lows, marking highs and lows.. If you draw a line through a consecutive series of highs or lows, it will be called, respectively, the line of resistance or support. These are values of quotes, at which the rate of the cryptocurrency feels a significant obstacle, after which a reversal is possible. Horizontal support and resistance lines are called levels.
Strong support levels occur where there are a significant number of large buy orders. It is the same with the resistance level, which is determined by the presence of a significant list of orders to sell. One of the main definitions that traders face is trend and trending price movement. The trend itself is just a channel made up of parallel resistance/support lines.
The direction of the trend movement is determined by the slope of the lines. If they are directed upward, the trend is called upward. This means that cryptocurrency trading is conducted with a predominance of purchases. For a downtrend it is the opposite. A sideways trend (or flat) is a movement in which the resistance/support lines are horizontal and there is an approximate equality of buying and selling volumes.
Main figures of technical analysis
The most readily available patterns are the simple Technical Analysis patterns. They are based on easily defined patterns of movement of cryptocurrency quotes.
A pattern is a kind of characteristic pattern describing the change in the price of a crypto-instrument, which traders notice over and over again on the chart. Based on recurring, similar figures, over time you can learn to make predictions about future movement.
Head and shoulders
The head and shoulders reversal pattern is quite common after a strong and prolonged trend. The figure represents three consecutive peaks, the middle one (head) being the highest, and the other two peaks on the sides (shoulders) being lower and approximately equal.
Let’s see how to work with this graphical model. The recommendations apply equally to the inverted model, with the only difference being that the highs are replaced by lows, which results in a buy signal instead of a sell signal.
1. Trend Detection
First of all it is necessary to state the development of an uptrend, a bullish trend. A strong uptrend must necessarily precede this chart pattern.
2. Left “shoulder.”
Then we wait for the formation of the left shoulder, which looks like a new maximum on the chart with the following correction. And the lowest point of correction, as a rule, is not below the current trend line.
3. “The Head.”
Now, after the correction is complete, it’s the “head’s” turn. It looks like a powerful price impulse in the direction of the current trend. It sets a new maximum, but the price immediately rolls back to the level where this impulse began and breaks the current trend line. This calls into question the strength of the bulls’ trend.
4. Right “shoulder.”
But the bulls still have enough power to try to rectify the situation, so they enter the market and push the price up. However, the lack of potential buyers leads to the fact that the price can not put a new maximum and rolls back, forming the right shoulder of the model. Although the theory assumes that the right and left “shoulders” will be symmetrical, in practice this is not always the case.
5. Breaking the “neck” line
After the price pulls back and fails to make a new high, it approaches the so-called neckline, which is drawn from the lows of the left shoulder and the head. The “neck” can be upward sloping, horizontal, or downward sloping, depending on the balance of power between the bulls and the bears. The classic sell signal appears when the price makes a break of the “neck” line downward.
6. Target profit
We recommend exiting this trading position when the price overcomes the distance equal to the distance from the maximum “head” to the “neck” level. But this is only a rough target and needs to be refined using other tools such as support/resistance lines, Fibonacci proportions and moving averages.
Double bottom or double top
Double bottom is one of the most common shapes encountered after a downtrend, respectively a double top after an uptrend. The “Double Bottom” figure is very similar in nature to the “Double Top” figure. They are identical, with the only difference being that they are like a reflection of each other.
As a rule, a classic double bottom implies at least a slight change in the direction of the trend.. The main price movement, which confirms the Double Bottom, is considered to be the resistance line crossing from bottom to top.
Rectangle
The Rectangle pattern is easy to spot on the chart. The rectangle is a kind of pause in the trend, during which buyers and sellers are about equal. Distinctive features of the rectangle – flat lines of support and resistance; support and resistance are the two horizontal sides of the imaginary rectangle. The vertical sides of the rectangle are completely arbitrary.
The rectangle is a simple figure in technical analysis that demonstrates the struggle between buyers and sellers. It is important to remember that the pattern is triggered only when the price crosses one of the horizontal sides of the rectangle. Until it is clear which player has won in this “rectangular” struggle, we should not consider the figure complete.
Flag and pennant.
The flag and the pennant reflect a short period of consolidation within a dynamically developing price trend. The formation of such models must be preceded by a sharp change in prices. The figure of consolidation itself is limited by the support and resistance lines, which are parallel or slightly convergent, forming a flag-like figure, usually tilted in the opposite direction to the trend, or positioned horizontally. After the breakdown, the price movement should at least repeat the distance traveled before the formation of the figure.
More complicated systems of working with graphical patterns, such as Elliott Waves and the like, can also be applied to cryptocurrency trading. But it would be too long for this article.
Japanese Candles
This type of graphical analysis was invented by the Japanese rice trader Munehisa Homma in the 17th century and is now one of the most common methods of displaying any market data. Observing a regular price chart is not very convenient, so to build “Japanese candlesticks”, the time is divided into periods. This kind of division into periods makes the big picture clear, which helps to judge the trend and the change in the trend.
Here, the red and green rectangles are colored depending on whether the opening price was lower than the closing price of the period or vice versa.
The maximum and minimum price is shown as a vertical line in the body of the candlestick. Due to the shadows, similar to the wick of a candle, the figures got their name. In practice, the relative length of the wick can be used to judge the trend for the next period. A longer top wick (compared to the bottom wick) could indicate a further rise, and a longer bottom wick could indicate a fall in the rate.
Candlestick patterns
Japanese candlesticks are versatile. They can be used both by experienced professionals and by novice traders. Examples of candlestick analysis patterns:
Three advancing white soldiers
This pattern represents 3 consecutively rising white candles, with the closing price of each successive one higher than the previous one. This figure confirms the bullish sentiment, so with a high probability we can talk about the beginning or continuation of the upward movement. If after the formation of 2 strong white candles on their background the third seems small – there is a possibility of forming a possible short correction in the market. At this time, you should limit the long positions for a while and gradually close the previously open ones.
Cover
A “Veil” is another pattern of continuation of an uptrend or downtrend.. After the formation of a long white candle comes a slight lull. At this time is formed 3-4 candles correction, which do not have a downward movement. When a white candle appears after them, it is necessary to open a long position on the maximum of the white candle, which began the formation of the model, exactly the same strategy is correct for a short position.
There are a huge number of candlestick patterns today. They have different names, but it is important for cryptocurrency traders to learn how to interpret them correctly.
Indicators
Technical indicators in trading are graphically displayed results of mathematical calculations according to a formula determined on the basis of past price changes or other market data. The indicator chart is used to predict future price changes.
Most of the simple strategies based on technical analysis are in one way or another related to the Moving Average indicator. It makes a mathematical averaging of prices taken over a certain period. As the rate changes, the value rises or falls, which allows you to determine the general trend of movement (trend) of the cryptocurrency instrument in the future and make a profit by a simple mathematical calculation.
The rules for using a moving average are quite simple: if the price is above the moving average, then the price is rising, if it is below, then it is falling. For a more accurate prediction, you can take two moving averages with different time periods. Where these lines intersect, a change in trend is very likely to be expected.
Even though it may seem simple, this type of technical analysis is very popular because of its simplicity and long-term predictability.
In addition to moving averages, there are a multitude of technical indicators which keep appearing. Indicators – the most popular and elaborated method of technical analysis. For “physicists” it is good because it is based on mathematics, not vague reasoning, and gives unambiguous answers. Single-valued, however, for each trader individually. And indicators help “lyricists”, who are prone to eternal doubts, to make a decision not just for fun, but “scientifically”. That’s why even if the indicators let a trader down, he rarely looks for something else but continues to play with their settings.
The usefulness of indicators is as hotly debated as the usefulness of technical analysis in general. On cryptocurrency exchanges they are used in the same way as on all other exchanges – that is, in combinations and with an endless search for the ideal parameters.
However, when trading cryptocurrencies you can use both classic indicators – MA, MACD, RSI, Stochastic, Momentum, ZigZag, etc., and more specific ones developed for other markets. Or even create your own indicator for trading specifically Bitcoin.
But due to the low liquidity and high volatility of the bitcoin market, there are a few simple tips to keep in mind:
- It is typical for Bitcoin to “freeze” trading for a long time with falling volumes, and then a sharp spurt triggered by an important event. Classic indicators do not have time to react to such jumps.
- In order to reduce the impact of volatility, you should avoid using indicators on small periods for intraday trading, it is better not to take periods below H1.
- Trading volumes show frequent and sharp jumps, sometimes in a single trade. If you decide to use indicators based on volume, they need very fine-tuning based on real statistics.
- On some exchanges occasionally appear unsubstantiated “candlesticks” of tens of percent, of the major exchanges especially BTC-e is famous for it
.
.. On other exchanges at the same time everything can be quiet. Indicators usually do not react to such antics and even more so can not predict them in any way.
Trading volumes
Trading volume is represented as the total number of units of traded cryptocurrency that changed hands based on executed orders. For the analysis is very important indicator of the volume, which arose when the price reached some level. This can be a strong signal to start trading in anticipation of further price movement in the right direction.
Different software platforms for cryptocurrency trading use vertical and horizontal volume representation. Vertical volume is the most common on exchanges.
Vertical volume
In this case the list with information about volume of all deals for a certain period is formed and is displayed in the form of bars under the price chart with reference to time. The time interval for drawing one bar is the same as on the price chart. That is, if the hourly chart is used, the volume is presented in the form of bars, each of which indicates the total trading volume for the past hour. For the daily chart it is calculated for the whole trading day.
The most practical use of volume can be to determine the end of a corrective movement as part of a trend. Strongly increased volume at a price going against the main trend can signal the end of the trend. This moment is advantageous to start trading in the direction of the trend.
This type of technical analysis can be seen on the page of the BTC-E exchange. Like the “Japanese candles”, it is also interval. The data is plotted on the graph in the form of bars, the height of which corresponds to the trading volume for the period. Large volumes can “shake up” price fluctuations, while small ones, on the contrary, can narrow. General patterns can be identified:
- .
- If the volume rises with further price movement in a given direction, then the market supports that movement.
- If the volume of trades falls when the price moves further in this direction, then the market does not support the movement.
- Trading volume may be an early signal of a trend change. In the case of a drop in price and a decrease in trading volume, you can expect the beginning of the fall and vice versa.
However, it should be kept in mind that the presence of high trading volume on cryptocurrencies may not always indicate a further strong price movement. The main stimulus for changes in quotations is aggressive (or large) orders, and it is impossible to determine the prevalence of bearish or bullish sentiment only by volume.. A joint analysis of the quote and volume glass will help.
Results
As a rule, rates are controlled by groups of players who are disparate in specifics and focus and who can increase traded volumes at one time. And yet, many participants successfully apply a small list of elements of technical analysis to predict price movements. It uses only basic tools and simple approaches that are easier to interpret.
News-based trading strategies are effective, but finding adequate news on cryptocurrencies, and most importantly, in time, can be difficult. One of the best sources of news are thematic forums and blogs, in which players often put their thoughts and comments on further developments. In the media, if news on cryptocurrencies appears, it appears with a long delay, which negates their relevance.
It should be taken into account that on cryptocurrency exchange the main part of movement is created by limited groups of participants, which trade in large volumes and are able to make a significant correction of the rate. And given the small capitalization of the major cryptocurrencies so far, a trader with even a relatively small deposit (compared to the stock market) can have a significant impact on the rate of. Such groups or individuals are unlikely to say anything about their intentions in advance, so all they have to do is detect the beginning of an event in time and place the appropriate orders.
All caveats and remarks about volatility that are true for Bitcoin trading should be “multiplied” several times for altcoins. Even the paltry capitalization of Bitcoin compared to the stock exchanges is measured in billions of dollars, while for most forks it is in the millions, and for the unpopular – a measly tens of thousands. Therefore, an enterprising trader or group, even with a small capital, can perform a Pump&Dump operation for any fork, selling their coins at the peak to those who hope to make money on the further rise. And it may never happen again.
In any case, before establishing an order on the exchange, it is necessary to conduct a thorough technical and fundamental analysis of the situation, and only if there are two or more confirming signals, enter the market.
Happy trading!