Fundamentals of Technical Analysis in Cryptocurrency Trading

Many traders are quite critical of the use of technical analysis for trading cryptocurrencies.. Admittedly, there is a reason for this.. But other equally experienced traders believe that technical analysis remains a relevant tool for working with such a specific tool.. It is applicable to Bitcoin, as well as to any other currency and stock markets.. But due to low liquidity on cryptocurrency exchanges, the use of technical analysis has its own characteristics. 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 biggest highs and lows in prices on the chart highlight the mood in 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 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 more balanced and regardless of other people's opinions. Methods of technical analysis The number of methods used by technical analysis is very large.. But they are divided into several fairly specific classes: Levels and lines of resistance and support. Technical indicators. 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 making transactions in the market. Lines (levels) of resistance and support The price is constantly changing, forming a chart, there are peaks and dips on it, which mark highs and lows. If you draw a line along a consecutive series of highs or lows, then it will be called, respectively, a resistance or support line.. These are the values of quotes at which the cryptocurrency rate feels a significant barrier, after which a reversal is possible. Horizontal support and resistance lines are called levels. Strong support levels occur in places where a significant number of large buy orders accumulate. It is the same with the resistance level, which is determined by the presence of a significant list of sell orders.. One of the main definitions that traders face is the 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 upwards, then the trend is called an uptrend.. This means that cryptocurrency trading is carried out with a predominance of purchases.. For a downtrend, the opposite is true.. A side trend (or flat) is a movement in which the resistance / support lines are horizontal and there is an approximate equality in the volumes of sales and purchases. The main figures of technical analysis The most accessible patterns for application are simple figures of technical analysis.. They are based on easily defined patterns of movement of cryptocurrency quotes. A figure is a certain characteristic pattern that describes the change in the price of a crypto-instrument, which traders again and again notice on the chart. Based on repeating, similar figures, over time, you can learn to make predictions about the future movement. Head and Shoulders The Head and Shoulders reversal pattern is quite common after a strong and prolonged trend.. The figure is three consecutive peaks, the middle of which (head) is the highest, and the other two peaks on the sides (shoulders) are lower and approximately equal. Consider how to work on this graphical model. Recommendations apply to the inverted pattern to the same extent, with the only difference being that price lows are formed instead of highs, and as a result, the signal goes to buy, not to sell. one. Determining the trend First of all, it is necessary to state the development of an upward, 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 on the chart looks like a new maximum with a subsequent correction. Moreover, the lowest correction point, as a rule, is not below the current trend line. 3. “Head” Now, after the completion of the correction, it's the turn of the “head”. It looks like a powerful price impulse in the direction of the current trend.. It sets a new high, but the price immediately rolls back to the very level from which this impulse began and breaks through the current trend line. This calls into question the strength of the bullish trend. 4. Right “shoulder” But the strength of the bulls is still enough 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 cannot set a new high and rolls back, forming the right shoulder of the model. Although in theory it is assumed that the right and left “shoulders” will be symmetrical, in practice this is not always the case. five. Breakout of the neck line After the price pulls back, failing to set a new high, it approaches the so-called neck line, which is drawn along the lows of the left shoulder and head.. The “neck” can have an upward slope, a horizontal position or a downward slope – depending on the balance of the forces of bulls and bears.. A classic sell signal occurs when the price breaks below the neck line. 6. Target profit It is recommended to exit this trading position after the price overcomes the distance equal to the distance from the maximum of the “head” to the level of the “neck”. 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. The Double Bottom pattern is very similar in nature to the Double Top pattern.. They are identical, with the only difference being that they are, as it were, a reflection of each other. As a rule, the classic double bottom portends at least a small change in the direction of the trend.. The main price movement, which confirms the Double Bottom, is the crossing of the resistance line from the bottom up. Rectangle The Rectangle shape is easy to see on the chart.. The rectangle is a kind of pause in the trend, during which buyers and sellers are approximately equal. Distinctive features of the rectangle – smooth lines of support and resistance; support and resistance are the two horizontal sides of an 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 sellers and buyers.. It is important to remember that the figure is only triggered when the price crosses one of the horizontal sides of the rectangle.. Until it is clear which of the players won this “rectangular” fight, you should not consider the figure finished. Flag and pennant The flag and pennant reflect a short period of consolidation within a dynamically developing price movement trend. The formation of such models should be preceded by a sharp change in prices. The consolidation figure itself is limited by the support and resistance lines, which are parallel or slightly converge, forming a figure similar to a flag, inclined, as a rule, in the direction opposite to the trend direction, or located horizontally. After the breakout, the price movement should at least repeat the distance traveled before the formation of the figure. More complex chart pattern systems, such as Elliott waves and the like, can also be used in cryptocurrency trading.. But their description would be too long for this article. Japanese candlesticks 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 for displaying any market data.. It is not very convenient to watch the usual price chart, therefore, to build “Japanese candlesticks”, time is divided into periods. Such a division into periods makes the overall picture clear, which helps to judge the trend and the change in 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 prices are displayed as a vertical line in the body of the candle.. Thanks to the shadows, similar to the wick of a candle, the figures got their name.. In practice, the relative length of the wicks can be used to judge the trend for the next period.. The long upper part of the wick (compared to the lower one) may indicate further growth, and the longer lower part may indicate a fall in the rate. Candlestick analysis patterns Japanese candlesticks are universal. They can be used by both experienced professionals and novice traders.. Examples of candlestick patterns: Three advancing white soldiers This pattern consists of 3 sequentially rising white candles, with the closing price of each subsequent one being higher than the previous one.. This figure confirms bullish sentiment, so it is highly likely that we can talk about the beginning or continuation of an upward movement.. If, after the formation of 2 pronounced white candles against their background, the third seems small, there is a possibility of a possible short correction on the market. At this time, you should limit long positions for a while and gradually close previously opened ones. Coverlet Coverlet is another uptrend or downtrend continuation pattern.. After the formation of a long white candle, there is a slight lull. At this time, 3-4 correction candles are formed, which do not have a downward movement. When a white fast-growing candle appears after them, it is necessary to open a long position at the high of the white candle, from which the formation of the model began, exactly the same strategy is true for a short position. To date, there are a huge number of candlestick patterns.. They have different names, but it is important for cryptocurrency traders to learn how to interpret them correctly. Indicators Technical indicators in trading are usually called a graphically displayed result of mathematical calculations according to a certain formula, determined on the basis of past price changes or other initial market data.. The indicator chart is used to predict future price changes. Most of the simple strategies based on technical analysis are somehow connected with the Moving average indicator (moving averages). It produces a mathematical average 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 a cryptocurrency instrument in the future and make a profit through a simple mathematical calculation. The rules for using a moving average are quite simple: if the price is higher than the moving average, then the price rises, if it is lower, then it falls.. For a more accurate forecast, you can take two moving averages with different time periods. Where these lines intersect, a change in trend is likely to be expected. Despite the apparent simplicity, this type of technical analysis is very popular due to the simplicity and long-term forecasting. In addition to moving averages, a huge number of technical indicators have been developed and they continue to appear.. Indicators are the most popular and well-developed of technical analysis methods.. For “physicists” it is good because it is based on mathematics, not vague reasoning, and gives unambiguous answers.. Unambiguous, however, for each trader individually. And the “lyricists” prone to eternal doubts, indicators help to make a decision not just like that, but “according to science”. Therefore, even if the indicators fail the trader, he rarely looks for something else, but continues to conjure with their settings. The usefulness of indicators is as hotly debated as the usefulness of technical market analysis in general.. On cryptocurrency exchanges, they are used in the same way as on all the others – that is, in combinations and with endless searches for ideal parameters. However, when trading cryptocurrencies, you can use both classic indicators – MA, MACD, RSI, Stochastic, Momentum, ZigZag, etc., as well as more specific ones developed for other markets. Or even create your own indicator for Bitcoin trading. But due to the low liquidity and high volatility of the bitcoin market, you need to remember a few simple tips:. Classical indicators do not have time to react to such jumps. 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 made by a single trade. If you decide to use volume-based indicators, they need to be very fine-tuned based on actual statistics. On some exchanges, unjustified “candles” of tens of percent occasionally appear, of the main exchanges, BTC-e is especially famous for this.. On other exchanges at the same time, everything can be calm. Indicators usually do not react to such tricks and, moreover, cannot predict them in any way. Trading volumes Trading volume is presented as the total number of units of a traded cryptocurrency that changed hands based on executed orders.. For analysis, a very important indicator is the volume that arose when the price reached a certain level.. This can be a strong signal to start trading in anticipation of further price movement in the right direction. Various software platforms for trading cryptocurrencies use the representation of vertical and horizontal volume. The most widespread on the exchanges was vertical volume. Vertical volume In this case, a list is formed with information about the size of all concluded deals for a certain period of time and is displayed in the form of columns under the price chart with reference to time. The time interval for building one bar is the same as on the price chart. That is, if an hourly chart is used, then the volume is presented in the form of bars, each of which indicates the total volume of trade over the past hour.. For the daily chart, it is calculated for the entire 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 the price going against the main trend can signal its end. This moment is favorable to start trading in the direction of the trend. This type of technical analysis can be seen on the BTC-E exchange page. Like “Japanese candles”, it is also interval. The data is plotted on the chart in the form of bars, the height of which corresponds to the trading volume for the period. Large volumes can “shatter” price fluctuations, while small volumes, on the contrary, can narrow. We can distinguish general patterns: If the volume grows with further price movement in this direction, then the market supports this movement. If the volume of transactions falls with further price movement in this direction, then the market does not support this movement. A change in trading volumes can be an early signal for a trend change. In the event of a fall in prices and a decrease in trading volume, we can expect the beginning of a fall and vice versa. However, it should be borne in mind that the presence of a large volume of trading in cryptocurrencies may not always indicate a further strong price movement.. The main stimulus for price changes is aggressive (or large) orders, and it is impossible to determine the predominance of bearish or bullish sentiment by volume alone.. This will help joint analysis of the glass of quotes and volume. Results As a rule, the rates are managed by groups of players that are separate in terms of specificity and purposefulness, and who are able to increase traded volumes at one moment.. And yet, many participants successfully use 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 trading strategies are effective, but it can be difficult to find adequate news on cryptocurrencies and, most importantly, on time. One of the best sources of news are thematic forums and blogs, in which players often post their thoughts and comments regarding further developments.. In the media, news on cryptocurrencies, if they appear, then with a long delay, which negates their relevance. It should be borne in mind that on the cryptocurrency exchange, the main part of the movement is created by limited groups of participants who trade in large volumes and are able to make a significant correction in the course.. And given the small capitalization of the main cryptocurrencies so far, a trader with even a relatively small deposit (compared to the stock market) can significantly affect the rate.. Such groups or individual players are unlikely to speak in advance about their intentions, it remains only to have time to detect the beginning of events in time and place appropriate orders. All warnings and remarks about volatility that are valid for Bitcoin trading should be “multiplied” several times for altcoins. Even the meager capitalization of Bitcoin compared to stock exchanges is measured in billions of dollars, while for most forks it is a matter of millions, and for less popular ones – miserable tens of thousands.. Therefore, an enterprising trader or a group, even with a small capital, can perform a Pump & Dump operation (rise and fall) for any fork, selling their coins at the peak to those who hope to earn on a further rise. And it may never happen again. In any case, before placing 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!