Dear crypto investor, in this article we are going to talk about technical analysis in crypto in detail. It is an explanation for beginners for applying technical analysis in crypto investing. We look at its usefulness: when to apply it and when not to apply it? Then we look at concrete tips with some important basics. Knowing the basics increases your chances of winning. Also read other articles to increase your knowledge of technical analysis and (day) trading.
On to sustainable financial success!
What is Technical Analysis in Crypto?
When you use mathematical indicators based on the price action data built in the past to predict future trends or price action, this is known as technical analysis. The main aim is to predict certain market behaviour according to the established patterns. Trends that head in a certain direction often continue along the same course, but that is not the real case every time.
Technical analysis is not only used in crypto. Short-term investors in stocks and forex also use this investment style. It is entirely focused on predicting market movements based on historical data. This is where the risk lies: the past is no guarantee for the long term. For the short term, however, it can work. Below we explain how.
Purpose of Technical Analysis with crypto currencies
Technical analysis assists us in understanding the emotional behaviour of investors. The chart patterns indicate whether the bears or bulls are in control. It makes no predictions and is just a visual depiction of what has transpired in the markets. Especially on a daily level, there are strong trend movements to follow. Technical analysis in crypto is so sought after because crypto coins can sometimes rise as much as 10 to even 30% on a daily level. Everyone would like to book high returns in one day. That's the golden egg. However, this has advantages and disadvantages.
Below are the points that reveal the purpose of Technical Analysis and when they are more worthy.
- To accurately determine the current Market Condition.
- To determine, for long-term analysis, the business cycles, whether those cycles are intact or in severe deviation patterns, the average duration, this helps determine where the company is in its business cycle. All companies have cycles; some are annual cycles, others are very long term, extending 10 -15 years. Where a company is in its cycle is critical to strong investments.
- To analyze Industry and Sector cycles to find the strongest industries or sectors for optimizing and focusing on the highest growth potential industries for the coming year and subsequent years.
- For Trading stocks for monthly income rather than long-term retirement investments, the technical analysis focuses on finding and identifying the specific Market Participant Groups that control the largest percentage of shares of stock.
- Selection of which market group the trader intends to trade with and which groups to avoid.
- Technical Patterns reveal enormous amounts of information about the current trading conditions that unfold during the day.
- Lowering risk is a huge aspect of technical analysis. The angle of Ascent or Angle of Descent is critical to identify. Fading volume, Spiking volume, trailing volume, contrarian volume, and large lot bias to which side of the transaction are all critical and can be derived from technical analysis if you know what you are looking for.
- Stop Loss placement should never be a percentage. The predators of the market will gobble up percentage stop losses. Rather technical analysis using the correct support and resistance levels for the trader's particular trading style is used instead. This provides excellent risk control while avoiding common whipsaw setups from percentage stop losses. Trailing Profit stops also use technical analysis to determine where the trailing profit stop should be placed to allow the natural price fluctuations to occur and to protect unrealized profits at the same time.
How to begin with technical analysis in crypto
If these terms are unfamiliar, then it is advisable to take a good day trading course first. Sure, this requires an initial investment, but day trading in crypto is extremely risky with potentially large losses. In fact, more than 70% lose money with trading / CFD investing.
Another tip is always to start with a demo account first. This is a free account where you can practice with fictitious (fake) money. It is like with everything: practice makes perfect. But make sure you practice with free money before putting your own savings on the line.
Our tip: create a free demo account with NAGA. They have many tools that support technical analysis of crypto and other assets (stocks, forex, et cetera). This demo account is available for European investors.
Are you from the United States? Then try a free demo account with eToro.
Technical Analysis Crypto Investing: Basics for Beginners
There are some important basic concepts that beginners should know when it comes to technical analysis in crypto. These are fundamentals that are also applicable to other assets.
1. Identifying Uptrend and Downtrend
A trend is defined as the market direction in technical analysis. In such a type of analysis, the trend is basically of three types. The uptrend, downtrend, and sideways trend are three basic types of a trend. There are many other types, but it is entertained for advanced and average-level traders.
If the price movement is in the upward direction, the trend is an uptrend. If, on the other hand, prices are moving downwards, the market is in a downtrend. When the price of a crypto coin moves or fluctuates between two levels, it is said to be in a sideways trend. An uptrend in the charts is characterised by higher highs and lower lows in the prices. A downtrend is characterised by lower highs and lower lows in prices.
A sideways trend may be determined by drawing horizontal lines on the price movement's highs and lows. It is important to recognise trends in the crypto market because they tell us where prices are moving.
It is important to remember that earnings in the crypto market may be made by trading with the trend. Novice traders should always try to trade with the trend since it minimises risk.
2. Identifying Support and Resistance Levels
In technical analysis, key swing levels are marked as support or resistance levels because they indicate whether prices will reverse or continue.
Support is a level where the demand for the crypto coin exceeds its supply; thus, when prices hit this level, they may reverse to the upside.
Similarly, resistance is a level where the supply of the crypty coin exceeds the demand for the crypto coin; hence, when prices hit this level, they might reverse to the downside.
The support level is determined when prices reverse from the same level to the upside at least twice.
A resistance level has been found when prices reverse from the same level to the downside at least twice.
When prices break out from either support or resistance, they will continue in either direction.
3. Price and Volume Analysis bij crypto
Volume analysis is a crucial technical signal that every trader should consider since it verifies the ongoing price movement. An increase in volume in the ongoing uptrend and downtrend indicates that the trend will continue. A drop in volume in the ongoing uptrend and downtrend, on the other hand, indicates that the ongoing trend may soon reverse.
4. Analysing Candlestick Charts
Candlestick patterns produced on candlestick charts may be used to analyse market movements. Candlestick patterns are a collection of candles that suggest whether a current trend will continue or reverse.
Want to learn more? Read our best crypto day trading tips.
Risks and Limitations of Technical Analysis in Crypto Investing
With the ability to make you aware of the price action, there are a few limitations and risks of technical analysis:
- Technical analysis alone does not give me more exposure to the trend, for that you always need the help of fundamental analysis. This can be more reliable for short-term crypto trading.
- Technical analysis provides no proof; it is entirely about likelihood.
- Two technical analysts may have opposing perspectives on the same stock, resulting in a biased assessment.
- This analysis may provide mixed signals when one indicator gives a purchase signal, and another displays a sell signal simultaneously.
- Because markets are so volatile, a single trading technique may not work in all situations.
- Another objection people level against technical analysis is kind of controversial. They claim past chart patterns cannot work perfectly again
Want to learn more? Read about 4 crypto trading strategies that actually work.
Questions about technical analysis with crypto investing? Post them in the comments