What is technical analysis?
It is the study of data on how price changes in response to market activity.
In order to identify any patterns in price movements, traders use charts. They use charts not only of prices but also of indicators, i.e. special calculated values based on price movements.
You can see supply and demand levels on a chart and you can track investor sentiment. Technical analysis of cryptocurrencies helps you predict how the price will move next.
Simply put, knowing technical analysis, you won't be able to answer the question "what caused the price to change?" But you will understand in what direction it is likely to movein the near future. Technical analysis is necessary, first of all, to traders, because they do not care about the asset itself, they make money on price fluctuations. Investors use this method, too: for example, to determine the trends, find the entry point, etc.
The Three Pillars of Technical Analysis
Adherents of technical analysis believe that their method solves the problem of unknown factors and makes it possible to determine buy and sell moments. What makes this possible is stated in the three fundamental rules of technical analysis:
- The market discounts everything.
- Trend is your friend.
- History repeats itself.
The market discounts everything
Technical analysis is based on the idea that it is impossible to take into account all factors which can affect the financial results and the exchange price. But it is not necessary, because the exchange price is already the result of reflection of all influencing factors.
There are a large number of participants in the market. They monitor reports, evaluate financial results in one way or another, have their own vision of the future, know something that others do not know, etc. The sum of the actions of all these participants leads to the fact that transactions at the exchange are carried out precisely at current prices, and not at any other prices. This is what is called "The market discounts everything". Therefore, all a trader has to do is to follow the price to determine the time of buying or selling.
Trend is your friend
The price on the exchange is not chaotic at all. If a cryptocurrency traded within $120 today, you can hardly expect the price to be $900 tomorrow and $30 the day after. It almost never happens that way. As a rule, the price is fluctuating within certain limits for some time and then it moves to another level not immediately, but also within some time. That is there are always trends or tendencies on the market.
Cryptocurrency trend analysis distinguishes three types of trends.
- Side trend - price fluctuations around the current level.
- Uptrend - upward price fluctuations more than downward fluctuations, because of which the price goes up in time.
- Downtrend - the decrease in price more than upward price movements, causing the price to decrease over time.
It is important for an investor to identify the current trend and not miss a trend change and take advantage of it. Therefore, "Trend is your friend”.
History repeats itself
By observing the price chart, traders have noticed that before significant changes in price dynamics, distinctive shapes, or patterns, can be seen on the chart. These patterns have certain names, and their appearance on the chart should mean that it is likely that price will continue to move as it most often does after the passage of such patterns.
Put another way, historical data can be used to predict price movements, because the behavior patterns of market players can be repeated. For example, Bitcoin technical analysis has proved more than once that the price change of the most popular cryptocurrency can be determined based on patterns.
Best crypto technical analysis tools
Technical analysis tools are divided into three big groups.
Crypto market indicators in technical analysis are mathematical functions based on trade data. Such data may be prices, trading volumes, etc. Based on their analysis, the trader decides whether to buy or sell the assets.
Also, looking at the cryptocurrency indicators, the trader can notice a trend change in the market, the arrival of a major market player, and signals to active operations.
There are many different crypto technical indicators. The most popular ones are Relative Strength Index (RSI), MACD, Moving Averages, Stochastic Oscillator, Bollinger Bands, Fibonacci levels.
Most often the indicators are based on cryptocurrency technical analysis charts. Crypto graph analysis is one of the basic elements of technical analysis.
There are three types of charts.
A line chart shows price movements over a certain period. Each point on the graph reflects the price of the cryptocurrency at a specific time period. All points are connected to each other. The line chart gives us a general idea of a stock's price movement in the past.
The time scale on the line chart is not always the same. Daily and weekly charts are the most common. The daily chart is clearer and shows more details, while the weekly chart is too cluttered because of the long time frame and amount of data. However, the weekly chart gives more information about the price trend of digital assets.
This is the simplest type of chart, but at the same time it is the least informative. For example, a trader can see the maximum and minimum price of a particular cryptocurrency.
The price chart in the form of bars - a chart that shows both the final prices and the maximum and minimum prices of the trading period, as well as the opening price.
The element of such a chart is a bar - a vertical line representing a separate trading period. The top of the line is the maximum price of the cryptocurrency for a certain period, the bottom of the line is the minimum price for the period. The opening price is indicated by the short marker on the left side of the bar and the closing price is indicated by the short marker on the right side of the bar.
This type of display of asset prices optimally shows the amplitude of fluctuations of the financial asset during the time interval set by the trader. Сrypto charts analysis allows one to determine the volatility of the price asset. The trader can also see the current direction of the price movement and the conditions of further moves.
A candlestick chart is a chart that shows both the final price and the maximum and minimum prices of the trading period, as well as the opening price.
The candle, or Japanese candlestick, is a component of such a chart. It has the appearance of a two-way candle. The tip of the top wick of such a candle represents the greatest price for the time, while the tip of the lower wick represents the minimum price for the same period. The distinction with the bar is seen in the presentation of the opening or closing price. The open and close prices correspond to the bottom and higher ends of the candlestick body, respectively. When the closing price exceeds the open price, the candlestick body is either transparent or green. If the closing price is lower than the beginning price, the body of the candlestick is coloured black or red.
Candlestick charts are the most useful, the most popular and the most used in technical analysis. Chart analysis of cryptocurrency of the candlestick type gives the trader the maximum information about the movement of a particular cryptocurrency asset.
A pattern is a figure, formed by a price chart or an indicator chart. It is believed that the same patterns lead to the same price changes. Thus, the patterns are used for forecasting the further price movement.
Patterns can be of the following types:
- Continuation patterns - the appearance of this type of pattern tells the trader that the price is preparing to continue the trend that existed before the formation of the pattern. The continuation of the trend occurs after the end of the pattern.
- Reversal patterns - the appearance of such figures on the price chart tells the trader about the possible reversal of the existing trend. The trend reversal occurs after the completion of the figure.
There are dozens or even hundreds of patterns - from the simplest to the most complex. It is believed that the more patterns a trader knows, the more successful his trading on the cryptocurrency market is.
How does technical analysis automate trading?
Trade automation, so popular today, is based almost entirely on the use of technical analysis.
Let's say you are developing a cryptocurrency robot. The trading strategies you put into it will be based on the study of charts and indicators. For example, the Bitcoin robot will use Bitcoin trading analysis of price change charts of the most popular cryptocurrency and based on the information obtained, determine in which direction the market will move.
TradingView, the most popular cryptocurrency community, is the best resource for studying and analyzing indicators and charts. The best crypto technical analysis tools are collected here - thousands of candlestick, line and bar charts, as well as the most popular and used indicators. In addition, traders look at popular patterns and make assumptions about where the market is going to move. Every trader can share his ideas or study the point of view of cryptocurrency trading professionals - for example, about Bitcoin chart technical analysis or crypto charts explained.
In addition, the PineScript language gives you access to the TradingView automated trading feature that you can use to create your own trading robots.
Even copy trading, the most popular strategy among all automated trading techniques, can't do without technical analysis. That's because the traders whose deals you copy use to analyze their charts and indicators in order to accurately track the price movement of a specific cryptocurrency. Without this, it will be impossible for them to determine which way the price will go. In other words, if they trade the world's most popular cryptocurrency, they can't do without Bitcoin trading analysis.
Disadvantages of technical analysis
Technical analysis has two major disadvantages - false signals and delay. Charts and indicators are based on previous prices, which are also highly fluctuating.
At the same time, if indicators are more sensitive, they will overreact to random price movements and give false recommendations more often. If indicators are set to "catch" only strong trends, they will give signals with a significant delay.
In the first case traders will have more profitable as well as loss-making trades. In the second case there will be fewer losing trades, but the amount of loss may increase. At the same time the amount of infrequent profitable trades will also decrease.
Cryptocurrency charts with indicators is a time-tested way to determine the price movement of your chosen crypto asset.
To analyze any cryptocurrency, such as Ethereum technical analysis, you can choose one of the charts we discussed or use several. The way in which price data is charted is not as important as the ability to analyze the chart information. The application of any of the charts in the cryptocurrency market requires training.
Don't forget to use the best technical indicators for cryptocurrency and don't enter into trading without understanding the specifics of each chart in detail. If you do not learn how to set the time frame and understand what the elements of the charts mean, especially the complicated ones, it will be very difficult for you to trade.
You also need to learn to understand shapes on charts such as Japanese candles and bar charts. It is best to try your chart reading skills on a demo account before you start real trading so you can hone your skills without losing money.