Trading cryptos is a profitable investment opportunity but it doesn’t remain so if you are doing it just based on your hunch and gut feeling. In this article, we will discuss technical analysis, a method of finding profitable trading opportunities, in detail.
What Is Technical Analysis?
Technical analysis is a trading strategy where the crypto traders try to invest the future price movements of the asset using past data. Traders observe past movements and indicators to bring out a pattern that can accurately predict the future in similar market conditions. An underlying assumption in technical analysis is that history tends to repeat itself. Crypto signals providers often use technical and fundamental analysis to set up trades for their members.
Technical analysis involves a lot of mathematical charts and indicators to represent emerging patterns. A few of such tools/ indicators are explained below.
Candlestick charts show information through a bar and two wicks. The information contained includes high price, low price, opening price, and closing price.
The body of the candlestick is either red or green. Green indicates that the closing price is higher than the opening price for that trading day. Red indicates the opposite.
The peak of the top wick indicates the high price while the last point of the bottom wick indicates the low price.
On red candlesticks, the top of the candlestick indicates the opening price while the bottom indicates the closing price. On green candlesticks, the top indicates the closing price while the bottom shows the opening price.
Support and Resistance Levels
In every cryptocurrency, it is generally observed that the price is bound by a lower and a higher limit, breaching which is impossible for the asset unless the trend is broken.
Support Level is the lower bound of the price, below which the asset enthusiasts do not let the price fall by starting to buy the cryptocurrency.
Resistance Level is the upper bound at which people start to start dumping the crypto to make huge profits. This decreases the demand for that cryptocurrency in the market and leads to a fall in its price.
Average Directional Index
It’s a short-term indicator calculated as an average of values of the directional movement lines over a period of time. Its value ranges from 0 to 100.
The value of ADX shows the strength of a trend. A value above 25 indicates the strength of the current trend. However, the value rarely goes above 60. Below 20, there is no trend. A rising value between 20-25 indicates that a trend might soon emerge.
Trend lines are used to find and illustrate potential trends in the market. When we join multiple high and low price points of an asset over time, a trend emerges. The more the number of points that lie on a trend line, the stronger the trend is. Multiple trend lines can be used on a single chart for a more detailed inquiry.
Moving averages, or MAs, in short, is another method of finding the direction of emerging trends for an asset. It takes an average of the price points of a cryptocurrency over a time period and displays the result. It’s called moving average as it only takes the latest data points into account. Like, some traders might be using the MA of the last 10 price points to predict a trend. Long-term MAs are better predictors as they use more data than short-term moving averages.
Technical analysis is a very detailed method with many other techniques unlisted in this article. If you are willing to learn more, you should grab a book on the topic. For others, the best crypto signals providers are a great bet.