An Introduction to Technical Analysis in Cryptocurrency Trading
Technical analysis entails employing technical indicators based on previous price action data to forecast future trends. The basic idea is that markets act in predictable ways and trends frequently continue in a direction for some time before reversing.
In general, investors seek to buy when prices are low to sell when high.
There is no single method for technical analysis. Each trader will have a personal preference and will most likely interpret indicators differently. It should be noted that technical indicators are not always 100% reliable.
Several technical indicators and chart patterns may be employed to undertake technical analysis. Entire books and courses have been written on the topic.
Here are some typical methods that traders may use to learn technical analysis.
Candlesticks represent four separate price levels for each time interval, rather than condensing data into a single point for each interval. These are some examples:
Candlesticks show this information in the form of a bar and two wicks. The peak of the top wick is the high price, and the tip of the bottom wick is the low price.
The body of the candlestick can appear either green or red. Red indicates that prices ended the day lower than they opened; green indicates that prices ended the day higher.
On green candlesticks, the top indicates the closing price and the bottom the opening price. The top indicates the opening price for red candlesticks, and the bottom is the closing price.
Each candlestick is interpreted in the context of the surrounding data points and provides a thorough look at how investors buy and sell crypto within a certain time period.
Here is an example of a candlestick chart:
Support and Resistance Levels
The phrases support and resistance relate to price levels where prices tend to bottom or peak, respectively. Traders may identify these levels and utilize them to make informed trading decisions.
How are support and resistance determined? There are several options. Sometimes it's as simple as looking at a chart and pointing out where prices have frequently pulled back (in the case of resistance) or bottomed out (in the case of support).
After recognizing them, traders may utilize these price levels to guide their trading strategy. Stop-loss orders, for example, maybe placed near support, while sell orders to collect profits could be placed at or above resistance.
Support and resistance levels may be employed in various ways since they can either be used to anticipate price reversals or indicate a new trend if prices continue to rise above them. If prices continue to rise above resistance, this might indicate that the uptrend will continue. Similarly, if prices continue to fall below support, they may fall much farther.
Below is a chart with support and resistance levels:
Other Notable Technical Indicators to Consider
Here are a few other notable technical indicators:
Relative Strength Index (RSI)
Average Directional Index (ADX)
Moving Averages (MAs)
Cup and Handle Pattern