What is Technical Analysis in Crypto Trading?

Technical analysis has existed for hundreds of years, and it's been a useful tool to increase profitability in trading.

Did You Know? Technical analysis is backed by science.

It’s not just about drawing random lines on a crypto trading chart. Technical analysis has existed for hundreds of years, and it's been a useful tool to increase profitability in trading.

The candlestick chart was invented by a Japanese rice merchant, Munehisa Honma. He wrote one of the first books about market psychology, which details many patterns and terms expert traders use today.

Believed to be the most successful trader, Honma earned over 10 billion dollars during his lifetime. At the time, he was probably the only one with an in-depth understanding of the ebb and flow of the commodity markets, giving him the ability to “predict” the immediate future.

Ways to Do Technical Analysis Reading the Candlestick Chart

Candlesticks are generated by the up and down movements of the crypto price. While these movements seem random, crypto traders use them to predict short-term price direction. A red candlestick represents a down market, and a green candle indicates that the market is up.

Each candle in the graph gives you a snapshot of the trading activity within a given unit of time. A daily candlestick is particularly useful because it shows four price points:

1. Market Open – The crypto price when another day of trading starts.
2. The High – The highest price the crypto reached during a particular trading day.
3. The Low – The lowest price the crypto reached during a particular trading day.
4. Closing Price – The final crypto price when the trading day ends.
   

Each candlestick has a real body and a wick. The wick indicates where the cryptocurrency price fluctuated relative to the open and closing price. Wicks illustrates the highest and lowest prices the cryptocurrency traded over a specific time period.

On the other hand, the real body represents the price range between each trading day's open and closing price. If the real body is filled in, the closing price is lower than the open. It's the opposite when the closing price is higher and is represented by an empty body.

There are many ways to analyze a given candlestick or consecutive ones.

1. Price Actions Per Candle
2. The Real Body

A candle with no body or almost no body, all the trading during that time took place within a very narrow price range. The crypto price did not change during that time. On the other hand, a candle with a long body with almost no wick indicates that the crypto price moved further from its opening or closing price. The bigger the candle, the more FOMO (Fear of Missing Out) or FUD (Fear, Uncertainty, and Doubt) traders feel.

The Wicks

The candle's wicks indicate when traders are taking profits or buying the dip. A long wick under the body means traders are buying the dip, and the crypto price remains bullish. Conversely, a long wick at the top of the body suggests that many traders took profit, which could indicate an impending shakeout.

Trading Volume

Reading candlesticks won’t be effective without factoring in the trading volume. Each volume bar at the bottom of a trading window shows the amount of crypto traded during a particular time frame.

Support and Resistance

When you see lines running across a candlestick chart, they normally indicate two things:

1. Support – the lower limit the crypto price could go
2. Resistance – the upper limit the crypto price could go.

In order to determine the crypto price’s current support and resistance, you can look at the highest and lowest prices hit during a given time. A resistance line across the top and a support line across the bottom will give you a sense of how much volatility the market could experience in the future. You can also use the line to predict price action in the short term, which will tell you if it's a good time to sell or buy.

Price Patterns

Support and resistance lines reveal a recognizable price pattern. There are many price patterns that expert crypto traders look for when predicting price movements.

Many price patterns have been shown to be able to predict how prices will move in the future, and they keep happening in every market.

On the other hand, professional cryptocurrency traders only trust a small number of price patterns. One of them is called the Tringle Price Pattern. A triangle is created every time support and resistance lines converge. There are two important types of triangle price patterns:

Ascending Triangle

The resistance line is more or less flat, and the support line is angled upwards. When the price of a cryptocurrency gets to the edge of an ascending triangle, it tends to jump up.

Descending Triangle

The support line is more or less flat, and the resistance line is angled downwards. When the price of a cryptocurrency gets to the edge of a descending triangle, it tends to drop.

Using Technical Indicators

Building a robust crypto trading strategy requires more than just reading candlestick patterns. Technical indicators help crypto traders confirm their hunches and act on them more confidently.

What is the Moving Averages (MA)?

Basically, the moving averages indicator draws the average crypto price over a given period. There are two types of moving averages, but the Exponential Moving Average (EMAS) is considered one of the most useful indicators in technical analysis.

EMAS puts more weight on more recent prices when projecting a trend. Therefore, it reacts faster to price changes. If the current cryptocurrency price is below its 200-day EMA, it might see some resistance when it hits the 200-day EMA line. On the other hand, when the price of crypto is above its 200-day EMA line, the 200-day EMA is a strong price support zone.

A death cross is created when a short-term moving average, like the 20-day EMA, crosses the 200-day EMA from above. It signals a bearish downturn in the market.

On the other hand, a golden cross is created when a short-term moving average, like the 20-day EMA, converges with the 200-day EMA from below. It indicates that the bullish days are just around the corner.

What is the Relative Strength Index (RSI)?

The RSI is made to measure the price action momentum, which is shown by how quickly and how much the price of crypto changes. The RSI indicator is used by expert crypto traders to figure out if a cryptocurrency has already been overbought or oversold. This crucial data can help traders determine a good time to buy or sell.

In order to get an RSI indicator, a 14-day time frame is usually used to compute the average gains and average losses of the market. The result is the relative strength value. It is then plotted on a graph between zero to one hundred. The graph can then be compared to the current trends, which can sometimes show that a change is coming.

There are two important ranges in the indicator:

Oversold

When the crypto price plummets rapidly in a short time, a potential uptrend reversal is expected. Many traders define oversold as an RSI value below 30. When the RSI value goes back above 30, it could be an entry signal for buying.

Overbought

When the price of crypto goes up quickly and in a short amount of time, a change in the downtrend could happen. Many traders define overbought as an RSI value above 70. When the RSI value crosses back below 70, it signals a potential exit signal.

Fibonacci Retracement

The Fibonacci indicators provide different levels of support and resistance in the chart. Therefore, it is used to estimate the best time to buy or sell an asset.

For the Fibonacci indicator to work well, you need to find two points on the candlestick chart:

1. Swing High – an obvious reversal in the price trend, from bullish to bearish.
2. Swing Low – an obvious reversal in the price trend, from bearish to bullish.
   

With these two points, you can draw the Fibonacci indicator between the swing low and the swing high if you want to predict how low the price will go. Conversely, you can see how high the price will rise by drawing the indicator between the swing high and swing low.

PRO TIP: The 0.5 line in the Fibonacci indicator is considered to be one of the strongest support or resistance levels. Therefore, if the price action goes beyond the 0.5 line, there could be a massive up or downtrend coming.

How to Become a Successful Crypto Trader

Technical analysis is a good way to make money when trading cryptocurrencies, but there are many other things to think about when making a trading plan. You also have to learn about tokenomics, the project’s use cases, network activity, founders, or the team behind the project, partnerships, and other macro indicators.

In order to predict the price of a cryptocurrency, you need to use a mix of technical and fundamental analysis. So, as always, trade with caution and do your own research.

Disclaimer: Bitcoin and other cryptocurrencies are extremely volatile and may be go up and down in real-time.