Crypto Technical Analysis: Step-by-Step Guide

One must either be in love with cryptocurrencies or have recently fallen for them in this thrilling world. There’s no different scenario. However, across your path came the term ‘crypto technical analysis‘.

But what is this, and how is it supposed to help you make wiser choices when you finally dare to invest in a cryptocurrency? We will dive into this deep ocean of technical analysis and explain what it is all about, trying to clarify why it might be an instrumental tool for your investment toolkit.

What is Technical Analysis in Cryptocurrency?

Technical analysis is the study of past price movements and volume, using that information to make a prediction on what will most likely happen with prices in the future. It can be applied not only to cryptocurrencies but to traditional financial markets too, like stocks and commodities.

Technical analysis of cryptocurrency simply means applying these techniques in the real market of cryptocurrency. A technical analyst, among other things, will study the charts and the volumes of trades to establish patterns and trends that might indicate which way the price of a cryptocurrency might move.

It is something simple, like reading the signs on the road to know what to expect and to avoid any surprises.

Does Crypto Follow Technical Analysis?

Another common question from people just coming into this world is whether crypto follows technical analysis. We would like to point out that most traders find some value in using technical analysis. We must say that the market is still very young and can be rather volatile. This suggests that over some time, using the technical analysis could be useful, but most times, it is not that visible.

Cryptocurrencies are driven by a very wide range of external factors, from sudden news or government regulations to tweets from influential personalities. Such events can shift prices in a way that even technical analysis can not prevent. 

However, many traders believe that price patterns and volumes in trading follow rules in the long term, which makes technical analysis useful in navigating a market.

Basic Technical Analysis Crypto

When you don’t have any idea and you are an absolute newcomer to start doing technical analysis for crypto, do not be intimidated by that. No one is saying that you need to be a mathematics wiz to do that. Just read through these basic concepts, and you can take your first step:

Candlestick Charts: These yield some of the most popular tools associated with technical analysis. Each candlestick has to do with a certain period – say an hour, a day, or a week – and consists of four important points of information: A candlestick chart is called a candlestick; it graphically depicts price movement in a stock market or financial markets at four basic points.

• Open price: It is the price at which an asset starts to trade when a certain period is opened. The opening price in a candlestick will show from either the top or the bottom of its body, depending on whether the price increased or decreased in that period.
• Close price: This is the price at which the trading asset closes at the end of a period. In a candlestick, it is always at the other end of the tip compared to where the open price is. A closing price higher than the opening price represents a price increase, and usually you will see a green candle. If the closing price is lower than the opening price you will have a red candle. 
• Highest price: This will be the highest price the asset has reached during such a period. In the language of the candlestick, the peak price is represented by the tip of the shadow above the body of the candle.
• Lowest price: This is the low price to which the activity dropped during the time period considered. It is represented in the candlestick by the lower extremity of the shadow or the “wick” below the body of the candle.

Hence, these four prices provide a clear and instantaneous view of price action for the period, thus aiding traders in making decisions. Through the use of candlesticks, you can identify trends and reversals in prices.

Support and resistance: Another key concept is the support and resistance levels of a given trading pair. A support is a level whereby at that position, a big enough volume of orders is expected so that ‌prices do not go further down. Resistance, on the other hand, acts as the level where a major selling interest may hinder the advance in price. They help identify at which level the price may stop or reverse its direction.

Technical Indicators: These represent the mathematical tools used over price data to support the decision-making process and subsequently appear as indicators. Some of the most common ones include RSI, which is a relative-strength indicator for the rate and change of price movements, and moving averages, to help you observe the general direction the trend moves in over time.

How To Do Crypto Technical Analysis

Now that you’re familiar with the basics, let’s focus on some applied crypto technical analysis. This can be accomplished through the following steps:

• Choose the Right Tool: There will no doubt be other independent websites that will provide tools to do the technical analysis of cryptocurrencies, but think along the lines of something like TradingView, the most popular. Just use your instincts and select one. Get familiar with the charts and indicators it offers.
• Select the Cryptocurrency to Analyze: Select a cryptocurrency you are interested in starting with. Let it be Bitcoin, Ethereum, and thousands of other altcoins. Once you are on the chart of the respective cryptocurrency, you are holding or want to analyze, set your time frame daily, weekly, etc.
• Trend Identification: You have to observe the chart to establish whether the cryptocurrency is moving in an upward direction, a downward direction, or is moving sideways. This would, in the majority of cases, provide an idea of the direction it is likely to predominantly take in the future.

To identify a trend, just look at the price action. If it creates higher highs and higher lows, we are bullish. If we have lower highs and lower lows, we are bearish.

• Use Indicators: Add the previously mentioned indicators, such as RSI or moving averages, that shall confirm the strength or the weakness of a trend.

In this case, we can say that there is a divergence because the graph shows lower lows, while the rsi shows higher lows.

• Patterns Chart Check: Look for chart patterns like head and shoulders or flags; they may provide you with an extra cue on future possible moves. Learn to see them; this is a very important element of technical analysis.
  Some of them are:

• Bullish Flag Pattern: The bullish flag is one of the continuation patterns, which shows the possibility of a further price rise after a short-term period of consolidation in an uptrend.
• Bearish Flag Pattern: The bear flag is a continuation pattern in technical analysis but suggests a much deeper potential drop of the price after a brief consolidation. 
• Head and Shoulders Pattern: Basically, the head and shoulders pattern indicates a trend reversal on the chart where a stock has the possibility of reversing an upward trend to a downward one.
• Double Top: The double top is another reversal pattern, indicating a potential change from an uptrend to a downtrend.

Plan Your Move: Now, with all this information in hand, you can make the decision whether to buy, sell, or just wait. But whenever doing this, though, always ensure you have stop-loss levels set, to be sure that you protect your capital if the movement goes unfavorable.

Conclusion: Thoughtful Means Everything

Crypto technical analysis is alright for the sake of trying to do anything within such volatile and bipolar markets, but it can never be done alone. Such analysis must always be partnered with other forms of analysis and always coupled with a keen eye kept on the news and emerging events within these industries.

Just remember, there is no magic wand to predict the future, and even the best technical analysis can go wrong. The trick is to guide yourself with these tools toward making wiser decisions and not listen to some unerring oracle.

With that in mind, now you should have a much clearer view of what crypto technical analysis means and how you can use it. 

Good luck with your trading, and always remember to invest only what you can afford to lose. The world of cryptocurrencies is really thrilling and abundant in opportunities, but, at the same time, it can be a rough patch that will need alertness and preparation.

FAQs: Understanding Crypto Technical Analysis