Are you a newbie in crypto and struggling to make that trade? Have you been trading based on guts? That could be very dangerous as you may end up trading with your emotion and falls victim to FUD and FOMO. Using technical analysis in trading cryptocurrencies will help you do the right trade. It will help you discern when is the right time to buy and sell your digital assets. But what is technical analysis? This process involves using mathematical indicators based on previous price actions to determine the future trend. Will it be downward or upward? That will depend on your technical analysis. Crypto traders use various indicators but always be noted that no technical analysis is 100% accurate. Now, let’s proceed to the basic steps on how to conduct a crypto technical analysis. Here are the basic indicators that crypto traders when doing technical analysis.
This is usually preferred by traders for their high level of detail. They are used to describe price action in a market during a given time frame. It is commonly formed by the opening prices, highs, lows, and closing prices of financial instruments on an exchange and shows information in the form of a bar and two wicks. The peak of the top wick is the high price while the bottom is the low price. The body can appear in green and red. Red indicates that prices ended lower than they opened while green means prices ended higher than they opened. The top of green candles indicates the closing price while the bottom is the opening price. In the case of the red candle, it’s actually the contrary. Using this indicator will help investors the entry and exit price.
Support and Resistance Levels
Support and resistance level refers to the level where digital assets tend to go bottom or peak. Traders need to identify these levels and use them to make trading decisions. These can be determined by looking at a chart and pointing where prices made repeatedly pulled back (for resistance) or bottomed out (support). Stop-loss-orders might be placed at support while taking profits might be put in place above resistance. Support and resistance levels can be used in many ways though since they can be very essential in predicting price reversals, or if prices continue on surge can indicate a new trend. If prices continue to rise above resistance, it is a good indication that the momentum is sustained. But if prices continue to decline below the support, this could mean that prices would fall even more.
Relative Strength Index (RSI)
This indicator is a favorite among veteran traders and presents itself as a simple line graph below a price chart. The line sway from 0 to 100 with 50 as neutral. A high value indicates that the asset is overbought conditions but when it’s lower indicates otherwise. But RSI is best used along with other indicators. An example of this is when a crypto asset is approaching an established support level and at the same time, the RSI is giving a low reading an upcoming price rally is more likely to happen.
Average Directional Index (ADX)
This is a short-term indicator used by traders to determine how strong a trend is. A high ADX indicates that there will be more momentum behind current trends. ADX is the average of the values of directional movement lines over a particular period and has a value of between 0 to 100, similar to RSI. But it’s very seldom for this indicator to rise above 60. An ADX 25 and above indicates trend strength while 20 below means no trend is ongoing. 20 to 25 could either mean neutral or no trend. A rising ADX line is a sign that the current trend is growing stronger.
Moving Averages (MAs)
Moving averages is a tool used to determine the trend of the direction and summarizes data points of a crypto asset over a set of periods with the total divided by the number of data points to create an average. Since the number is constantly updated using the latest price data hence the term “moving” average. MAs can either be tracked as long-term or short-term. There are four types of MAs namely simple or arithmetic, exponential, smoothed, and weighted. We will be discussing more of this in our next article.
An MA indicates a bullish trend called the “golden cross” when a short-term MA moves above a long-term MA known as the 50-day MA above the 200-day MA.
As the word indicates, trend lines show potential trends and may take many forms. At times multiple trend lines can be drawn on the same chart to illustrate more complex patterns. They can also be single lines that connect multiple high or low price points. More points connecting on the same line indicate a stronger trend.
Cup and Handle Pattern
This is a famous bullish setup consisting of a price chart over which a cup (the bottom half of a circle) and a handle (a downward-slanting line at about a 45-degree angle) can be drawn. How can this happen? Prices generally should fall, briefly trade sideways, rise for about the same length of time as they originally fell then have a steep but brief drop. The final drop creates the handle, at which point the pattern is thought to be confirmed, and prices could rise. But an upside-down cup can indicate a bearish trend where prices could fall.
The use of these indicators can help crypto traders make a wise trade. But always keep in mind that despite the use of these tools, none of these can give 100% accurate predictions when making a trade. Cryptocurrencies are basically volatile and can create a trend at any given time that could be contrary to signals given by these indicators. So it’s always best to invest what you can afford to lose.