15. Technical analysis in Crypto

There are 2 main ways in which you can perform your analysis of a project; fundamental analysis (FA) and technical analysis (TA). In the fundamental analysis, the value of a cryptocurrency is evaluated by examining the underlying project variables and parameters to assess whether it is a good investment. Technical analysis, on the other hand, looks at the historical price data to predict the future price movements of a certain cryptocurrency.

The TA is not as intuitive as the fundamental analysis, and for beginners, it can be overwhelming, as it can give you an idea of ​​the language and the various techniques that many veterans use. That said, once you understand the basic concepts below, you will be able to read between the lines and extract meaning from them.

The technical analysis of the charts is simply to follow the flow of money. It shows us where the big investors are depositing it and on the other hand, where they are taking it from.

This type of analysis is based on the assumptions and basic concepts of something called Dow Theory.

A technical analysis of an asset, in addition to allowing visually recognizable patterns, uses several mathematical models to indicate reversals of trends or confirm continuous trends.

These mathematical “indicators” are usually visually represented in graphs using an “overlay”. The indicators can be used to select entry points for long-term determined positions through fundamental analysis, or for trading strategies that are carried out on the same day as Swing Trading.

Types of investors and their tools

Before deciding with which tools one will work, one must decide what kind of trader is going to be or, at least, is intended to be. Basically, we can talk about three types of investors according to the tenure of our operations:

- Short-term investors Open and close positions quickly (day trading or Swing Trading), and seek to make a profit in a short time. Generally, they have a much smaller capital.

- Investors in the medium term, in the stock market, a medium-term operation would last for months, while in crypto it could last a month for example.

- Long-term investors, Coto reserved for large fish market. It requires a very important capital investment and it is an investment that could last for years.

The most important factors when making TA

Japanese candles

We have not commented so far, but the graphs of technical analysis are usually represented with candlesticks or candlesticks, and show the opening price, the closing price, the maximum and the minimum of a session. If we are using daily charts, a candle will give us those values ​​for that day.

Candlestick charts are the oldest and most used technical analysis indicator in online trading, learn to use them.

They have the advantage that they are very intuitive to interpret, and there are even people who ignore the indicators, oscillators, medias, etc., and only take into account the shape of the candles compared to the previous ones, looking for predefined patterns, which can be found in any book or course on Japanese candles. Lap patterns, end-of-trend patterns, etc. are described. Some patterns are formed by only one candle, and others require a sequence of several candles consecutively.

Trends

A trend basically is the direction that the price follows in a graph, which may be an upward, bearish or neutral trend.

The price movement depends on the imbalance that exists between supply and demand. If there is a great interest to acquire or buy a currency, the price of it will rise, the demand is stronger than the offer. Likewise, if there is a great interest in selling a currency in the market, the price of it will fall, the supply is stronger than the demand. When these two forces are balanced, the price is lateralized, that is, the price moves in a certain range.

One of the principles of the theory of Dow tells us that the market moves by trends, Charles Dow identified 3 types of trends:

Primary Trend.

This trend is the main one of the market, it can last several months and even several years. This trend is generally followed by long-term operators.

Secondary trend.

This trend moves within the primary trend and can last from 3 weeks to 3 months, its direction is contrary to that of the primary trend, which can be a correction of 50% to 75% of the last movement of the primary trend. This trend is followed by medium to short-term operators.

Minor Trend.

This trend moves within the secondary trend and its direction is contrary to it, lasts less than 3 weeks and is usually followed by operators with very short-term trading.

Support and resistance

A level of support is the price at which a large number of traders feel they would be happy buying the asset, because they think they can sell it comfortably at a higher price. As purchase orders pile up around this price of exchange currency, a “floor” is created because the demand to buy at that price is higher than the offer to sell and, therefore, every time that the price reaches that level, goes up again. Support levels support the price rise at that level, avoid sharp drops and occasionally return the momentum upward.

A level of resistance is essentially the yin to yang of the support level. This is the price level at which a large number of bitcoin traders feel that bitcoin is overvalued (also known as overbought) and decide to sell. The large volume of sales orders creates a “ceiling” on the price and, therefore, prices fall after the resistance level is reached. The offer is high in resistance, and once the price of the currency slowly rises towards it, it is often rejected.

Negotiation Volume

As a trader of small currencies or cryptocurrencies, volume plays an important role in understanding the conviction behind a price movement. A way of thinking about the volume is as a proxy for the number of operators involved in buying or selling. The high volume points to a high trend of conviction prices (more operators are making the same decision to buy or sell at the same time) and the opposite low volume.

The volume plays a fundamental role when deciding to enter an asset; in fact, if this volume, in the area to study the possible entry, is not considerably higher than that of the previous candles, the system tells me not to enter, that I usually wait for a pullback, if there is a Second entry option, because if there is not enough volume, the market can stay on the side and I stay inside without having liquidity to be able to invest in other assets that offer me better opportunities.

History tends to repeat itself

Human psychology drives markets and human psychology tends not to fundamentally change. This means that given the trigger of a particular event, operators will often behave in historically similar situations.

The Market “Discounts” Everything

When you see the price of an asset, you must assume that any information that could raise or lower the price (demand levels, news that moves the market, regulations, etc.) is already included in the price. Essentially, everyone knows the same amount of information, so the price is an exact representation of that.

Myths

Another detail that we cannot ignore is that there are a number of myths that you have to ‘put to bed’ first.

- There is no ‘miracle’ algorithm to analyze a cryptocurrency that will tell you exactly what is happening. Remember this: Technical Analysis are the tools, but their value is determined by their user.

- Moderate your expectations. Technical analysis will not give you a crystal ball, but it will help you determine the general direction in which a cryptocurrency is directed.

- No matter how many times you read the theory, you have to practice. When you think you have it, practice a little more. It is advisable to apply the analysis that is learned to as many different currencies as possible.

- Possess a craving for knowledge. Never stop reading and learn about these things. This is not something that will read for a couple of seconds and just dominate randomly. This is a skill, and as such, you need to feed it

Resources

One of the best sources for opinions of professional analysts on the price of Bitcoin is TradingView since, in addition to providing a wide range of tools with graphics that can be useful, allows its users to share your own analysis with other users. This is one of the few sources where you can see the content for free, but you must bear in mind that not all authors are professional traders.