Technical Analysis: Candlesticks & Crypto

Published in

CoinBundle

8 min readAug 23, 2018

Investing in crypto goes beyond simply purchasing a coin and monitoring its performance in the market. Any real crypto trader would tell you that not investing at the wrong times is just as — if not more — valuable than investing at the right time. So, how are you supposed to know when is and isn’t the right time to invest? This is where something like technical analysis (TA) comes into play, giving intelligent traders the ability to analyze market conditions and make trades or even long-term investments with the resulting information. Let’s take an in-depth look at what technical analysis is all about as well as w to perform it for yourselves!

This is not financial investment advice.
This article will touch on key aspects of technical analysis and its relating market indicators

What Is Technical Analysis?

Before we jump straight into any of the strategies or analysis associated with technical analysis, let’s first take some time to go over what it is and how it developed in the first place. Technical analysis considers the history of a coin with price charts and trading volumes, irrespective of what the coin or project actually does. As opposed to technical analysis, fundamental analysis is more focused on establishing whether or not a coin is over or undervalued.

Technical analysis is based on the fundamental ideas of Dow Theory, which assumes several things about the market when assessing its overall performance. The market considers everything in its pricing. All existing, prior, and upcoming details have already been integrated into current asset prices. Technicians interpret what the price is suggesting about market sentiment to make calculated wise predictions about future pricing. Price movements aren’t random either. Rather, they often follow trends, which may either be long or short-term.

When it comes to assessing the performance of the market, especially when using technical analysis, the “what” is more important than the “why,” Another thing to consider when assessing the market is to understand that history tends to get repeated. It’s possible to predict market psychology, as traders sometimes react the same way when presented with similar stimuli. Having this information will give you an advantage when trading or investing, especially when performing technical analysis.

Technical analysis considers the history of a coin with price charts and trading volumes, irrespective of what the coin or project actually does. As opposed to technical analysis, fundamental analysis is more focused on establishing whether or not a coin is over or undervalued.

Technical Analysis Terminology

Now that you’re aware of what technical analysis entails regarding market sentiment, let’s understand some keywords and phrases that will give you a better understanding of what technical analysis is all about.

Trend lines: Trends, or the typical direction that a coin is moving towards, can be most beneficial for traders of crypto. That said, isolating these trends can be easier said than done.

Resistance: Resistance, or a resistance level, is the price point at which the rise in the price of a stock or a coin is halted by the emergence of a growing number of sellers who wish to sell the asset at that price. Resistance levels can be short lived if new information comes to light that changes the overall market’s attitude toward an asset, or they can be long-lasting.

Support: A support or support level is a financial term that refers to the price level that historically a stock or coin does not fall below. Buyers tend to purchase the stock at this level.

Moving Average: A moving average is based on the average price of the coin over a certain period of time. For example, a moving average of a given day will be calculated according to the price of the coin for each of the 20 trading days prior to that day. Connecting all moving averages forms a line.

Familiarize yourself with the aforementioned terms before reading about how to actually perform TA.

How To Perform Technical Analysis

So, now that you’re aware of what technical analysis is and have familiarized yourself with key terms, let’s go over how to actually perform technical analysis when trading cryptocurrencies.

Performing technical analysis relies on your ability to identify and react to key indicators within the market, that will allow you to better analyze market sentiment towards specific coins. One of these indicators happens to be the trading volume of specific coins. The literal volume, the amount of coins traded, often appears as a column along the bottom of a price chart. The height of this column acts as a visual identifier of the volume, and the color indicates if that volume tended to be more bearish (sells) or bullish (buys).

Volume is actually an extremely important indicator, as it shows just how serious a bullish or bearish market is. The larger the volume of trade, the more volatility we’ll see in the price. Traders like volatility because it provides the opportunity to buy at a low price and sell at a high price, but also runs the risk of acting in the opposite way.

Another key indicator for performing technical analysis is moving averages. As stated above, these are based on the average price of the coin over a certain period of time. It shows the support or resistance to buying or selling at a certain price point. If the closing price for the day can’t get past the moving average, it suggests that there is resistance at that point where people are selling. If it climbs past the moving average, it supports the idea that it’s a bullish market and that you should look for an opportunity to sell. If the closing price can’t dip below the moving average, it suggests that there’s support in the form of people buying at that price. However, if it does dip below the moving average, then it suggests that the market is moving into a downward trend which might actually result in some buying.

When dealing with moving averages, you must be aware of the time period which you are assessing before making any decisions. Remember, as a rule of thumb, that the longer the period examined, the stronger the indicator. With that in mind, assessing the price movements over just seven days isn’t that strong compared to 70 days. The latter would provide a more robust indication of whether the market is beginning to move above or below the moving average.

Lastly, traders use trend lines as key indicators of market performance when using technical analysis. Considering how volatile the crypto market can be, trends emerge in all kinds of time frames from the hour to the month. Similar to moving averages, trend lines are best understood when looking at longer time frames which tend to give you a more rational behavior associated with each trend. With that being said, it might be a little difficult to isolate these trends, especially when crypto prices are moving all the time.

A series of higher highs or lower lows gives technicians a good idea of how a trend is moving. Using candlestick graphs, you can make the most accurate trend lines irrespective of what time frame you decide to use. Recognizable candlestick patterns help traders create lines which they believe will result in actual price movements. Given the assumptions listed in the Dow Theory, we know that there is also a psychological aspect of price movements which traders can easily exploit by using technical analysis to isolate trend lines.

Performing technical analysis relies on your ability to identify and react to key indicators within the market, that will allow you to better analyze market sentiment towards specific coins. Using trend lines, moving averages, and volume, traders can accurately predict how the market will perform.

Technical Analysis Patterns

Given the fact that there are popular trading patterns which have been created through technical analysis, it would be a good idea to familiarize yourself with some of the most common ones. Let’s go over some of the most widely known candlestick trading patterns identified by some of the world’s top traders.

The patterns above have been identified and recognized by many of the top traders as common trends when using technical analysis. Since cryptocurrencies tend to have a strong upside bias, traders who want to use candlestick formations to improve their trading skills should focus on chart patterns that tend to predict bottoms or a continuation of the uptrend.

However, there are still tons of other patterns which can go more in depth or even take a broader look at prices. The most significant bullish patterns which all traders should educate themselves on are: The Hammer, The Bullish Engulfing Pattern, The Piercing Line, The Morning Star and The Three Soldiers. Let’s take a closer look at these.

The first of these patterns is called The Hammer. This is a bullish reversal pattern, which signals that an instrument is nearing a bottom in a downtrend. Hanging Man — the opposite.

The next pattern is The Bullish Engulfing Pattern, which is a two-candle reversal pattern that appears in a downtrend. The Piercing Line also appears in a downtrend:

The next candlestick pattern which you should familiarize yourself with is the Morning Star pattern. This is a famous pattern known for bringing hope amongst traders who are in a bear market. During a downtrend, when the Morning Star pattern emerges there is sign of hope during what is already a gloomy downtrend. This is a common pattern traders look for when prices are dropping.

Last but not least, we have the infamous Three Soldiers pattern which is actually similar to the Morning Star pattern. This pattern results in three “higher highs” which subsequently leads to the “three black crows” pattern. Usually appearing during a time of price consolidation, this pattern is also very well known and could help traders greatly.

Want to learn more about technical analysis patterns which involve candlesticks? Simply search online for these patterns and you’ll find a seemingly endless list of more intricate and less-known patterns as well which we haven’t gone over. Otherwise, your understanding of candlestick patterns will adequately improve if you learn to identify the aforementioned patterns in today’s crypto world.

Conclusion

So is technical analysis really all that technical after all? We’ll let you decide for yourself, but as you have read, this is ultimately an extremely useful tool for any intelligent trader or investor who aims to get an upper hand over others in the world of crypto. Simply investing in a coin does not make you a smart trader, but taking time to assess and deeply analyze specific coins — or even the market as a whole — will give you a much better understanding of crypto markets as a whole. As always, happy investing!

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Are you or someone you know actively using technical analysis when trading? Let us know why in the comments!