Become a Better Crypto Trader with Technical and Chart Analysis

#8 — Buy and sell cryptocurrencies at the right time with chart analysis

After reading this article you will be able to fully read this chart, and know when to buy and when to sell

I am sure you heard about EMA, Resistance, Support or even saw some weird drawings with triangles, waves or lines? When I started investing in cryptocurrencies I felt very dumb not understanding them. That’s why I did my researches and I am now sharing here the basics of Technical analysis and Chart analysis.

This article is part of my Learning challenge where I learn about one topic each month. As you can imagine, this month, I was learning about trading & cryptocurrencies. I based this studies on a book and a few article and ended up investing 1000€ on cryptocurrencies. Click here, if you want to know more about my methodology.

Technical analysis and charts analysis will help you to anticipate how will the market evolve. There are a few patterns you can easily find, add to that some mathematical indicators and use them to buy/sell at the right time (or at least at least at a better time than before).

Start analyzing charts and become a chartist 👨🏽‍🎨🎨!

There is a very good tool for that: https://www.tradingview.com/
I invite you while reading to try to play with it to see the patterns or to add the different indicators to understand them.

If you don’t know why the price of the market is define, why it increases and decreases or don’t know how to read the candle chart, check first this article I made that explains the basics.

Trend. Resistance & support

Finding the trend, resistance and support are quite easy. Just follow these steps:

  1. Make a line from the local maximum (using at least 3 points), this will be the resistance line
  2. Make a line from the local minimum (using at least 3 points), this will be the support line
Here is an example that I did in trading view. And we can see here a Descending Channel!

Channel

If the two lines are parallels this will give you a channel, this channel can have an ascending, descending or horizontal trend. To maximise your should buy when the price touches the support and sell when it reaches the resistance until a breakout which can be bullish (going up) or bearish (going down).

Channels from Investopedia — https://www.investopedia.com/articles/trading/05/020905.asp

When the channel is horizontal, we call it the rectangle, the price usually leaves the triangle in the same way it entered, if the trend was bullish before entering the rectangle, it will leave it bullish and vice-versa.

Triangle

If the two lines make a triangle shape, it means that the market is hesitating 🙄. But there are 3 types of triangles.

Triangles for Investopedia — https://www.investopedia.com/university/charts/charts5.asp
  • Symmetrical — at the end of the triangle the market will probably continue the same trend that it entered
  • Ascending — when the resistance line is horizontal, the market will probably continue growing and break the resistance
  • Descending — when the support line is horizontal, the market will probably continue decreasing and break the support

There are also other patterns that the book didn’t cover. I invite you to google to know more about them.

Patterns

You have a few other patterns that can be harder to find but help you to see how the market may evolve.

Head and shoulders/Inverted Head and shoulders

Head and shoulders from Investopedia — https://www.investopedia.com/university/charts/charts5.asp

The head and shoulders pattern with an M shape or W shape for the inverted one is often seen in the stock market, just try to be careful before passing an order if you are or not in one of these patterns.

Flag 🚩

The flag often happens after a fast growth, when the market is consolidating (when it decreases) in a descending channel, then it keeps going up after this break. The more the channel decreases, the more the volume of transaction decreases

Flag pattern from Investopedia — https://www.investopedia.com/university/charts/charts6.asp

There is also in a similar way an inverted flag.

Eliott waves 🌊

The Eliott wave pattern is a pattern you can see in trading markets.

Eliott Waves from Wikipedia — https://fr.wikipedia.org/wiki/Th%C3%A9orie_des_vagues_d%27Elliott

As you can see in the graph above there is 3 time the same graph with different granularity. You can see Eliot Waves in smaller waves of Eliott Waves, it’s like a fractal.

Every Eliott wave pattern is composed of 8 movements:

  • 5 in the ascending phasis (1, 2, 3, 4, 5 in the figure above)
  • 3 in the descending phasis (A, B, C in the figure above)

Every ascending phasis is alternating with descending ones and vice versa. If you can identify these pattern you know if your market is in a right cycle to buy it. The good news is that the Eliott waves are repeating infinitely and at different periods since it’s like a fractal. Some cycle can take only days, some other months and some years.

Eliott Waves are usually used with a more mathematical calculation called Fibonacci retracement.

Fibonacci retracement

When the market is having a retracement for example at the 4 in the figure. The price will lose 38.2%, 50% or 61.8% of its previous gain.

Candlestick patterns 🕯

There are also some candlestick patterns, the book only mentioned them so I made a google research to understand them. Here is an example of one of them.

Three Line Strike

Note that the black candles are the one going down (can be also red) and the white ones are the one that goes up (can be also green).

Three line strike pattern from Investopedia — https://www.investopedia.com/articles/active-trading/092315/5-most-powerful-candlestick-patterns.asp

If there are three black/red candle a row and a white/green one which “cancels” the three previous ones then it’s a beginning of a bullish trend.

This pattern has an 84% success rate, and it’s the one with the highest success rate. Also, you can also find the same pattern inverted.

If you want to see the top 5 of the most powerful candlestick pattern read this:
https://www.investopedia.com/articles/active-trading/092315/5-most-powerful-candlestick-patterns.asp

Moving average

Let’s now talk about the mathematical indicators. Note that you can find all this indicator in the website Trading view I recommended above.

Simple Moving Average — SMA

It’s based on the average in the period and a number of past period. In order to know when to buy and when to sell you add two SMA:

  • One for a short number of period for example 12
  • And one for a long number period for example 26

When the two are crossing:

  • The short is about to go above the long: buy
  • The long is about to go above the short: sell

Here is an example, they use one SMA of 200 days and one of 50 days.

SMA example from Online trading concepts — http://www.onlinetradingconcepts.com/TechnicalAnalysis/MASimple2.html

Also, if the price of the market is going very far from the SMA, the price may go down/up to adjust so avoid buying in this case.

Exponential Moving Average — EMA

The EMA is similar to the SMA, except that more weight is given to the latest data. You can use it in a similar way, using two curves (one using a short number of periods, and one using a bigger number of periods). You can also compare it to the SMA to make your decision.

When the EMA curve crosses the SMA of the same period and goes under it it’s usually time to sell. When it crosses and goes over it, it’s time to buy.

Weighted Moving Averages — WMA

The WMA is calculated using a weight which is bigger in the latest periods. You can use in a similar way than EMA and SMA. Or compare it to SMA.

EMA is better than WMA when the curve fluctuates a lot.

Other indicators

Relative Strength Index — RSI

The RSI is calculated by dividing the average of growth by the average of decreases. This can tell you if the currency is overbought or oversold.

RSI from Wikipedia — https://en.wikipedia.org/wiki/Relative_strength_index

If the RSI is between 70 and 30 we are in a neutral zone:

  • if it goes over 70 it’s the right time to sell because it may correct
  • if it goes under 30 it’s the right time to buy because the market will probably go up again

Stochastic — STS/Oscillator

The Stochastic is a bit similar to RSI, but it has two charts: the STS and its moving average.

Momentum/Rate of change — ROC

The ROC shows the speed of the evolution of the price. If the ROC stays around 0 means that the price will evolve constantly.

If the ROC keeps decreases while the price is going up means that the price will start to go down. So maybe the right time to sell.

Moving average convergence divergence — MACD

This indicator uses Exponential Moving Average of 12 and 26 periods and their crossing to find signals. It’s used with another signal line calculated with a Moving Average of 9 periods. They two charts are evolving around 0, and when they are crossing: it’s time to buy or sell:

  • When the MACD is going over the Signal line: buy
  • When the MACD is going under the signal: sell
MACD from Wikipedia — https://fr.wikipedia.org/wiki/MACD

This indicator gives more prediction on the future compared to others but it has a bigger error rate.

Note: in TradingView you have one indicator called MACD Strategy which tells you when to buy or sell directly.

Bollinger bands

The Bollinger bands are 3 charts: one is the moving average of 20 periods, and two others that are this one +/- twice the standard deviation. It shows how should be the variation of the price: inside the band. It’s a good indicator if you do short-term trading. It acts as a support and resistance.

Bollinger bands from Investopedia — https://www.investopedia.com/terms/b/bollingerbands.asp

Other

We saw a bit everything about the main patterns, and indicators to analyze your graphs and try to make better decision. If you want to do more analysis as concern the correlation between currency I invite you to follow this link: https://blog.patricktriest.com/analyzing-cryptocurrencies-python/

What’s next?

This article is part of my Learning Challenge about Trading & Cryptocurencies. Like this one I made 4 others article related to the topic.


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