What Crypto Investors Should Know About Technical Analysis
This research was sponsored by Luno Global, a platform that allows users to buy, save and manage cryptocurrencies.
Newcomers to the world of cryptocurrency investments face a myriad of issues to consider before they even buy their first digital assets, including:
The volatility of crypto markets
What to buy (or not to buy)
How much to buy
When to buy
How to make buying (or selling) decisions
Newbies would then look to articles much like this one, hoping to gain insight into how to invest in crypto and make money.
Let me start by making one thing clear, though. No article you read will make you rich.
What this article aims to achieve is providing the reader with a solid set of tips, tricks, do’s, and don’ts, written by a seasoned investor with more than 20 years of experience trading the financial markets.
This article will make the following assumptions:
1. You’re a beginner investor in cryptocurrencies.
2. You know about major cryptocurrencies like bitcoin and ether, and the various altcoins.
3. You’ve transacted on established exchanges like Luno, Coinbase, or Kraken, buying and selling crypto.
4. You’re not a day trader in crypto, trading leveraged contracts.
I made that last distinction between investor and day trader because this article will outline simple techniques using price charts (i.e. technical analysis) that may aid the average casual investor in making their investment decisions.
Technical analysis techniques used by day traders (as opposed to investors) may involve the same concepts as will be discussed but the factors influencing trading decisions are more complex and nuanced as compared to those affecting investment decisions, and will be beyond the scope of this article.
When starting, you don’t have to time the market
Most first-time crypto investors start their journey without a plan.
If you’re one of those, and you don’t have a plan, don’t start by looking at technical price charts.
If you take that approach, you’ll only second guess yourself.
Maybe you’d think the price is too high to buy. If the price is already low, maybe you’d listen to your favorite uncle, who tells you bitcoin will probably see a newer low soon.
When crypto newbies like you start to buy, no time is ever the best time. There will always be someone out there who started out buying at lower levels than you did.
The best way to start is just to start buying.
So your first plan is to begin a dollar cost averaging program, i.e. start buying a fixed-dollar amount of crypto, say, once a week, every week at whatever the price.
For example, set aside $10 to buy bitcoin every Thursday morning, for example.
Never mind the price on the screen. Just buy.
Once you’ve accumulated some crypto regularly and you’ve observed how prices move on a charting software, then you’d be ready to start incorporating technical analysis in your investing decision-making.
Just start with bitcoin
Bitcoin is what I would call a “mature trading asset.” It has a price history that’s more than two years old, which is important because it contains valuable support/resistance data to aid technical analysis.
I will explain how important support/resistance is to technical analysis later in the article.
You will also encounter cryptocurrencies known as altcoins, which are basically any cryptocurrencies other than bitcoin.
I can only recommend looking at altcoins with a similar maturity in price history. There are well-established altcoins you can look at, for example ether, litecoin, XRP etc.
Unless you also use fundamental analysis, I do not recommend taking part in initial coin offerings (ICOs), because at this stage, their price history is nonexistent.
Technical Analysis vs. Fundamental Analysis
Let’s look at the differences between technical analysis and fundamental analysis.
Technical analysis analyzes financial markets by charting and studying price movements.
Traders — as opposed to investors — will tend to use technical analysis to actively trade the markets, regardless of whether the traded asset goes up or down in value.
Investors tend to take a buy-and-hold approach. Some might think investors don’t need technical analysis; they can just buy crypto on some variation of dollar cost averaging.
However, they can use technical analysis to find better levels at which to buy.
Technical analysis works like a window into the market’s psyche, helping identify potentially profitable trading setups and (in the case of investors) potential buying opportunities.
Fundamental analysis in crypto markets looks at background information, news, and “intelligence” relating to cryptocurrencies.
Examples include technical details of the crypto’s blockchain (e.g. the white paper), news about the crypto’s project runners, news about issues that the crypto project tries to solve, legal issues, hash rates, transaction volumes, etc.
Markets can “react” (or not) to fundamental news and vice versa. These developments can be confusing, and we will not be covering them in this article.
Technical analysis platforms
There are many software platforms you can use to conduct technical analysis on the crypto market.
Some are freely available, like TradingView. Some are linked to particular brokers or exchanges like MetaTrader and Binance.
Day traders will tend to use platforms like MetaTrader, but if you’re an investor who only buys from exchanges like Luno, a free platform like TradingView will do just fine.
Many of these technical analysis platforms provide similar features, such as the ability to draw trend lines, support/resistance lines, and basic indicators such as moving average lines, as described below. …
Technical Indicators and trading robots
Traders use technical indicators to get a feel for supply and demand in the market and market psychology.
There are hundreds, if not thousands of indicators out there.
Some are generic and built into whatever technical analysis platform you use. These are common ones such as moving average (MA) lines, the stochastics indicator, the relative strength index (RSI) indicator, etc.
Some are proprietary and commonly marketed as able to give “accurate” or “profitable” trading/investment signals.
Trading “robots” are software programs that use algorithms based on preset indicator values to provide trading/investment “signals.” They are sometimes programmed to execute trades on behalf of the user.
Most newbie investors approaching technical analysis for the first time would be tempted to think there’s a “Holy Grail” technical indicator or robot that will “work” (i.e. make money) regardless of market condition or the skill level of the end-user.
I can assure you that no such unicorn exists.
Despite the marketing, technical indicators and robots only give you information. This will only get an investor so far, as they need skill required to interpret this data.
What influences the crypto markets
A cryptocurrency’s price is usually quoted as a two-way price, i.e. as a bid and an offer.
Price moves to where there is least resistance.
It goes up when bidders keep bidding prices higher and higher, until no one wants to bid anymore and the only price remains is the offer and no one is offering higher either.
In technical analysis charts, you will see this as the price is moving generally upward.
The last bidder can continue bidding at the same high levels and not bid higher than the current offer, resulting in price ranging sideways at the higher levels.
When there are no more bids, there’s little resistance to the downside.
Sellers can then continue to offer at lower and lower prices until no one wants to offer anymore and the only price that remains is the bid and no one is bidding lower either.
In technical analysis charts, you will see this as the price is moving generally lower.
The last seller can continue offering at the same low levels and not offer lower than the current bid, resulting in price ranging sideways at the lower levels.
In retail crypto markets, price movements are not always a function of how much money a trader has. It’s all due to a combination of collective individual will and whose price is (or is not) impeded by an opposing force.
For example, bidders can easily take price higher on low volume, as long as there are no willing sellers on the way up.
Likewise, sellers can easily take price lower on low volume, for as long as there are no willing bidders on the way down.
Don’t worry if the above seem a little blurry. When you’ve taken the time to examine price charts in earnest, you’ll see what I mean.
Identifying support and resistance
The most basic skill in technical analysis is the ability to draw support and resistance lines.
Crypto investors should always be mindful of where support and resistance levels are for their crypto assets.
You don’t want to buy crypto when the price is too close to a known resistance level.
You most certainly don’t want to sell crypto when the price is too close to a known support level.
The problem is that drawing these horizontal lines involves a great deal of subjectivity, for example, at which high or low price point should these lines be drawn.
It’s confusing enough that different traders or investors have different timeframe preferences (e.g. daily vs. hourly charts). The situation is further complicated by the fact that price high/low information can vary between different sources of price data, albeit not by a lot.
Investors will then ask “how come my support/resistance levels aren’t the same as everyone else’s?”
In this section, I will show you a way to properly draw support and resistance lines that should convince you that none of the above issues are important.
Open a BTCUSD bitcoin chart in your chosen platform and choose any timeframe.
In my example I will open a BTCUSD four-hour chart in MetaTrader 5.
A four-hour candlestick or bar chart means each candle or bar shows price history of every four hours.
Switch to a line chart. Candlestick or bars are not used here. A four-hour line chart shows the closing price every four hours.
Identify all the swing highs and lows, and draw a horizontal line at each level.
Next, identify zones where there has been a lot of price “history”. Look for areas that price seemed to “pivot” around.
After taking some time to search for more swing points and pivot zones, you might end up with a chart like this:
You’ll be able to get close approximations of all those other support/resistance lines above if you squeeze in as much price data as possible. In the following chart, we see all the data since January 2021.
Drawing support and resistance lines can be very subjective. The best way to attack this “problem” is to just accept this as unavoidable.
Save the horizontal lines for future use in the chart time frame you selected, and you will see that price will continue to “respect” the lines every time price action returns to those levels in the future.
For example, let’s say that price has penetrated a known resistance level and went straight up. Then some time later, price reversed course to revisit that level, which has now been turned into a support level because there are now clusters of buy orders there to keep price “supported” for the time being.
The reason for this phenomenon is that markets in general have “memory” and traders love the comfort of familiar levels. You’ll find traders frequently like to place market orders at or near certain price levels for no other reason than that they’ve seen the asset in question trading near those levels in the past.
This might not make sense to some newbies who think markets are random.
If that is the case, welcome to the crypto markets.
What about trend lines?
The only difference between trend lines and support/resistance lines is that trend lines are drawn diagonally across visible highs or lows on price charts, presumably as price targets for order-setting.
I don’t subscribe to using trend lines because drawing them is even more subjective than drawing support and resistance levels.
No two traders draw trend lines the same way, whereas any two traders can generally agree that support/resistance exist at a given price level.
Nothing illustrates the ridiculousness of trend lines than the following chart. You have several interpretations of what trend line to use, but the horizontal support/resistance levels remain constant.
The bottom line is you don’t need trend lines when you can just use your eyes.
Trade with the Trend
As mentioned in the last section about trend lines, you can virtually eyeball a cryptocurrency’s trend just by looking at any price chart.
If price action is generally moving higher, then the trend is bullish, and so on and so forth.
Day traders may sometimes trade against a cryptocurrency’s trend. They do this because they speculate that the trend will change soon, and they want to get ahead of the pack.
This usually means day traders have to spend an inordinate amount of time looking at charts on their computer screens.
Most successful investors don’t have to complicate their lives doing this. Some of them simply apply dollar cost averaging as their investment strategy.
But one way of improving their investment holding costs is by leveraging a simple tactic of using a basic moving average line in conjunction with the support/resistance technique I outlined in the previous section.
NOTE: the following suggestions should only be applied to mature and liquid cryptocurrencies such as bitcoin, ether, etc.
To identify a cryptocurrency’s trend, just apply a simple 60-day moving average (i.e. a 60 MA) and look at the slope of the MA line.
If the MA line is sloping upwards, and price is generally above the line, then the trend is up.
If the MA line is sloping downwards, and price is generally below the line, then the trend is down.
Check out the following four-hour bitcoin chart for the 60-bar MA in action.
When in an uptrend, investors may buy every time price drops down toward its MA or when price drops 2 or 3 support levels.
When in a downtrend, investors don’t need the MA so much; they can just layer multiple buy orders near lower support levels as price continues to go down.
Always trail your stops
Stop-loss orders (or stops as they are commonly called) are orders placed to prevent further losses on open positions.
Traders use stops diligently as they tend to not hold their trading positions for longer than necessary.
But investors also use stops, just not always in the same way as traders.
For example, investors normally only place stops at their portfolio’s breakeven cost in the beginning, and then move the stops higher as price goes up. This process is known as “trailing your stops.”
This way, investors always protect the bulk of their open profit in case of sudden drops in price.
It’s important that investors place actual stops, and not just “mental stops,” on their respective platforms.
A mental stop is just an “intent” to stop out a position. Serious investors would not want to have mental stops when price runs away too fast before they can react.
The best levels to place stop orders are near the support and resistance lines that I showed you how to draw in an earlier section in this article.
For more information on this, look up trailing stops.
Don’t complicate your analysis
Technical analysis can be simple. Start with the basics and reduce the overwhelm.
The basics include:
- support/resistance lines,
- simple trend determination rules,
- a little market psychology,
- and very little indicator use.
Focus on a particular trading approach that you’re comfortable with and stick with it.
Don’t keep changing strategies every time you lose money.
I hope the above tips and tricks prove to be valuable in your first foray into technical analysis for crypto markets.
Feel free to reach out to me if you have any questions or comments by Responding to this story below.
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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