Technical Analysis in Crypto Trading | Guide
Technical analysis is a form of financial analysis that makes use of correlation and patterns in market data to predict the direction of the price for cryptocurrency.
There are many ways to go about trading the crypto makers, but one of the best ways is technical analysis. For those new to the term technical analysis, don't be scared. There is nothing "technical" about it per se. Don't be afraid, and we are here to hold your hands. But for real, as long as you know how to add indicators and draw some lines across your trading charts, you are fine.
So What Exactly is Technical Analysis?
I will give you both a technical definition and a layman's own. So here we go.
Technical analysis is a form or version of financial analysis that makes use of correlation and patterns in market data to predict the direction of price.
Simply put, the trader makes use of historical price data provided by the chart to predict where it will be going in the future.
How Does Technical Analysis Work?
The information provided by previous price action makes it possible to interpret the demand and supply of every financial instrument using technical analysis.
Each movement on a price chart is as a result of an action taken my a major trader or a large group of traders simultaneously. These major traders, also known as the big boys, are made up of the investment banks and hedge funds. The more money they pump in or remove from the market, the farther the market moves. This explains why the market rarely makes major moves when the big boys are closed for trading.
Using technical analysis, a trader can easily track, read, and interpret the footprints of the big boys. Using the information gotten, such a trader can then proceed to make a trading decision.
Importantly, the use of technical analysis only tracks actions that have been taken. This means the big boys would have made their moves, and you will only be able to interpret these moves using technical analysis after it has been made. However, if the movement is a strong one, it is likely to last a long while. This is more than enough time for you to take some profit off the market.
By now, you should be asking how you can identify a strong move? Well, it is quite simple and straightforward.
Only focus on a larger time frame. What does this mean? It merely means try as much as possible only to interpret information from a more extensive time frame chart (4hours, 8hours, daily, weekly, and monthly).
Any chart below the 4 hours time frame is usually full of distractions and whipsaws (fake movement). On low-level charts like the 1 hour, or 30 minutes chart, small scale actions of demand and supply generally have an effect on the price data.
For those who have been in the market for a while, it is no longer news that the price actions tends to repeat itself. Meaning, if you are patient enough, the market is likely to do what it did at that same point the last time.
Who is Technical Analysis For?
Technical analysis cut across all sections of the financial market, be it the stock market, forex, bonds, or cryptocurrency. So if you are trading in any financial market, you definitely need to consider technical analysis.
How Can Technical Analysis Help a Crypto Trader?
The price movement in the crypto market works on the principle of supply and demand. Meaning the more people buying a coin, the higher the price of the currency. Once people start to sell the coin, the amount of the coin goes down. In cases of sudden movement, a "whale" is usually involved. It is not uncommon to find coins worth about $500 million getting moved from one wallet to another within minutes in the crypto market. Trades like this usually lead to a sharp movement in price. With technical analysis, a trader would be able to predict the likely destination of cost and its direction after such a significant trade.
Determine Risk Level
Technical analysis will also help you determine your risk. The market is known to respect essential points in the market. Having this in mind, you can quickly learn how far you think the price will turn against you. If the price eventually crosses this level, you won't get stuck in a losing trade.
Identify Overbought or Oversold Levels
There have been several occasions whereby an announcement is expected to pump the price of a coin, only for nothing to happen. Or worse, the coin turns sideways. More often than not, coins like these are usually almost already overbought or oversold. Using technical analysis, you will be able to predict if there is still room for movement. If there is no more room for price to move i.e., overbought or oversold, the price is likely to make a u-turn to adjust. You can ONLY determine levels like these using technical analysis.
Provides You With the Real and Bigger Picture
Technical analysis helps to connect the dots between the coin price, the overall outlook, and future valuation of the project. So even if the CEO of a project is feeding lies to the public about the project, coin price, as well as the price pattern formed on the chart, can help determine if the CEO's statements are true or mare fluff.
How to Learn Technical Analysis For Crypto Trading?
Like it was previously said, technical analysis is simple and straightforward. Although you will need to take time to practice well, this shouldn't be a surprise, though. Just like everything in life, practice makes perfect.
Also, learning technical analysis is free. There are 100s of books to select from and download for free online. Another major platform where you can easily find materials relating to technical analysis is YouTube. There are tons of video teaching all you need to know about technical analysis.
What Do You Expect To Learn?
Technical analysis relies mostly on previous actions and patterns. So the first thing you will learn in your professional analysis journey is identifying price patterns.
There are a lot of charting patterns to learn, but the most important ones are not more than 20. The rest usually don't occur often.
You will also learn how to read candlesticks as well as patterns formed from combining one or two candlesticks together. This, in most cases, will be taught alongside charting patterns.
An excellent technical analysis lesson will teach you how to identify significant levels of support and resistance on the market.
You will also learn how to draw essential trendlines on the chart. Trendlines helps to identify market direction. This way, you won't be trading against the market.
Combining Technical analysis with other trading methods have been known to yield the best result, although there is nothing wrong with basing all your trading decisions on technical analysis.
Charting Package For Technical Analysis
Cryptocurrency recently started receiving support from the CFD broker, which provides one of the best charting packages for Technical analysis — MetaTrader. As a result, you might be limited and have to stick to the basics when it comes to analyzing the market. But for those looking to analyze the price of top coins like ETH, BTC, XRP, EOS, TRX, and the likes, you can still do this using the MetaTrader charting software.
Learning technical analysis takes time, but in the end, you get to make better trades and make a lot of money.