Technical analysis is one of the key methods of analyzing the crypto market before placing a trade. The others are fundamental analysis and mixed analysis. Fundamental analysis involves the use of market charts and mathematical tools called indicators, to point out trading opportunities in the market. Some of these opportunities can include
- Market trends
- Key support zones
- Overbought and oversold market conditions
- Reversal or continuation chart formations.
It is important to get familiar with indicators and charts if one is to be a successful trader or technical market analyst.
Why Crypto Technical Analysis?
Technical analysis is regarded as one of the most difficult forms of market analysis. This is because understanding market patterns and how advanced indicators like the Ichimoku cloud and the MACD work, might be overwhelming for some people.
Technical analysis, however, can be profitable if one understands how to read and understand charts, patterns and indicators.
Anyone can read a chart. But it takes skill, time and patience to extract meaningful information and trade profitably from them.
Some Crypto Technical Analysis Concepts To Be Familiar With
Here are a few concepts and terms to be familiar with, if one intends to be a successful technical crypto analyst.
A market chart is a graphical representation of a market’s prices over time. A chart shows data such as historical prices, market formations, trends and support/resistance zones to name a few.
There are many kinds of charts, depending on how they graphically display prices. Some of these types include
- Candlestick charts
- Line charts
- Bar charts
- Area charts
Indicators refer to one or a combination of mathematical tools, that can be applied to a chart. These tools can be used to identify key market trends, buy and sell zones, and overbought or oversold market conditions.
There are various types of indicators, including but not limited to
These indicators show the strength and direction of market trends. They are important assets when one needs to determine when to enter, leave or stay away from the market altogether.
These indicators consider the closing prices of market options over a duration known as the period. A moving average then displays this data in a way that makes it easier to predict future market behaviour.
These indicators show how fast market prices change over time. In other words, they show the degree of variation in market prices. A good example of this is the Bollinger band indicator.
Relative Strength Index (RSI)
The relative strength index is a simple yet powerful indicator. Put simply, an RSI indicates overbought and oversold conditions in the market.
The indicator looks like a simple line within a margin that ranges from 0 to 100. When the line is closer to the 0 mark, this indicates oversold market conditions and might mean that a trend reversal to the upside is about to happen. When the line is closer to the 100 mark, this indicates overbought conditions and might mean that the market trend is about to reverse to the downside. The line is on neutral ground at the 50 mark.
Support And Resistance Levels
These levels refer to points where market trends tend to reverse. In essence, a trader can draw a line to connect the highest of these reversal points in a chart, and another line to connect all the lowest reversal points. These lines serve as a market range inside which traders can place and exit trades. Support and resistance lines can also help a trader to predict where the next reversal might occur, and take full advantage of such points.
From their name, trendlines are pretty self-explanatory. They refer to imaginary lines that illustrate market trends. Trendlines are drawn to connect various high and low points on a chart. Sometimes, multiple trendlines can be drawn on the same chart to illustrate complex or unclear trends.