We all realize that cryptocurrency is a totally unique asset class that is very different from traditional securities by its technical characteristics and market peculiarities. Nevertheless, some obvious similarities are also present due to the fact, that the crypto market is also the space that, similar to the stock market, changes every day.
So, crypto investors, similar to forex traders, have to keep an eye on all these changes in order to be able to make profitable decisions. Besides, despite the common misconception that social media hype is the only factor driving cryptocurrency prices, there are numerous real factors investors need to track. All this forms technical analysis in crypto. Let’s take a closer look at how it works in the era of digital assets.
Definition of the term
Technical analysis in crypto is a special research that aims to assess the current performance of the digital asset market and predict possible changes and fluctuations. Analyzing technical features of the market is a complex process that required a deep understanding of the industry and some basic skills in reading charts and graphics. Thanks to this, buyers can spot the best time to purchase an asset at its lowest price and then, using similar tactics, spot the best time to sell it when it’s on the rise and is about to start a downward movement again.
Such practices are an integral part of the cryptocurrency trading process because it helps participants to better understand the trends and, based on this understanding, make informed decisions. Good technical analysis requires the utilization of specific tools that help to track the behavior of the market in real time and build a strategy on how to respond to this behavior when it repeats itself. Below, you can learn some basics about the most frequently used instruments.
The one peculiarity that is similar to all the instruments below is that their core function is to visualize the behavior of the market so that participants could see how certain trends and tendencies are evolving within a particular timeframe.
- Candlestick charts: If you want to learn about the overall behavior of the market at a particular moment, you should consider using candlestick charts. These are specific graphics whose major feature is to visualize the highest and lowest price points of the cryptocurrency and at the same time, show the opening and closing price within the adjusted timeframe. Candlestick charts also represent different patterns, based on which you can determine your further steps. For example, the hanging man candle pattern indicates a price reversal occurring after a price advance. A fall of the cryptocurrency below its opening price within a specific period is indicated by the hammer pattern. Overall, there are 42 recognized candlestick patterns you need to learn how to read in order to achieve success in any form of trading.
- Trend lines: Although previous performance isn’t always a good indicator for future movement, by analyzing previous performance you can track a certain trend that repeats itself over certain periods of time. To do this efficiently, you can use crypto trend lines. Their biggest advantage is a high level of customizability — you can connect various price points and track strong trends if they are present.
- Support and resistance levels: Support and resistance levels serve as crucial indicators in the crypto market, representing past peaks and troughs and aiding in identifying entry and exit points. Trend lines help determine if the market is range trading or exhibiting a directional trend. Fibonacci retracement and expansion levels assist in identifying potential target levels and reversal patterns. Resistance levels indicate price pullbacks, while support levels signify bottoming out. If prices surpass resistance, it suggests upward momentum and a potential breakout. Conversely, the continuous bottoming of support points suggests the opposite scenario.
- Moving averages: Moving averages are effective tools for analyzing cryptocurrency market trends. They calculate the average price of an asset over a specified timeframe, with longer periods smoothing out daily fluctuations. Short-term moving averages shouldn’t be disregarded, as they have shown success in the crypto community. Traders can customize the lengths of moving averages, commonly ranging from 10 to 200 days. By dividing the sum of data points by the number of data points in the chosen period, moving averages provide insights into market direction.
Is technical analysis enough to succeed in the crypto market?
Undeniably, a thorough technical analysis is an extremely powerful tool that helps crypto investors to make informed trading decisions and succeed in a highly volatile market. Nevertheless, this doesn’t mean that you can make profitable cryptocurrency deals the only thing you do is track and respond to price trends. When you deal with digital projects, it’s necessary to have a deep knowledge of the entire industry. You should be aware of the team behind the project, their goals, competition in the sector, the utility of the coin, its potential for wide acceptance, and more. Information about the community and hype in social media are also important factors that might affect the price.
To conclude, cryptocurrency trading is a complex process that goes beyond research on trends and price fluctuations. While patterns, indicators, and charts are important, they won’t bring the necessary result if you don’t dive deeper into the context of this universe.