Technical analysis of cryptocurrencies

In classic financial instruments, you can find analysis tools that can be used for chart analysis. In this article, we will introduce you to the various technical analysis tools related to the cryptocurrency market. But before we go into detail, a little information about the crypto market.

Cryptocurrency market - opportunities & dangers of volatility

opportunities

At the outset, it should be pointed out that the cryptocurrency market is highly volatile. This means that the value of Bitcoin, Ripple and Co. is subject to strong price fluctuations. The more volatile a market, the more difficult it is to predict it.

The opportunities and risks are actually self-explanatory. Due to the extreme price fluctuations, a lot of money can be made or lost within a short period of time. Therefore, the principle always applies: never invest more than you can lose. Because the market is so volatile and sensitive, certain headlines can lead to extreme effects. There is also, of course, the risk of market manipulation, as there is relatively little capital in cryptocurrencies compared to traditional markets.

HODL vs. day trading

The term HODL is a Bitcoin meme and describes nothing more than holding cryptocurrencies for the long term and not being influenced by market fluctuations. The HODLER intends to hold Bitcoin, Ethereum or other cryptocurrencies for the long term. One does not speculate on short-term profits.

Day trading is a short-term speculative interpretation to generate profits on a daily basis. Cryptocurrencies - with the volatile markets - are naturally optimal for day traders. The day trader does not aim to hoard Bitcoin and other cryptocurrencies, but wants to get as much as possible out of his stake in a relatively short time.

Trader talks about a scenario with bitcoin

The Bull and the Bear / Bullish vs. Bearish

A bull market is when prices continue to rise. The bull represents the upswing, is positive and optimistic. In practice, however, a long-lasting bull market is also understood as a bubble that could burst. A bear market, on the other hand, is the opposite, the bear is pessimistic and represents falling prices. Before you can start, however, we recommend the trading platform eToro, because here you can deposit quickly via Paypal and start trading immediately.

Long and short positions

Since cryptocurrencies are quite volatile, traders decide to bet on long or short positions. With a long position, you bet that the price will rise, while with a short position you speculate that the price will fall. The risk here is immense, because as soon as the price moves into the opposite position, the entire deposit is lost from a certain leverage. On the Bitmex* trading platform you can set long and short positions.

Fundamental analysis

Bitcoin hand take money

Fundamental analysis can also be described as a causal analysis in which an attempt is made to analyse the reasons for fluctuating prices. Transferred to the cryptocurrency market, one tries to evaluate the infrastructure and the economic environment and thus determine the actual value of the cryptocurrency.

Technical Analysis - Assumptions, Terms & Methods Explained

Technical analysis analyses the price trend from the past in order to forecast the future value. The basis of technical analysis is always the price chart, which is why it is also referred to as chart analysis.

Price charts graphically represent the price development of an asset over time. A price chart shows the time on the horizontal axis and the price on the vertical axis. Pay attention to the swings of the graph: The more frequent and intense these fluctuations, the higher the volatility of the asset. If, on the other hand, there is a very flat curve, we also speak of sideways oscillation, the price was stable and hardly changed.

Successful investing and trading follow the same principle: buy cheap and sell expensive. Every trading decision is therefore always based on the question: "How will the price of the asset develop in the future?" The future cannot be predicted, but a look into the past can be very revealing. This hindsight is obtained by looking at a price chart.

Chart analysis attempts to predict what future price changes might look like by looking at past price trends. It is therefore important to consider the three basic assumptions of chart analysis.

3 Basic assumptions of chart analysis

Those who believe in the effectiveness of technical analysis are commonly known as "technicians" and are usually opposed to the proponents of fundamental analysis. To believe in the validity of price charts, one should be convinced of the following assumptions:

1. the futures market has priced in all fundamental factors.

Proponents of technical analysis are convinced that the exchange price already represents the intrinsic value of the commodity or security. Consequently, all fundamental factors that influence supply and demand have already been taken into account. Accordingly, chart analysis is sufficient to predict coming price changes. Incidentally, the "technician" does not ignore fundamental factors altogether, for he takes them to heart indirectly through chart analysis.

2. prices move in trends

Prices can move in one of three directions, up, down or sideways. Once a trend takes effect in one of these directions, it usually stops. The market trend is simply the direction of market prices, a concept that is absolutely essential to the success of technical chart analysis. Spotting trends is quite simple; a price chart usually shows the prevailing trend characterised by a series of waves with obvious highs and lows. The direction of these highs and lows makes up the market trend.

3. history repeats itself.

Technical analysis also captures market psychology. Human behaviour patterns have been documented and categorised for several hundred years, and they are constantly repeating themselves. This reveals itself in the form of specific chart patterns that indicate a continuation or change in the trend.

Reading price charts correctly

In order to be able to read and interpret price charts correctly, you should familiarise yourself with the different chart types, time frames and indicators.

Different chart types

In order to be able to read price charts correctly, it is also recommended that the chart is presented in a way that is friendly to your eyes. With professional analysis tools you can therefore choose from different chart types. There is no best approach, some investors prefer curve or bar charts, but line charts are also common.

The importance of the chosen time window

An important factor in chart analysis is the time frame within which you analyse the price development. In general, the longer your investment horizon, the longer the time window you should use for analysis.
  • While as an investor you will look at least at the last 6-12 months, as a trader you are more interested in short-term price fluctuations - for example within a few hours or days at most. In extreme cases, you can even carry out the chart analysis with time windows of one minute.
  • It is important that the analysed time frames are meaningful for the purpose of your investment horizon. If you want to buy and sell in day trading, i.e. within one day, then you should look at past price patterns within 24 hours. (In this case, daily volatility can be a good indicator).

Instruments and indicators of technical analysis

A look at a price chart offers initial clues, but still lacks a more detailed analysis. However, technical analysis becomes much more precise through the use of indicators and instruments of technical analysis, which we now present.

Support

Probably the best-known techniques in technical analysis are the terms support and resistance. Support means nothing more than a kind of support line. With this line, one assumes that there will be strong buying power, i.e. that demand will be greater than supply and the price will rise because many buyers are willing to buy the respective cryptocurrency at this price. As soon as the price approaches a support zone, the support is tested. However, if the line is broken, this can be an indicator of a downward trend.

Resistance

With resistance, it is the other way round. Here the sellers rule because they want to sell at a certain price. Supply is greater than demand and a price rise will reverse. But if the resistance line is broken, this can be an indicator of an uptrend, as buying power is stronger than selling pressure.

Resistancef

SMA - Simple Moving Average

The Simple Moving Average, or SMA for short, is the simple moving average. The moving average is a trend-following indicator that tends to follow rather than lead due to its reference to the past. The shorter the period chosen for an SMA, the more sensitive the moving average reacts, the longer the period, the less sensitive. As you can see from the figure, we have a 100 SMA, i.e. a 100-day moving average. As soon as a closing price rises above the moving average, it is a buy signal and a sell signal if it closes below it.

v

Relative Strength Index (RSI): What is the RSI indicator?

The RSI indicator was developed by Welles Wilder and is one of the most popular tools used by traders. However, the name often leads to a misunderstanding. The Relative Strength Index does not measure the relative ratio between indicators, but assesses the momentum line and is used more as a range indicator. It calculates the ratio of upward to downward closing prices within the respective period. The bandwidth ranges from 0 to 100. Everything above the bandwidth of 70 is overbought and everything below 30 is oversold. The level around 50 is called the mean value of the RSI and often acts as resistance or support in the respective price fluctuation.

Strength Index

The Stochastic Oscillator

The Stochastic Oscillator was made famous by George Lane. It states that closing prices in an uptrend tend to hit the upper end of the range, while prices in a downtrend hit the lower end of the range. The range is between 0 and 100, with values above 80 classifying a closing price at the upper end and values below 20 classifying closing prices at the lower end. As with the RSI, closing prices in the upper range (> 80) signify an overbought market, while closing prices in the lower range (< 20) signify an oversold market.

Combination RSI and STOCH

The Relative Strength Index and Stochastic Oscillator are often combined, as the RSI line is usually not as volatile as the Stochastic Oscillator. As soon as both lines are in an overbought or oversold market, one theoretically has the best buy and sell signals.

Cryptoscene

Moving Average Convergence/Divergence (MACD)

The MACD is an indicator that measures the difference between two exponentially smoothed moving averages based on closing prices. On the one hand there is the slower line, the signal line, in our example the orange line, and on the other hand there is the faster MACD line (blue). As soon as the MACD line crosses the signal line from bottom to top, this is a buy signal. Conversely, if the MACD line crosses the signal line from top to bottom, this is of course a sell signal. This is defined as the double crossover method. Furthermore, the MACD also has the zero line, which signals an overbought or oversold market depending on the position of the two lines. The further above the zero line means an overbought situation and the further below the zero line means an oversold market. The histogram shows the difference between the two lines. When the histogram is above the zero line, the MACD line is positive and vice versa. The "turning" of the histogram serves as a kind of early warning indicator that a trend could slow down and even change.

Bitcoin explodes rises by 5,000 dollars overnight
Average Convergence

Hi, my name is Benzion. I have twelve years of experience in the Forex industry, and I have launched two successful crypto trading services. I have in-depth experience on several blockchain networks like Bitcoin, Etheruem, EOS, Cardano, Hyperledger, ICON, Komado, etc. I also have in-depth knowledge of blockchain techniques, including various consensus mechanisms, DLT, smart contracts, security, and privacy measures. Benzion Friedman