In the unstable environment of cryptocurrency trading, accessing a well-structured decision-making model can greatly improve your chances of achieving a significant number of successful trades.
Traders interpret market data and identify patterns for technical analysis for crypto. This provides them with a framework for making more informed trading decisions.
Irrespective of your being a neophyte or a trader with experience, whether you are looking to cut value trades or make consistently profitable trades; understanding how to technically analyze a chart, or economically analyze an economy, can be the difference between making a chart interpretation that earns you consistently profitable trades versus missing iffy trade signals.
What is Technical Analysis and Why Does It Matter for Crypto Trading?
The Technical analysis for crypto means using past price data, volume of trade, and assorted statistical signs to try to forecast where the price will go next. This is, of course, not the only way to analyse a crypto asset.
There is also fundamental analysis, which looks at things like the technology behind the crypto asset, the people working on it, and the actual use of the asset. But fundamental analysis takes a lot of time and effort, whereas technical analysis can be done a lot more quickly. And there is a lot of data, and kinds of data, to work with.
Technical analysts operate on three core principles:
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What you pay for a market reflects all relevant information.
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What moves in identifiable trends and patterns?
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Identifiable trends and patterns generally mean that something is not random, leaving us with the possibility to predict a future state from a past state with some degree of accuracy.
What repeats itself (and isn't random) is good old price action, which is particularly reliable in the cryptocurrency trading market.
We can step back and look at charts, use technical indicators, and try to identify what 'they' (the market) are going to do next. What 'they' do next is obviously going to be part of some future price action.
Essential Chart Patterns Every Crypto Trader Should Know
The manifestations of market psychology can be seen clearly in the formation of crypto chart patterns. These formations may very well contain clues that are priceless in determining the next direction of price movement. If you can learn to recognise the following seven formations, you will be able to significantly improve your trading decisions.
Head and Shoulders Pattern
This reversal formation indicates a possible transition from a market that is bullish to one that is bearish.
It comprises the following components:
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A crest (left shoulder)
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An uppermost summit (head)
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A smaller height (right shoulder)
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A low-cut neckline connects the lows.
A downtrend usually begins when the price goes underneath the neckline after the right shoulder has been formed.
Example: Bitcoin fluctuates from a value of $50,000 to $55,000 (the left shoulder), then retreating to $52,000, and then soaring to a height of $58,000 (the head). After this point, it drops steeply to $52,000, and then climbs back to $54,000, but the price then retreats below $52,000. A market structure in which such zeniths and nadirs are formed would strongly suggest that the movement has lost buying power.
Also read: Top Trading Tools for Beginners: Forex Calculators, Pip Tracking, and Learning with Babypips
The inverse head and shoulders formation is a reversed directional pattern that indicates a possible bullish reversal in the market. This formation occurs following a downtrend and looks like a head and shoulders formation that is upside down.
Double Top and Double Bottom
The double top is a bearish reversal pattern that resembles the letter "M." It occurs after an uptrend in price. Peaks, two of them and pronounced, are at the same height and about the same price level. The first peak forms, then price goes the other way and drops to a not-quite-as-deep trough that precedes the second peak.
The peak that is the right one seems like the first peak in that it is about the same height as the left peak. Then price goes the other way again and drops.
How to read crypto charts with double bottoms
Understanding cryptocurrency charts with double bottoms. This reversal formation takes place after a downtrend. It resembles the letter 'W.' It has two dips that are roughly the same price and a really solid rally.
When the price crests above the peak found between the two dips, the formation is considered to be confirmed. This is not a rare formation, but it's also not one you see every day—nothing to be ashamed of.
If the price of Ethereum were to fall to $3,000 after first having dropped to $3,500, then bounced back to $3,300, and staged one more drop to $3,000, before moving back above the prior high of $3,300, this would constitute a clear double-bottom bullish reversal pattern.
Symmetrical Triangles
A time of consolidation leads to the creation of triangles, which represent a temporary balance between buyer and seller. A symmetrical triangle possesses these traits:
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A downward sloping upper trendline connecting lower highs
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An upward sloping lower trendline connecting higher lows
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Decreasing trading volume as the pattern forms
Either the upper or lower boundary can be broken. When this happens, it typically signals the end of the consolidation phase and leads to a meaningful price movement in the direction of the breakout. This can happen in either an upward or downward direction.
If Bitcoin's price for a long stretch oscillates within the constraints of a narrowing range between $40,000 and $45,000, creating a symmetrical triangle, then a decisive break above $45,000 with big-time volume could signal that a strong uptrend is underway.
Read: How to Start Trading CFDs: A Step-by-Step Guide for Beginners
Mastering Technical Indicators for Enhanced Crypto Trading
Crypto technical indicators are computations that traders carry out on past pricing, volume, and occasionally open interest data to uncover vital details about present market conditions.
Technical indicators provide insights into the collective behavior of all market participants and their next big move. When traders analyze them, they try to understand what is essentially a big, not very well ordered secret that all participants either keep to themselves or reveal only in gestures that appear to be nonsensical until one understands what they mean.
Moving Averages (MA)
The SMA (Simple Moving Average) is a tool for computing the average price for a designated number of periods. It is helpful for traders in identifying the overall direction of the trend and, by the very nature of its computation, tends to smooth out price fluctuations. For beginners, crypto trading strategies often encompass using SMA crossovers as signals for placing trades.
When a 50-day MA (moving average for a shorter period of time) crosses above a 200-day MA (moving average for a longer period of time), this event is known as a "golden cross" and is considered to be a potential signal of an uptrend.
When a moving average with a shorter term crosses below a moving average with a longer term, this event is called a "death cross" and is often interpreted as a signal that an uptrend is going to reverse and a downtrend is coming.
Consider the following. The 7-day SMA of Bitcoin is currently at $42,000. If, in the next few days, it moves above its 30-day SMA (now at $40,000), this will likely be a sign that an uptrend has started and that buying Bitcoin is a good idea. In technical analysis, we often call this situation a "golden cross."
Relative Strength Index (RSI)
The RSI gauges how quickly and in what manner prices are changing. When prices are changing quickly, the RSI is changing quickly too. Designating rates of "fast" price-change as 0-100, we get our first measure of speed. However, that's really just one measure.
The RSI, in fact, is two measures in one. It tells us how quickly prices are changing, and then it extends the reading by telling us if we should be concerned that prices are changing a little too quickly (overbought) or if we should be expecting a change in the change because prices have been going down for too long too fast (oversold).
You are aware that when you attempt to ascertain the market's direction, price, and volume are typically very informative. And they can be used in several ways. In fact, the ways in which we use them appear to correspond to the different personality types that comprise the trading community.
If Bitcoin's relative strength index reads 78, it signifies that the crypto market might be too hot. A corrective move in Bitcoin's price is imminent and necessary to restore balance. If the RSI reads 25, it indicates that the price of Bitcoin has dropped too far, too fast, and is likely to make a move back up in the not-so-distant future.
Read: The Psychology of Trading: Mastering Emotional Discipline
Moving Average Convergence Divergence (MACD)
The MACD is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs). It consists of:
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The MACD line (usually the 12-session EMA subtracted from the 26-session EMA)
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The line that signifies is generally a nine-period EMA of the MACD line.
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A histogram displaying the divergence between the MACD and signal lines
Understanding crypto indicators like MACD helps traders identify potential entry and exit points:
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A bullish signal occurs when the MACD line crosses above the signal line.
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A bearish signal occurs when the MACD line crosses below the signal line.
When Ethereum's MACD line crosses above the signal line, and the histogram turns positive, it signifies a development in the bullish momentum of Ethereum's price. That could represent a significant buy opportunity for traders.
Identifying and Using Support and Resistance Levels
Support and resistance price levels are essential because they are points where the direction of a trend might change because of supply and demand. Crypto market analysis often uses support and resistance levels to identify potential points to enter or exit a market trade.
Support Levels
A support level is a price point where buying interest is so strong that it stops the price from falling any further. It serves as a floor that the price has trouble breaking through when it wants to go down.
If Bitcoin has consistently rebounded after dropping to $38,000 over many weeks, this price point has become established as a support price. Traders might think of this as a good point to buy when the cryptocurrency comes close to this level again, hoping for yet another uptick.
Resistance Levels
A resistance level is a price point at which selling pressure exceeds buying pressure. This prevents the price from rising further. It acts as a ceiling that the price has a hard time breaking through.
Resistance levels can be determined using many different methods. Some traders use trendlines to mark off resistance levels. Other traders use technical indicators or chart patterns to find resistance levels.
If the price of Ethereum has faced rejection several times at the $4,000 mark, then traders should see that price as resistance. And if traders see that price as resistance, then taking profits when the price approaches $4,000 is a likely scenario.
Alternatively, if traders are looking to establish long positions, then waiting for confirmation of a breakout is also a scenario that makes sense.
Trading Strategies with Support and Resistance
When it comes to the best chart patterns for crypto trading strategies, some of the very best chart patterns that exist all incorporate support and resistance levels. Below, we summarise the most common and effective chart patterns that you should know about when trading cryptocurrencies.
Each of these patterns is effective in its own right, but together, they form the backbone of many successful trading strategies.
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Range Trading: Buying near support levels and selling near resistance levels in a sideways market
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Breakout Trading: Entering a position when the price breaks decisively above resistance or below support
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Retest Strategy: Entering a position after a broken support becomes resistance or a broken resistance becomes support
Practical Tips for Applying Technical Analysis in Crypto Trading
Choose the Right Timeframe
The timeframe you select for your analysis should align with your trading style and objectives:
Must read: You Need to Know About Crypto Scalping Strategies
Using technical analysis on cryptocurrencies requires understanding that different timeframes can display a single market in various ways. For a clear, comprehensive view that spans all the timeframes, many traders use something called multi-timeframe analysis.
This is not complicated—it just involves looking at different kinds of charts over different kinds of periods. And it's something that experienced traders know to do because it helps ensure that their shorter-term trades are in line with whatever larger trend is going.
Combine Multiple Technical Analysis Tools
Relying on just one indicator or pattern can be perilous. Instead, you should look for confirmation from several good sources:
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Combine trend indicators (like moving averages) with momentum oscillators (like RSI).
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Confirm chart patterns with volume analysis.
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Use support and resistance levels to validate potential entry and exit points.
When several indicators and patterns give the same signals, you probably have a good trade on your hands.
Understand the Role of Trading Volume
Volume confirms price movement and chart pattern strength. High volume accompanying a breakout indicates strong conviction behind the move and suggests that it is likely to be sustained. A breakout occurring on low volume? Well, that may indicate a not-so-trustworthy signal.
Example: If Bitcoin were to break above a key resistance level with twice the average daily volume, this would be read as a super strong buying signal that the uptrend in price is likely to continue.
Risk Management in Crypto Trading
Likely even more than your technical analysis skills, Crypto trading in risk management is what keeps you from losing money. As long as you have an entry and exit strategy, even the most ridiculous analysis can't put you in the poor house if it happens to go the opposite direction of what you envisioned.
But if all you got is a dank and moldy strategy for avoiding loses, then you're tightroping with no safety net. And that is scary.
Setting Stop Loss and Take Profit Levels
For every trade, confirm the following:
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Confirm the placement of your stop loss to confine prospective losses.
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Confirm the placement of your take profit to secure your gains.
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Confirm the risk-reward ratio for each trade.
If you purchase Bitcoin at $40,000 with a stop loss at $38,000 and a take profit at $44,000, you have a risk-reward ratio of 1:2. This means even if only 40% of your trades were to end positively, you'd still be in the green when tabulating your trades.
Position Sizing
Avoid risking more than a small percentage (usually 1-2%) of your entire trading budget on any one trade. This strategy safeguards your entire portfolio from a brokers tipped trades. You protect yourself from what could otherwise be a massive blow to your portfolio.
If you have a trading portfolio of $10,000 and a 2% risk limit, you would ensure that no single trade risks more than $200. If your stop loss is set at 5% below your entry price, your position size would be $4,000 (since 5% of $4,000 is $200).
The Value of Demo Trading
Prior to putting actual capital on the line, rehearse technical crypto analysis on the demonstration accounts provided by the assorted platforms that exist for trading cryptocurrencies. Such rehearsal lets one:
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Experiment with various tactics without monetary repercussions.
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Get to know the platform's features.
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Establish confidence in your tech analysis capabilities
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Devise a trading plan that conforms to your objectives and risk appetite.
Visit: How to Optimize Your Cryptocurrency Trading Strategy Through Backtesting
Conclusion: Enhancing Your Crypto Trading Success Through Technical Analysis
To analyse the price movements of a cryptocurrency requires commitment, patience, and the acceptance of the reality that you might not always come out on top. Yet, when you are an inexperienced newcomer, it is absolutely necessary to concentrate on the basics. You should not only attempt to understand what the patterns in charts are and how they work but also why they work. After you master the basics, there isn't a guaranteed pathway to success in technical analysis. You are most likely to succeed if you create your own rituals and combine them with the principles of good analysis.
Keep in mind that every analysis technique has its shortcomings, and the crypto market can be totally crazy. The most successful traders are those who do T.A. but also couple it with several other really good practices: managing risk, displaying emotional discipline, and being flexible (i.e., the ability to adjust to a market that is moving all over the place).
Begin with demo accounts, then graduate to a trading journal. With the latter, you will go far if you make it a habit to track every decision you make while trading and then learn from it. Over time, you can tinker with your approach. Anything you do that renders your guides to trading increasingly detailed and personal is a good thing. As I note above, you shouldn’t expect your technical analysis to become a profitable part of your strategy for quite some time.
Have you tried applying technical analysis to your crypto trading? What indicators or patterns have you found most useful? Check out the daily analysis at Btcdana.com