8 December 2021
In the realm of cryptocurrency, a trader without a strategy is like a ship sailing without any direction. It is possible to survive for some days, but it will eventually lead to unwanted circumstances and considerable losses in the long run.
As the crypto market is highly volatile, you need to have a strategy to pass through safely. Intuition won't be profitable every time. Planning and Strategizing is a must before diving into the crypto universe. You must also have a good understanding of the market before applying a specific strategy.
There are different types of strategies ranging from classic HODLing to Day Trading but none of them will be beneficial until you know how to read the market. Reading the market is crucial for choosing the right strategy to rely on. Many crypto traders depend on Technical Analysis to plan out their wise Investment Strategies.
Defining Technical Analysis
Technical Analysis (TA) is often referred to as charting, and it involves using real-world data to predict future market behavior. Technical Analysts thoroughly observe the past price movements and volume data of the crypto-asset in question. TA can be applied to any security with historical trading data like cryptocurrencies, forex, commodities and stocks.
In the premises of TA, it is assumed that "History Repeats Itself". The price fluctuations of an asset are not random and generally evolve into identifiable trends over time. Generally, when a cryptocurrency follows one trend, it will eventually follow the opposite trend too. Technical analysts try to identify these trends to make profits. Once the pattern is identified, they make calculated predictions based on the market's bearish or bullish trends.
Also read: 10 Tips For Cryptocurrency Day Trading
Let's assume that the market has been bullish for a while resulting in a decreased supply of coins due to high demand, increasing the price. When the price goes up, people will try to make their profits by selling their coins leading to the emergence of a Bearish market. As more and more people sell, the supply will eventually begin to outweigh demand, decreasing the price. And from there, the cycle continues.
Technical analysis is accomplished by using a variety of charting tools known as i
"Indicators". Technical analysis indicators can assist traders in identifying existing trends and also providing accurate information about the future trend that can emerge.
Different types of TA Indicators
- Candlestick Chart: There are different types of charts, such as line charts and bar charts, but the most common and effective tool in Technical Analysis is Candlestick Chart. Initially, it may not seem very comforting, but it is relatively easy to understand once you understand the basics.
Originating from Japan, each point plot on the graph appears like a candlestick. It includes coloured Rectangles and a line coming out of the top or bottom, like the wick of a candle. Hence, named as Candlestick chart. Each candle displays four critical components for the desired time frame: Open price, High price, Low price, and Close price.
The top and bottom of the candlestick's rectangle are the opening and closing prices of the cryptocurrency for a particular time frame. Green candlesticks indicate that the value of crypto assets increased, so the opening price is low and the closing price is high. Whereas, Red (or pink) candlesticks indicate that the value of crypto assets decreased, so the opening price is at the top and the closing price is low. The wicks can come out from either end of the candle, giving an idea of how volatile the market currently is. If the wick is long, it indicates a highly volatile market.
2. Trend lines: Another basic tool a crypto trader should learn is Trend lines. They point out in which direction the cryptocurrency is moving. There are three types of trend lines.
- Uptrend: It indicates that the asset is going up making, higher highs and lows.
- Downtrend: It indicates that the asset is going down, making lower highs and lows.
- Sideways trend: It indicates that a cryptocurrency has not moved significantly either up or down.
After observing the tops or bottoms of candlestick patterns, a crypto trader will be able to identify a bullish or bearish trend and adjust their trading strategy accordingly.
Also read: 8 Tips For Successful Crypto Trading
3. Support and Resistance Levels: Understanding Support and Resistance Levels is of utmost importance in crypto trading. The movements in the crypto market are not linear; the price will face resistance as it goes up or supports as it goes down.
- Support Level- It is a point where traders want to purchase the crypto in high quantities since traders feel that the crypto price is low.
- Resistance level- It is a point where there is a heavy supply without much demand, but traders feel the crypto is overpriced and resist buying it.
4. Moving Averages: Moving Averages helps paint a clear picture of a digital asset's average price over the chosen period. They can be used individually or in conjunction with each other. There are two types of moving averages:
-Simple moving averages (SMA) is the arithmetic mean of the closing prices of an asset within a set period.
-Exponential moving averages is a modified version of the SMA that weights recent closing prices more heavily than the older ones.
5. Relative Strength Index( RSI): It is a momentum indicator used to identify whether a cryptocurrency is overbought or oversold. The RSI can be anywhere from 0 to 100. RSIs close to 30 or lower indicates that the crypto is currently undervalued, and a price rise can be expected. In contrast, RSIs that approach or go above 70 indicates the crypto is overbought, so its price may drop.
6. Bollinger Bands: It is another oscillator-type of TA indicator most popular among crypto-traders. This consists of two lateral bands that flow around a moving average line. It is used to identify potential overbought and oversold market conditions as well as to measure market volatility.
7. Trading Volume: Observing Trading Volumes can help you determine whether a trend is significant. High trading volume points out a significant trend you should take note of. In contrast, low trading volume points out a weak trend that may pass quickly.
Technical analysis can give crypto traders insightful information into short-term market conditions, which may be helpful to both traders and investors. Almost all charting software has built-in technical analysis tools which you can supplement with your own analysis. It is advisable to combine Technical analysis with other methods for better results.
Disclaimer: The author's views and opinions are for informational purposes only and do not constitute financial, investment, or other advice.