With the launch of Bitcoin, the big bang event of the cryptocurrency world, the 24×7 crypto market started on a global stage. In a mix of decentralized and centralized exchanges, the crypto market is highly volatile and quite unpredictable. Further, the borderless working of the cryptocurrency market brings a new set of challenges for traders worldwide. With no centralized regulations, the price of cryptocurrencies moves in a highly volatile fashion. The price trend can quickly reverse based on market sentiments, tech-based developments, news related to regulations, and even social media trends. For instance, a single tweet from Elon Musk is known to create massive fluctuations in the market.
Amid such high volatility, the rapid price movements offer massive opportunities. Traditional technical analysis comes in handy when identifying opportunities. Using the technical analysis and tools involved, traders can navigate the highly volatile crypto market. With a technical approach, traders can identify and pinpoint entry and exit opportunities to make educated trading decisions. This learning guide will help you understand the essential tools and charts required to start a successful cryptocurrency trading journey.
Understanding Technical Analysis
At the crux of technical analysis, the price action is the main component. It relates to the price movement of an asset over a period of time in three main directions: uptrend, downtrend, or sideways trend. In a candlestick chart, the movement leads to multiple patterns and highlights multiple areas of demand and supply. These areas of demand and supply help traders decide whether to buy or sell a cryptocurrency. Areas of high demand can reveal buying opportunities despite the cryptocurrency falling in a downtrend and vice versa. However, traders should remember that the breakout of such levels is possible.
Further, it also involves technical indicators like the Relative Strength Indicator or Moving Average Convergence Divergence and various other tools like the Fibonacci retracement levels or Pivot levels to predict future price movements. While fundamental analysis deals with the intrinsic value of the projects, the estimated movements are vague and speculation-based. Hence, it provides a better viewpoint than a fundamental approach. However, some sharp moves based on news, global market fluctuations, FOMO and FUD moves, etc., could remain off the radar.
Essential Tools for Technical Analysis
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Knowing the right crypto technical analysis tools is crucial to survive in the cryptocurrency trading market, as technical analysis heavily uses charts, indicators, and other data sources. Choosing the right strategy and applying the correct tools over the right timeframe chart separates profitable traders from others.
1. Key Charts and Indicators
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Candlestick Charts
Most top cryptocurrency traders perform crypto chart analysis using candlestick charts to visualize price action over different timeframes (e.g., one hour, one day). Further, the OHLC prices (open, high, low, close) form different candles, generating multiple patterns. Trading decisions can be made using different candlestick patterns, such as the morning star or evening star, along with price patterns, like double bottom or double top.
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Moving Averages (MA)
Moving averages are crucial tools in technical analysis for crypto. They identify price trends and even provide a dynamic demand or supply level. There are multiple types of moving averages: Daily, Simple, and Exponential. The Simple Moving Average (SMA) calculates the average over a time period, giving equal weightage to all price points. However, the Exponential Moving Average (EMA) gives additional weightage to recent prices. Hence, Exponential Moving Averages (EMA) respond more quickly than SMAs. The moving averages give a buy signal when a smaller period average line crosses above the larger one, giving a bullish crossover, and vice versa. Further, the importance of the 50 and 200 average lines is critical, providing the golden cross (bullish) or death cross (bearish). Hence, the moving averages are one of the best trading indicators for crypto.
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Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a trend momentum indicator used in technical analysis for crypto to measure quick changes in crypto prices. The RSI ranges from 0 to 100, with 70+ values painting the asset as overbought and under 30 as oversold. It is calculated by comparing the magnitude of recent gains to recent losses. If the RSI line hits or surpasses the extreme boundaries, a reversal in the cryptocurrency price is possible. Divergences also play a critical role in finding buying or selling opportunities.
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Bollinger Bands
Bollinger Bands are a volatility indicator that forms a price band in the chart. It includes a simple moving average (SMA) in the center packed with two bands of two standard deviations. The band can squeeze or expand based on price volatility to reflect trend volatility.
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2. Popular Technical Analysis Tools and Indicators
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TradingView
TradingView is a widely used platform by traders worldwide, making it one of the best crypto analysis tools. It also fosters a trading community to share ideas and strategies. With a user-friendly interface, it helps traders with crypto chart analysis over different timeframes with multiple indicators and tools.
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Coinigy
Coinigy is a trading platform that brings comprehensive market data from multiple exchanges to traders. With real-time market data, charting tools, and API access, experienced traders use Coinigy. Integrating multiple exchanges helps traders avoid switching between exchanges to execute trades.
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MetaTrader 5
MetaTrader 5 is a professional trading platform used by professional forex traders, and it has recently become famous among cryptocurrency traders for crypto chart analysis. MetaTrader offers a variety of features, including automated trading, highly customizable indicators, algorithms for various trading strategies, and much more. Known as one of the best platforms for performing backtesting, MT5 is a powerful tool for serious traders with cryptocurrency technical analysis charts.
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CryptoCompare
CryptoCompare is a market data aggregation platform that provides real-time data from various cryptocurrency exchanges. It offers price movement insights, market trends, and trading volumes, along with the features of portfolio tracking tools, news updates, and a range of educational resources.
3. Developing a Trading Strategy
Just like pilots, the checklist before flying and a well-balanced strategy to take off and land, trading involves a well-defined strategy, too. While managing the risk, the traders must mark the entry and exit points to maximize returns.
Here are some proven trading strategies:
- Trend Following – As the name suggests, the trend-following strategy involves the “herd mentality” followed in the market. Similar to Newton’s first law of motion, a trend in motion stays in motion, providing traders with a smooth rally in either direction to ride the momentum. However, one must be ready to jump the ship if the signs of reversal are visible.
- Scalping – Using the high-frequency trading strategy, Scalping involves making small profits by doing multiple trades in a day. Scalpers make the trades mainly using technical analysis over short time frames and rely on RSI and Bollinger Bands to mark quick entry and exit points.
- Swing Trading – Unlike Scalpers, traders using the swing trading strategy hold positions for several days or weeks. Using the basics of trend following, traders aim to profit from “swings” in the market. As it involves more patience, traders rely on Fibonacci retracement, trend lines, and moving averages.
- Day Trading – In Day trading, traders execute the entry and exit trades on the same trading day. Unlike Swing traders, day trading demands a strong understanding of technical analysis to make quick decisions. And, unlike scalpers, day traders must be more vigilant and patient to hold positions all day.
Conclusion
Unlike the Equity and Forex markets, crypto demands a strong understanding of tools, charts, and complex strategies. While technical analysis helps traders find potential buying and selling spots in the market trends and potential price movements, it’s important to remember that no strategy is foolproof. Like in every other field, traders need to hunger for continuous learning, practice, and discipline. Hence, before putting real capital at risk, traders are encouraged to backtest their strategies and use demo accounts. This will help them develop confidence and sharpen their psyche.
FAQ
Do chart patterns always work?
Chart patterns are effective but not guaranteed. Under volatile market conditions, the pattern can often reverse. Hence, a broader market understanding must be applied to chart patterns to avoid getting trapped.
Which Crypto exchange is best for crypto technical analysis for beginners?
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Crypto beginners should compare crypto exchanges that offer demo accounts, user-friendly charting tools, and educational resources. Visit our best crypto exchange list, showcasing platforms that provide demo accounts for practicing technical analysis.
What are some common mistakes beginners make with technical analysis?
The most common mistake seen is traders heavily relying on a single indicator. Ignoring broader market trends and adjusting strategies to changing market conditions can delay success in one’s trading journey.