What is technical analysis?

You could seriously burn yourself if you just place buy and sell orders crypto property based on speculation or advertising. Traders need to be informed about the market and the cryptocurrency they intend to trade. Technical analysis is one way to gather information before making a trade.

What is technical analysis?

Technical analysis can mean different things to different people. A basic understanding of chart patterns is essential for anyone trying to predict stock or cryptocurrency prices. Some see technical analysis as a way to predict market movements and prices. Let's take a closer look at the technical analysis.

To predict market movements, technical analysis uses data from market trends and reversals. Predictions are based on price movements and trading volume of crypto assets. This is used to identify supply and demand imbalances. This strategy is used by traders to spot buying and selling opportunities and pinpoint the highs and lows of their preferred crypto assets. Technical analysts use indicators and tools to study trend movements, order flow charts, and algorithmic patterns.

Although it may sound easy to predict commodity prices, it can be quite difficult. Because it depends on trends and predictions, technical analysis relies on three fundamental assumptions.

All subject to market discount.

The assumption is that all factors that could affect cryptocurrencies are included in their price. The price of the cryptocurrency indicates that all conditions, such as trader psychology, government policies and employee layoffs, determine the trend.

Trends determine price action

Red and green crypto assets are hard to understand for newbies. A trader who has made the effort to learn technical analysis will see trends in price action. A trader can predict future price movements regardless of how much time it takes to analyze a chart.

It is more likely that historical events will repeat themselves.

The psychological belief that trends in cryptocurrency markets repeat themselves leads to technical analysis. When prices cross the threshold, traders react in the same way as before. Technical analysts believe that trends can repeat themselves, even if they have existed for some time.

Basic concepts of technical analysis

A trader who only uses technical analysis tools for trading never becomes an expert. Every trader should learn from the market. Concepts of technical analysis are essential for traders to be skilled. It is almost impossible to be a successful trader without understanding these concepts.

Market trends

Trends are the basis of any profitable trading strategy. Trends are the constant movement of supply and demand in a certain direction. Prices rise when demand for crypto assets exceeds supply. But prices fall when supply is higher.

It is easy to recognize the market trend. To confirm market momentum, traders in uptrends must look for higher highs and lower lows. Traders can determine market momentum by observing how quickly prices move in a particular direction. You'll find out which force is driving market momentum right now: bears or bulls. Market velocity is slowing and crypto asset prices are falling. Prices are moving in the opposite direction.

Support and Resistance

A new trader will learn the concept of support and resistance as it is crucial to identify buy and sell levels. The market reaches a level where the prices of crypto assets do not exceed or fall below a certain price. Support refers to large buy orders below which prices are difficult to fall. Buyers become more aggressive when the price is near this level to prevent further declines. The resistance zone is where large sell orders are placed. This prevents crypto assets from rising above certain prices. Sellers start aggressively selling their crypto assets when it hits resistance.

This explanation may seem a little too complicated. Here's an example to help you understand. Imagine a man standing in an apartment building. The roof is directly above his head, and the floor is made of impenetrable wood. He tries to jump high to see outside, but his head keeps hitting the roof. The roof acts as a barrier to his head from climbing higher than the building. He switches to jumping to break the tree to reach the apartment below, but it proves futile. The floor is so dense and terrifying that he becomes exhausted. There is support.

Repurchased or resold assets

Cryptocurrency trading is different from stock traders who believe that there are no bad stocks, only bad prices. Crypto traders need to be aware of bad crypto projects pulling the carpet. However, prices can become very low when cryptocurrencies are overbought or oversold. This is not a negative thing as it implies. It's as simple as it sounds. An asset is considered overbought if its price exceeds its market value and investors are applying buying pressure. It is also considered oversold when the price falls below its market value and investors sell aggressively.

These scenarios may indicate a reversal in an uptrend or a downtrend. Technical analysis tools and indicators can help traders identify market movements. This article will continue to focus on this topic as it will provide information on indicators and technical analysis tools.

Technical analysis tools and indicators for every trader

Technical analysts may argue that certain concepts above are indicators of market price movements. However, we will focus on the technical aspects of technical analysis. These tools are used by technical analysts to guide decision making at all stages.

Relative Strength Index (RSI).

The Relative Strength Index (RSI), an oscillator, is used to identify an asset's momentum. It is used to determine if a crypto asset has gone too far. This indicator is used by technical analysts to measure price movements and changes. The RSI indicator can be read from 0 to 100. A crypto asset that falls below 30 means it is overbought, and 70 or more means it is overbought. When a crypto asset becomes too expensive, traders will sell it off and then aggressively buy it if there is no more demand for it.

Bollinger bands

Bollinger bands are named after John Bollinger, a trader and technical analyst. It measures the volatility and price of crypto assets. The Bollinger indicator consists of a 20-period simple moving average (SMA) and two bars (upper or lower) that show the standard deviations from this simple moving average.

Bollinger bands, which are the upper and lower Bollinger bands, represent standard deviations. The Bollinger Band is the upper indicator that the asset is overpriced. This is usually when the Bollinger band is exceeded. If the Bollinger Band is below the lower Bollinger Band, the Bollinger Bands indicate that the underlying crypto asset is overbought. Bollinger bands widen from the 20 period SMA and the crypto asset becomes volatile. Once it gathers, it becomes less volatile.

Moving Average (MA).

Simple technical analysis tools are moving average indicators. They are used to measure the average price for a tradable asset over a period of time. The indicator signals that the asset is in an upward trend if it moves in the direction of growth, or in a downward trend if it moves in the direction of decline.

Because they provide delayed analysis of price movements after they occur, moving averages can also be called a lagging indicator. Exponential and simple moving averages are the most famous versions of this tool. The simple moving average (SMA) collects data on trends that do not change direction. The exponential moving average captures rapid price changes and is suitable for short-term traders. Different timeframes are available for traders to check trends and get different results. The most popular time frames used by traders are the 200, 50 and 20 period moving averages.

A 200-period moving average calculates the average price for a crypto asset over the last 200 days. It adds the average prices to the total and divides it by 200. This tool is useful for long-term traders as it helps identify uptrends or downtrends. It also provides price support and resistance zones. If the price of a cryptocurrency asset is higher than the 200-period average, it signals a bullish trend. It is lower than the 200 period average and indicates a bearish downtrend. The 50-period moving average is the average price cryptocurrency investors have paid over the past ten weeks. This is the support level for the asset.

The 50-period SMA crosses over the 200-period SMA to the downside. This signals a death cross that warns of a bear market. A golden cross, on the other hand, signals a bull market when the 50-period SMA crosses over the 200-period SMA. The 20-period moving average is preferred by short-term traders because it measures the average price of an asset over the past 20 days. This technical tool is used by traders to identify accumulations that could lead to breakouts. These price movements can be either a bull trap or a bear market, although they are short term.

Moving average convergence-divergence (MACD)

MACD is the relationship between two moving average prices of crypto assets. It reflects the momentum of price movements. The MACD is calculated by subtracting the 26-period EMA from the 12-period EMA. The 9-period EMA (signal line) of the MACD line, plotted over the MACD lines, identifies dominant buy or sell signals. When the MACD crosses below its signal line, traders can sell or buy crypto assets.

Average Directional Index (ADX).

The technical tool ADX measures the trends of crypto assets. Two volume indicators are used to measure the strength and direction of cryptocurrency trends. The current trend level can be used by traders to place buy and sell orders. The periods used to calculate ADX levels are often divided into 14 columns. Analysts can plot ADX levels for shorter periods using 7 bars or longer on 30 bars. The ADX indicator can be plotted with line values from 0 to 100. Below 25 indicates a large accumulation phase. Values between 25 and 50 indicate a trend in crypto asset prices trying to reach support or resistance levels before a breakout.

Stochastic oscillator

The stochastic oscillator calculates the price momentum of crypto assets. The momentum of the cryptocurrency trend must change before prices change. The Stochastic Oscillator works in the same way as other technical indicators, which measure crypto asset prices on a scale of 0 to 100.

The ideal timeframe for a 14 period is generally between 14 and 14 days, regardless of whether the goal is set at 14 days, weeks or months. A reading below 20 on the stochastic oscillator indicates that the price of the crypto asset is at its lowest point. If the Stochastic Oscillator reading rises above 80, it means that the price of the crypto asset is close to its highest point in the given time frame.

Conclusion

You can make better decisions by using technical analysis to analyze crypto market price movements. While there are some inconsistencies – especially when history doesn't repeat itself and when it's out of balance with fundamentals, it remains key to placing the right buy and sell orders. We recommend that you test and combine different indicators and tools until you have a consistent cryptocurrency trading strategy.