Technical analysis is a fundamental trading tool for successful traders. Technical Analysis, also called TA, is using a set of trading tools to evaluate an asset’s past movements and attempt to forecast its future movement. This is done by analyzing statistics such as price movement and trading volume, while attempting to identify patterns pointing to future movements. Utilizing a certain set of indicators and tools to develop your trading strategy is necessary for long term success.
As opposed to fundamental analysis, which attempts to look at information and development that could lead to an asset's intrinsic value, technical analysis focuses on the charts showing price movements, patterns, and using certain tools and indicators while trying to identify strength or weakness in trends to forecast future price movements. As we’ve seen in numerous projects in the cryptocurrency space, fundamental factors are not always reflected in the price. Technical Analysis will help you to identify and trade the gap between intrinsic value and market price.
Now, no amount of technical analysis will help your trading if you don’t have the proper mindset, so if you haven’t already read our report on developing the proper mindset for trading, check it out here: bit.ly/3jzvWsA
One of the first things you must do as a trader is to identify your trading style and what type of trader you will be. Day trading is one option, which usually looks at shorter timeframes on a chart to scalp profits in numerous trades per day. Swing trading involves trading higher time frames looking for short term trend reversals or trend continuations.
A swing trader may trade a few times a week on average. Day and Trend traders sometimes will develop an automated trading algorithm which could be as simple as moving averages, or include multiple volume and/or technical indicators to drive their decision making. Sticking to a trading algorithm can help many that would be susceptible to letting their emotions cloud their trading judgment.
Position traders are long term positions that avoid the day to day volatility of cryptocurrency trading. Position traders will hold through short term dips and only trade when long term trends begin to reverse.
Holders, or hodlers as they’ve been called in the crypto space, can be considered position traders. However, most hodlers do not use any kind of technical analysis or fundamental analysis, as they just focus on holding for the long term, potentially multiple years with the intent to trade much later hoping for a much higher value. Learning to not just be a hodler can pay huge dividends if you learn the basics of trading these market swings over time.
Once you identify your trading style, you need to determine your technical analysis strategy. There are hundreds of technical indicators and tools you can use, so we will take a look at a few basic strategies used by many just getting started in trading. Using too many indicators and tools can cloud your judgment on what decision you should make. It is also important to point out that you will never win 100% of your trades.
Because of that you can’t validate or invalidate a trading strategy off of one bad trade. Keeping a trading journal of each trade, what you predict, and why will help you to identify the true effectiveness of your trading strategy. Since there are many different strategies, we will share just a few below for those that are new to trading. Then again, I also know people who have been trading for years with these basic strategies.
SUPPORT AND RESISTANCE CHANNEL TRADING
Being able to identify support and resistance is something most successful traders use as a tool in their tool belt. Support and resistance are key price levels that act as barriers that stop or slow down price action from hitting certain price levels.
The barrier on the bottom that holds up the price level is known as support. The level that suppresses the price below it is known as resistance. Support happens where a downtrend is expected to stop due to a concentration of demand. Resistance happens where an uptrend is expected to stop due to a concentration of supply. Support and resistance can be identified in many ways within chart patterns.
Newscrypto’s trading tool Moon Lines gives traders an easy way to identify support and resistance channels along with trend lines. This can be used by the beginner to identify those support and resistance levels, and by the experienced trader to save time from marking up their own chart
The key thing about support and resistance is that it is not impossible to break those barriers, but price action may bounce back and forth between support and resistance until there is either enough sell pressure to break below support or enough buying pressure to break above resistance. One thing to understand and you can see this by scrolling back in the charts is that once one of those barriers is broken, resistance can then become the new level of support, and the same is true that when support is broken, it can become a new level of resistance. This is mainly due to concentrated heavy trading volumes at those levels.
There are some successful traders who will use support and resistance as their main tool most of the time, but most who trade with this strategy will use a select momentum indicator or two such as Stochastic Oscillator or Relative Strength Index(RSI).
RSI identifies levels where an asset can be overbought and may be ideal for a pullback in price, or an asset may be oversold and primed for a rise in price from buying action. The Stochastic Oscillator is also a momentum indicator to identify overbought or oversold areas using a formula involving Moving Averages.
Many people have used breakout trading in their early days of day trading and some still use even as their trading has progressed. Breakout trading can also be referred to as Buy The Dip trading, but breakouts happen in both directions which is why many will call it Breakout Trading. The most common TA indicators used in this trading method are Bollinger Bands, Moving Average Convergence Divergence(MACD), and RSI.
A Bollinger Band is a TA indicator defined by a set of trendlines plotted two standard deviations away from a simple moving average of price. The three lines that compose Bollinger Bands are a simple moving average (middle band), and an upper and lower band. Many people who use this feeling that the closer price gets to the upper band, the more overbought the market is, and the closer to the lower band the more oversold the market is. MACD is a combination of two lines. The MACD line is calculated using a formula of two different exponential moving averages. The second line is known as the signal line which uses a different moving average. When used as a stand alone tool, traders may buy an asset when the MACD line crosses above the signal line, and they may sell an asset when the MACD line crosses below the signal line
Each of the TA tools mentioned so far can easily be used independently of other tools or indicators, but most traders prefer to use a combination of a few for better confirmations of potential trades. Breakout trading relies on times when there is a very tight pattern of the Bollinger Bands between the top band and bottom band. This is where a trader’s strategy can differ. If the price is staying close to the upper band, traders may trade the breakout and buy and sell on the breakout above it, or some may wait for the breakout momentum to slow and trade the retracement, which usually can happen to a certain extent. The same can happen in the opposite direction, in what some call Buy The Dip trading. The key to trying to identify these moves is to use MACD and RSI to identify shifts in momentums when the MACD lines cross and/or when the RSI movement moves contradictorily to price action.
MOVING AVERAGES ALGORITHMS
Some traders looking to automate trading may rely heavily on moving averages. I have seen many different forms of moving averages algorithms used over the years that it is impossible to list each one. Some examples of long term swing trading can use a combination of a shorter moving average on the daily chart compared to a much longer moving average, for example comparing the 50-day moving average to the 200-day moving average.
When these two lines cross, a trader may see that as a shift in the trend and trade accordingly. A popular day trading strategy uses a combination of the 5, 8, and 13 moving average periods. These can be used to identify momentum shifts when the shorter time period crosses and then separate from the longer time frames. A break above indicates positive momentum and price moving up and a break below indicates loss momentum and price decrease. In longer-term trading or swing trading, in major assets like Bitcoin and Ethereum, some use a simple trading algorithm comparing the 5-day moving average to the closing price of a daily candle.
If the price closes above the 5-day moving average, a trader will either buy or stay in a long position. If the price closes below the 5-day moving average, a trader will sell short or stay in a short position. This only works overtime if the asset is considered a momentum asset, meaning there is a large uncertainty of what price should be and more volatility. The opposite of momentum is mean reversion asset, meaning there is a general consensus of what an asset's price should be and price tends to revert back up or down towards that consensus.
For mean reversion assets, you should trade the opposite of the momentum strategy mentioned above. Long term stock market assets have mostly been mean reversion since 2001. Most cryptocurrencies can be considered momentum assets, except for any stablecoins that fluctuate slightly in value. This is due to the general consensus that stablecoins will revert back towards their set price they are backed to.
As you can see, these are just a few of the many trading strategies that you can use to trade. It is important to decide what strategy or combination of strategies works best for you. You can see other technical analysis posted in Community Predictions in the Newscrypto platform and on the TradingView website as well.
These have helped me over time with my trading. I do not use them to dictate the trades I take, but I look for those with well thought out and explained strategies based on the chart they are sharing and learn from what they say they see on the chart. Just as important as identifying your strategy, it is important to test your strategy over time to see if it can give you some consistency in trading.
Just because trade is a winner once does not mean it is valid and the same for if one trade is a loss. Consistency is what you want over time. Newscrypto gives you a trading simulator that you can use to trade risk-free to practice and test your trading strategy before risking any money. One of the biggest mistakes a trader can make is rushing into large trades without testing on a trading simulator or trading with small, insignificant amounts first.
Take the time to be a student to those that willingly share their TA and test strategies that you are comfortable with and that match to the time frame you have decided to trade-in. Having a strategy takes out the emotion that would normally cause you to jump into a bad trade when the conditions are not right for you. In your trading and investing experiences, education continues to be your most valuable asset, and never stop learning.
Thank you for your attention!
Content written by Blockchain Wayne and the Analysts team at NewsCrypto.io