Technical analysis is a forecasting method which makes use of existing market data to predict future market behavior. Technical analysts make use of the forces of supply and demand to make their predictions. This analysis, which is in the form of a chart, makes it possible for experienced players in the market to predict when a particular cryptocurrency value will rise or fall, making them take actions in regard to buying and selling.
To understand technical analysis, you need to understand the Dow theories behind technical analysis:
- Market fluctuations reflect all known information. All already existing details and future expectations have been integrated into the current price.
- Price movement follows a trend. Although there are certain times when prices move randomly, they usually move according to a pattern at a particular period, making it possible to make a chart and predict future behavior. The chart makes it possible to predict when the market will be bullish or bearish. If predictions are correct and properly utilized, an investor will buy a coin during the period in which market prices are envisaged to be low and sell when they are expected to have a higher value. The coin value, of course, is controlled by the laws of supply and demand so you expect that during the period when the market is bullish, sales will increase because investors will want to sell to make huge profits. This will eventually lead to the market returning to being bearish again as supply will eventually outweigh the demand. In the cryptocurrency world, this could happen within an hour or even a few minutes.
- History repeats itself. It is possible for technical analysts to easily predict the market behavior by studying how humans reacted to the same conditions in the past. Human behaviors are very predictable, and technical analysts use this to their advantage.
Now that we have looked into the ideologies behind technical analysis, let’s understand how technical analysis works in cryptocurrency trading and how it can be used to our advantage.
Technical analysis of cryptocurrencies is done by making use of statistical indicators and oscillators.
1. Look for quick results
Technical analysis focuses on a short period of time, as short as a month or a few hours. You should, therefore, act as quickly as possible.
2. Study charts to determine price trend
This is done by understanding how the candlestick works. Candlesticks are the rectangular green and red bars you see on a chart with lines (wicks) coming out of them, making them look like a candlestick. The rectangle of the candlestick indicates the opening and closing price of the coin for the day. If it is green, the base of the rectangle indicates the opening price while the top indicates the closing price. This is good news because this indicates that your coin value has gone up over that period. If the rectangle is red, the top indicates the opening value and the base gives the closing value. This means that the coin value went down during that period. The wicks on the rectangles indicate the highest and lowest peak of the coin for that day. That means that at some period of the day, the price can go higher or lower than the opening or closing figures.
3. Understand how volume works
Studying trade volume helps you know how much buying and selling have occurred over the period in view and whether a trend will continue over a period or if it’s about to reverse itself. If the volume of trade increases as price increases, that will be a good time to buy more coins in anticipation that the trend will continue. So for this period, if you’re thinking of selling, you should think again. But when volume increases only slightly, even when prices are increasing, then there is not much conviction and prices might start to fall in no time, so you may consider selling during this period.
4. Trading based on the trend
Now that we understand some of the basic things to take note of while doing technical analysis, we should learn how to make use of them while making decisions as to whether we buy or sell.
While doing technical analysis, you need to study the trend over a time interval. Since technical analysis is primarily for people who want to make gains within a short time interval, we’ll use a short-term study of the trend as an example. Start off your analysis from a point, say two weeks ago, and the candlestick at that point is your starting point. If the candlestick is red, which shows a negative as stated earlier, look at the wick of that candlestick to determine the lowest point for that day. Study the trend from there until the present day and decide if the trend is positive. If the trend is positive in this case, the wicks of the succeeding days after the starting day shouldn’t be as low as that of the starting day. If this is the case, then there is an upward trend. Otherwise, it’s a downward trend.
If a green candlestick is our starting point, we take note of the peak of its wick and continue our analysis from there. For the succeeding days, the wicks have to be longer than the starting one for the trend to be called an upward trend. Otherwise, the trend is a downward trend.
Understanding this trend tells you the right actions to take. You should look more into buying on the upward trend and selling on the downward trend.
Our timeframe is, however, a very short period to make the best analysis since there will normally be frequent fluctuations during this short period. Thus, the longer the timeframe, the more accurate the analysis. An analysis taken for a year will help in making better decisions than one done for a month.
Now that we have a basic knowledge of what technical analysis is about, there is still more to it than the little things highlighted here, so you will need to read up more on it and most importantly practice. Once you feel you’ve gained more knowledge, practice. You cannot be good with technical analysis if you do not practice.
You can learn more about technical analysis and cryptocurrency on trybe.one.
It is important to note that technical analysis doesn’t exactly decide when prices will rise or fall, it only gives a general insight as to what might happen.