Cryptocurrency isn't a get rich quick scheme. Producing a steady income trading takes time, experience, dedication, and a lot of emotional grit. However unlike traditional markets, you can make money much faster trading cryptocurrency (and lose it just as fast) due to the markets volatile nature and low barrier of entry.
There are two vital aspects to become a successful crypto trader. Obtaining a solid understanding of technical analysis and managing your own emotions. I would go so far to say that the emotional aspect of trading is a bit more difficult, however we’ll dive more into that aspect of trading in another guide. Let’s talk technical analysis and some of the most basic crypto trading indicators you’ll need to learn, in order to get a grasp on what you’re doing.
What is Technical Analysis?
Technical analysis is a representation of price and trading volume over time, using an easy to read graphic representation of candlesticks. These candlesticks form patterns over time which traders commonly referred to as chart patterns. These patterns represent mass psychology over a group of traders during a set period of time.
There are two types of research methods that you want to be familiar with before attempting to make any trade; technical and fundamental analysis. Fundamental analysis is focused on aspects of of a cryptocurrency like the development team, utility of the coin, white paper current investors etc.
Before we go covering the details of technical analysis, remember that price movements on a given chart are rarely ever random. They often follow a trend, both long or short term, depending on the timeframe you are looking at. Trends refer to the mass psychology of a group, in order to obtain increased price movement, through the analysis momentum in a particular direction. The group of people we are analyzing, always follow certain patterns and react to certain price levels. These can be predictable to those who know what to look for.
Support and Resistance Levels
One of the more simple indicators to identify in your early stages of your trading career are support and resistance lines. Trading patterns are always made up of of these two fundamental levels. Support is when you have more than two candlesticks that touch a particular price level towards the bottom of a trend. These tend to touch and bounce off support, thus moving up towards the top of the price level. These are known as resistance levels. A single bounce off support and resistance is known as a cycle. The more candlesticks that touch your support and resistance, the stronger they are. Let’s take a look at a strong support and resistance.
As stated above, you need at least 2 touches of a candlestick, within a cycle, in order to claim any sort of support or resistance. I typically look for at least 3, in order to be more confident about a certain level.
The only major difference between support and resistance lines are the fact that trend lines tend to be drawn in a diagonal direction. Support and resistance are drawn with straight horizontal lines. In order to better conceptualize trend lines, let’s have a closer look at both rising and falling trends.
Much like the support and resistance lines, you want to make sure you have “at least” 2 or more touches off a candlestick in order to consider it a trend. The more the merrier. Trend lines can also move sideways, which we typically label as a “consolidations”. You also have short, intermediate, and long term trend lines depending on the timeframe of the chart you’re looking at.
Trading volume plays a crucial role in identifying whether a trend is weak or strong. Strong trends with high trading volume will always be accompanied by long candlesticks. The same goes for weak trends. These will be accompanied by short candlesticks.
If you have several long candlesticks along the volume indicator, this indicates a strong trend. If most of these are green, that would indicate a strong bullish trend. The opposite goes for red candlesticks indicating a strong bearish trend.
Moving averages are generally used to simplify trend recognition. These moving averages are based on the average price of a coin over a designated period of time. You can calculate moving averages to show the average of any group of candles, but most traders calculate these averages over a period of 10, 20, 50, 100, and 200 timeframes (minutes, hours, days).
I like to use a 50 day moving average on all my charts. These allow me to quickly tell whether a trend is currently in a bear or bull market within the timeframe I am viewing. Anything below the 50 day moving average tells me that the trend is currently in a short or long term bear market. If the candlesticks are above the 50 day moving average, you’re in a bear market trend. Knowing which trend you’re in (both long and short term) will allow you to better formulate a strategy moving forward.
The Simple EMA Strategy
Exponential moving averages (EMA) will help you decide if a trend is about to reverse within a short term timeframe. Many traders use different EMAs, however the one that I found to be the most useful are the 13 and 34 day moving averages.
Here is the basic strategy behind EMA:
As you can see, as soon as any of the lines cross, a substantial shift within the trend can be seen. This combined with a few other indicators to help substantiate your trading strategy, will help you form a profit maximizing trade.
Technical vs. Fundamental Analysis
Don’t be lured into the always present debate between fundamental and technical analysis. Many novice traders tend to choose sides between these two research powerhouses. They believe one is ultimately better than the other. This couldn’t be any further from the truth. Why choose one method over the other, when you can choose both right? Using technical analysis as well as fundamental analysis will equip you with the prophetic knowledge you need to culminate a precise trading strategy that you can actually feel good about.
Technical analysis will give you a practical way to measure past price movements and their corresponding trading volume. This is vital knowledge you’ll need when considering a trade. Fundamental Analysis will empower you with significant insight regarding the current cryptocurrency conditions. Everything from current news, rumors, and future developments will play a crucial role in your decision when using fundamental analysis.
Combine these two powerful research techniques into one highly effective trading strategy. Utilize fundamental analysis to dictate which coin is worth investing in, while tightening up your strategy when you’re ready to trade, by finding a good entry point with technical analysis.
This guide has presented you with the basic concepts behind technical analysis. I highly recommend you practice using the indicators and patterns I covered above. Once you’ve got a good handle on them, move on to more advanced charting patterns. I’ll go over these within another guide.
Now get out there and start trading!