Just like other kinds of asset trading, sensible crypto trading relies on technical analysis to identify potentially profitable trades. Without a way to predict how the market will behave based on past data or present economic and political events, you will surely lose your investment capital.
Technical analysis involves the study of historical price and volume data to predict future price movements. It’s based on the assumption that all the information relevant to an asset’s price is already reflected in the price, and that trend is when the price moves in one direction for a sustained period. It also assumes that past observed price patterns are likely to occur again in the future. That means, using a variety of tools, one can predict where the price will go to some degree.
Popular technical analysis tools for cryptocurrency include:
Bollinger Bands are volatility indicators. They measure the amount of deviation of the cryptocurrency's price from its average price over a fixed period of time. They are typically composed of 3 lines.
- The middle band: This is the simple moving average (SMA) of the price over a specified period of time, typically 20 periods.
- The upper band: This is the SMA plus two standard deviations of the price.
- The lower band: This is the SMA minus two standard deviations of the price.
Bollinger Bands can be used to identify overbought conditions (Price is above the upper band) and oversold conditions (Price is below the lower band). Traders typically buy crypto prices that break above the upper band and sell when it break below the lower band.
Alternatively, one can wait for a reversal in trend. For example, if the price moves above the upper band and then breaks back below the middle band, it could be a sign that the uptrend is losing momentum.
Moving averages are a trend-following indicator that smooths out price action by averaging closing prices over a specified period of time. There are many different types of moving averages, including the above-mentioned SMA and the below-mentioned MACD, Stochastic oscillator, and Ichimoku cloud. Moving averages can be used to identify the overall trend in a cryptocurrency's price, as well as potential support and resistance levels.
Relative Strength Index (RSI)
The RSI is a momentum indicator. It estimates the magnitude of recent price changes to determine overbought or oversold conditions. It’s typically characterized by an oscillator and can range from 0 to 100. The oscillator moves between the two extremes.
When the oscillator moves above the 70 mark, the crypto is probably overbought and may be headed for a pullback, so you need to sell. When the oscillator is below 30, the crypto is probably oversold and may be headed for a rebound, so you need to buy. Exit your position once the oscillator moves back into the neutral range. Always pair an RSI with an MA or trend indicator to get a good sense of the overall trend.
MACD is short for Moving Average Convergence Divergence. It’s typically characterized by a histogram and two lines that oscillate without upper and lower limits. One line is the MACD, and it’s calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA of the closing price. The next line is the signal line, and it’s a nine-period EMA of the MACD itself.
When the MACD is above zero, the conditions are said to be bullish and vice versa. Another bullish situation is when the MACD points up from below zero. When it points down from above zero, it means bearish.
When the MACD line crosses above the signal line, it may be a good time to buy. When the MACD line crosses above the zero line, it may also indicate a bullish reversal. On the other hand, when the MACD line crosses below the signal line, it may be a good time to sell. When the MACD line crosses below the zero line, it may also indicate a bearish reversal.
On-Balance Volume (OBV)
The OBV is a technical indicator that uses volume data to measure buying and selling pressure. The OBV is calculated by adding volume on up days and subtracting volume on down days.
The OBV can be used to identify divergences between price and volume, which can be a sign of a potential trend reversal. If the price of a cryptocurrency is making new highs, but the OBV is not, this could be a sign of a bearish divergence, meaning the buying pressure is weakening, and the crypto may be headed for a price pullback.
The Ichimoku Cloud is a technical indicator comprising kumo (cloud), senkou span (leading span), kijun sen (baseline), and other indicators. The Ichimoku Cloud can be used to identify trend direction, strength, and potential areas of support and resistance in the market.
To use it, just look at the price position vis a vis the cloud. If the price is below the cloud, the trend is bearish, and vice versa. Additionally, consider the cloud width. Larger clouds indicate strong trends, while narrower ones indicate weaker trends.
Fibonacci retracement uses horizontal lines to reveal key resistance and support levels. The retracement levels are a quotient of price swing and key Fibonacci ratios 0.382, 0.500, 0.618, etc).
Basically, you just need to identify a recent price swing, e.g. high to low, and calculate the Fibonacci retracement levels, then check for the presence of support or resistance. Let’s say you find the 0.618 retracement level at $20,000. Then, you place a buy order at $20,000 because you believe the crypto will find support at that level.
The Stochastic Oscillator compares a cryptocurrency's closing price to its price range over a specified period to identify overbought and oversold conditions, as well as potential trend reversals.
The indicator is typically comprised of %K and %D. The former is faster and more volatile, while the latter is slower and smoother. When the lines are below 20, the crypto is probably oversold, indicating a buy signal. When the lines are above 80, the crypto is probably overbought, indicating a sell signal.
Also, when the %K line crosses the %D line from below, it shows bullish conditions, and when it crosses from above to below the %D line, it gives a bearish signal.
The Aroon Indicator is a technical indicator consisting of the Aroon Up line and the Aroon Down line. The Aroon Up line measures the strength of the uptrend, while the Aroon Down line measures the strength of the downtrend.
When the Aroon Up crosses above Aroon Down, it shows the market is bullish, and the sentiment is likely to continue. When the Aroon Down crosses above the Aroon Up, it indicates bearish sentiments. When both Aroon lines are below 50, there’s no clear trend.
On-chain metrics are data points derived from the blockchain itself. They are used to track factors such as transaction volume, whale activity, active addresses, etc. They can provide insights into the overall health of the crypto market and reveal potential trading opportunities.
If you want to get into crypto trading and learn more about the workings of the above-mentioned indicators and many others, please give our platform a try.