Crypto technical analysis is one of the methods used by traders, especially seasoned or experienced, to analyze or conduct studies on the crypto market to get the best price when buying or selling assets.
A technical approach will help a trader gain a deeper understanding of many things, from sentiment to significant trends in the cryptocurrency market.
Through this analysis, too, a trader can later produce a more accurate estimate instead of getting a better investment strategy to achieve maximum profit.
To get acquainted with this analysis, let’s look at the description as follows.
What is Crypto Technical Analysis, and How Important is it?
Explain what technical analysis is in crypto
Fundamentally, in the financial world, technical analysis is used to make forecasts about the price movement of an asset. These forecasts and predictions are made by monitoring the asset’s price movement and transaction volume in the past period.
Technical analysis will involve knowledge of mathematics and statistics, which are then presented in charts to make it easier for a trader to find the best price when he later buys or sells his asset. Usually, this analysis is carried out by monitoring price movements, using 3 steps.
In the crypto world, this analysis will consider the history of the movement of crypto assets with price charts and trading volumes and what was done with the token.
Furthermore, this technical analysis is very important for predicting the cryptocurrency market. In addition, this analysis is also very suitable to be used by traders and investors in determining the right time for them to buy an asset.
Technical analysis is essential for a trader to maximize his profit opportunities. The reason is traders can later buy assets at prices that have the potential to rise again.
Fundamentals of Performing Crypto Technical Analysis
Now, to get a complete view of technical analysis, the following fundamental ideas of Dow Theory which are based on technical analysis, are essential. Here are some points:
- The market considers everything about pricing. All the existing, previous, and future detailed sections are merged into calculating the current asset price.
- Bitcoin or other crypto assets will consist of many variables, such as current, past, and future demand and regulations affecting the crypto market. It is known that the available prices are in response to all the latest detailed sections, which include expectations and knowledge of every coin traded in the market. Technical analysts interpret prices on market sentiment to produce reliable and calculated predictions for the future.
- Prices often follow trends, which can be extended or short-term. Certainly, price movements are not random. After the token forms the trend, the trend is likely to continue or reverse. In this case, technical analysts make an offer to help investors capitalize on and profit from the trend.
“What” is more important than “why.” Here, technical analysis will focus more on the coin’s price rather than each variable that results in price movements. Although several aspects can affect the price of a coin to move in a specific direction, these analysts tend to review supply and demand.
- History tends to happen again. Therefore, it becomes possible to predict the psychology of the market. Occasionally, a trader will react similarly when he experiences the same sentiment or trend.
Crypto Technical Analysis Indicators: Trend Lines to Moving Averages
This specific price direction for a token, aka trendline, can benefit crypto traders. Here, the choice of highs or lows that form a linear pattern will appear on the graph of the price movement of Bitcoin or other crypto assets.
With this view, technical analysts can ignore volatility and find an uptrend when they find a series of highs. And vice versa, as a trader, you can identify a downtrend when you find a series of low-price positions.
In addition, there is also a trend that moves sideways. In that case, the token does not move significantly in either direction. You should also be aware that trends come in various periods, including medium, long, and short-term trendlines.
2. Resistance and Support Levels
Furthermore, there are also support and resistance levels indicated by horizontal lines. Identifying that level will allow you to conclude the supply and demand for tokens.
Many investors or traders are willing to buy the coin at the support level—a significant demand. The investors believe this currency will be priced low at the current level, so they will try to buy it.
Well, after the token approaches that level, a buy situation occurs. Usually, heavy demand will stop the decline and sometimes even turn the momentum into an uptrend.
On the other hand, the resistance level is the opposite. This level is where many traders wait patiently to sell their tokens. It then forms a significant supply zone. Therefore, every time the coin approaches the “upper limit,” a crowd of tokens will be sold, and the supply will increase again.
3. Moving Average
This is another technical analysis tool for cryptocurrencies and other instruments that can use to simplify trend prediction. The moving average is based on the average price of the token over a certain period.
For example, the moving average on a given day will be calculated according to the token price for every 20 trading days before that day. Then, the data will connect to form a line.
In addition, it is also necessary to know the exponential moving average (EMA), which is the average price movement that gives more weight to the price value of the past few days than the previous days.
Steps to Perform Crypto Technical Analysis
1. Monitoring Market Movements
First, to do technical analysis, you can see the direction of the price movement of an asset when you want to buy or sell. When conducting technical research, you need to know that three price movements occur: sideways (consolidation), up, and down.
When the price moves sideways, there is usually uncertainty in the market, in the sense that it is still impossible to predict whether the price will go up or down. It’s good. This condition is avoided when you want to transact because it may lead to wrong calculations.
Next is the movement of the correction or price depreciation. This occurs when the price of an asset moves down. Usually, analysts will wait to buy until they get additional confirmation when this correction movement occurs.
Then, there is the movement of price appreciation. This condition occurs when the price moves up clearly. Usually, a price appreciation will be used by investors to buy, but a good analyst will use it to prepare to start selling because he will sell when the price starts high, then buy when the price drops to make a profit.
2. Setting Targets and Maintaining Risk Management
The next step in crypto technical analysis is determining targets for buying, selling, and maintaining risk management. In determining the target, analysts will generally monitor the prices that are most frequently visited when prices move up or down.
As mentioned earlier, this targeted analysis is called support and resistance analysis: support is the lower limit of the price, while resistance is the upper limit of the cost. It is important to note these boundaries are found by monitoring the area visited and then marked.
The support itself is usually used as a potential place to buy or cut losses, while resistance is used as a place to take profits. On the other hand, when looking for support and resistance for a price movement, one tool that can use is the Fibonacci indicator.
3. Looking for Confirmations to Buy or Sell
Finally, the steps that can be taken in crypto technical analysis, namely looking for confirmation to buy or sell. To find it, there are two ways that can be used. First, look at the price movement or trend when a reversal occurs.
Usually, the greatest profit is obtained when a trader buys or opens a position during a reversal. The reason is, the reversal is the beginning of a new direction of movement that can usually survive and provide profits.
The second way is to look at chart patterns and candlestick patterns to complete the reversal confirmation. Here, there will be types of chart patterns and candlestick patterns that indicate potential price appreciation and there are also types that indicate potential correction. These patterns also need to be studied for later analysis. Furthermore, if the confirmation has been obtained, the trader can buy or open a position.