A Basic Guide to Crypto Technical Analysis

In this post, we’re going to tell you everything you need to know about crypto technical analysis. We’ll tell you what it is, what you should expect from it, basic crypto technical analysis tools, and more.

Let’s start with what it is.

What Is Crypto Technical Analysis (TA)?

Crypto technical analysis is a method of predicting the future price movements of cryptocurrencies by analyzing past price data. Typically, TA is used to try and identify patterns in the market that may suggest future price movements. There are many indicators and tools that TA analysts use, but the goal is always the same: to make informed predictions about where a cryptocurrency is likely to go next.

Next, let’s talk about what sort of expectations should you have for TA.

Setting The Right Expectations

We’ll talk about different TA strategies soon, but first, it’s important that you set the right expectations. Some people start using crypto TA with wrong expectations, and they leave with nothing but disappointment. Even if things go in their favor.

They left disappointed even after making a profit because they were expecting to make bigger profits.

You don’t want to be like those people, do you? Of course, not.

TA can’t predict the future, and it can’t tell you when to buy or sell. What TA can do is help you understand what has happened in the past, so that you can make better decisions in the present. By understanding the patterns that have occurred in the past, you can gain a better understanding of what may happen in the future.

So, let’s talk about what you can expect from TA.

Crypto Technical Analysis - BTC

TA Defines Short Term Trade

The first thing you should know about TA is that it’s used for short-term trading, and not long-term investment. Therefore, if your goal is to HODL than you shouldn’t worry, give much attention to TA.

However, when it comes to short-term trading, technical analysis is a super-effective tool. It can help you understand when a market is in a bullish or bearish trend and can give you an idea of when it might be time to buy or sell.

For example, if you see that a particular cryptocurrency has bounced off a support line, you might decide to buy into that coin. Conversely, if you see that a cryptocurrency is in a downward spiral and has broken past its support line, you might decide to sell. 

TA Always Includes Risk

No matter how skilled you may be at crypto technical analysis, it’s always important to remember that there’s always some risk involved. Never make investment decisions based solely on TA—instead, use it as one tool in your overall investment strategy. Also, remember that TA is never 100% accurate, so always be prepared to make adjustments if necessary. Overall, if you’re patient and understand the risks involved, crypto technical analysis can be a great way to increase your chances of success in the crypto market.

TA Returns Are Moderate

As we have mentioned already, crypto technical analysis is used for short-term trading. Usually, the price of cryptocurrencies doesn’t skyrocket in a small amount of time. It can happen since the crypto market is volatile, but the chances of any stable cryptocurrency skyrocketing in a small time period are extremely slim.

For this reason, you shouldn’t expect to reap huge profits using crypto technical analysis strategies. However, there is a decent chance that you can earn a good profit.

Basic Crypto Technical Analysis Tools

There are tons of technical analysis tools. If we explain all of them, we’ll need to write a few more guides. Therefore, we are going to do the wise thing and explain only the basic crypto technical analysis indicators.

Here are the crypto technical analysis indicators we’re going to explain:

  • Candlestick Charts
  • Relative Strength Index
  • Support And Resistance Levels
  • Moving Averages
  • Trend Lines

Let’s start with candlestick charts.

Candlestick Charts

One of the most important tools in technical analysis is candlestick charts. Candlestick charts offer a more detailed view of price action than traditional bar charts. It gives you a visual representation of price movements during a given time period. Each candle on a candlestick chart shows the opening price, closing price, high price and low price for a given time period. The body of the candle shows the difference between the opening and closing prices. A long white candle signifies that the stock closed higher than it opened and a long black candle means that the stock closed lower than it opened.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a popular technical indicator that measures the magnitude of recent price changes to determine if a security is overbought or oversold. To calculate RSI, take the average of the up closes and down closes over a set period of time (usually 14 days). The resulting number is then plotted on a chart with 0 on the left (indicating oversold) and 100 on the right (indicating overbought). When a security’s RSI moves above 70, it is considered overbought and may be due to excessive buying pressure. This may lead to a sell-off as buyers eventually exit their positions. Conversely, when a security’s RSI moves below 30, it is considered oversold and may be due to excessive selling pressure. This may lead to a price rally as buyers eventually enter their positions.

Support And Resistance Levels

Support and resistance levels are important indicators to help you make informed decisions about when to buy or sell crypto. They’re basically price points at which the demand for a given asset is strong enough to either halt or reverse its current trend. To identify these points, you’ll need to monitor the market closely and chart the data over time. When a support or resistance level is breached, it often signals a buy or sell opportunity. So keep an eye on these lines—they could mean the difference between making and losing money.

Moving Averages

One of the most popular technical analysis strategies is the use of moving averages. A moving average (MA) is simply a mathematical formula that calculates the average price of a security over a given period of time. When using MAs, you can identify key support and resistance levels, as well as trends.

There are a number of different types of MAs, and we can’t cover them all here. We are going to cover the Simple Moving Average (SMA), it’s the most popular and one of the most effective type. The SMA is calculated by taking the sum of all past closing prices and then dividing by the number of prices used. For example, if you were using a 10-day SMA, you would add up the past 10 closing prices and then divide by 10.

Trend Lines

One of the most basic, yet effective, technical analysis tools is the trend line. A trend line is simply a line that connects two or more points on a chart and helps you identify the overall trend. You can use trend lines to identify entry and exit points, as well as support and resistance levels. When a cryptocurrency is trending up, you’ll want to buy near the support level and sell near the resistance level. When a cryptocurrency is trending down, you’ll want to short sell near the resistance level and buy back in at the support level.

Crypto Technical Analysis - tablet

Important Things You Should Know About Crypto Technical Analysis

While you’ve got a decent understanding of crypto technical analysis, there are still a few important things you should know to understand the basics.

Learn How to Read Candlestick Chart

As mentioned before, candlestick charts are one of the most important tool for technical analysis. Therefore, it’s best that you learn how to read them. To a degree, we have already explained how to read candlestick charts earlier. But, we’ll explain the same details here and more.

Candlesticks are a type of visual chart that shows the opening, high, low and closing prices of a security or financial asset over a given period of time. The body of the candlestick is represented by the range between the open and close prices, while the length of the candlewick (or “shadow”) shows the high and low prices for that period.

The color of the candlestick can also be telling. A white candle signifies a positive day, where the close was higher than the open, while a black candle signifies a negative day, where the close was lower than the open. If the candle has a wick on both ends, it means that the market was volatile that day – prices moved significantly up and down.

Learn How to Trade Chart Patterns With Technical Indicators

After deciding which technical indicators to use, the second step is to select the proper chart patterns to trade with those indicators. In other words, not all chart patterns are created equal. Some patterns are more reliable than others and should be traded only when certain indicators are signaling a buy or sell opportunity. For example, a bullish engulfing pattern is more reliable when confirmation is provided by a bullish moving average crossover. In contrast, a head and shoulders pattern is less reliable and should only be traded when confirmed by other technical indicators, such as RSI or MA. By matching the right chart patterns with the correct technical indicators, you can improve your chances of success in the markets.

Limitations of Crypto Technical Analysis

Again, we have already touched upon this point as well. TA doesn’t define anything, and it merely tells you what’s more likely to happen. But, let’s talk about the factors that stop TA from making 100% accurate predictions.

One of the biggest factors is that it can be difficult to predict how whales or other large investors will move the market. Additionally, TA doesn’t always take into account external factors like regulations or news events. It’s important to remember that TA should be used as one tool among many when making investment decisions.

Best Crypto Trading Tool

Using crypto technical analysis is a good way to find good crypto trading options. But, there are some tools that help you find the great crypto trading option in a much faster and more convenient manner.

One of the best tools for finding crypto trading options is the Algory crypto scanner. It gives you tons of actionable and insightful tools.

Here is what you get:

  • Pre-built crypto scanner libraries created by expert traders
  • +100 scanners alert and filters
  • A news aggregator that brings you news from +800 crypto sources
  • Scanning is done within milliseconds
  • Access to all the features mentioned in one place