In the financial markets, charts are used to display a pictorial view of the underlying asset price performance. Technical analysis is used by traders to help them predict how the prices may move in the future.Technical analysis is utilized in the stock markets, forex and even in cryptocurrencies to predict the future trends, by doing this a trader can make the right move whether a buy or a sell an underlying asset.
You may have been wondering when is the best time to buy cryptocurrencies or sell, occasionally people will only say you buy in the deeps and sell in the highs, but that is a just a theoretical say, practically you are unable to identify the deeps, and when the prices are in the tops you just want to hold and wait for it to raise even higher “to the moon”.
In this post, we are going to discuss about how you can use technical analysis tools to analyze a chart and identify patterns that will help you in making a buy or sell decision. The tools are not only applicable in the cryptocurrency markets but can also be used in the stock market as well as in Forex trading.
In the price analysis, there are two concepts used,the fundamental analysis and the technical analysis.
Technical analysis is a methodology employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. (Investopedia). A technical analyst uses analytical tools on available historical price data to identify a pattern.
On the other hand, fundamental analysis is a method of evaluating a security or cryptocurrency in an attempt to assess its intrinsic value, by examining related economic, financial, and other qualitative and quantitative factors (Investopedia). Unlike technical analysis where the statistical tools are used across different markets, fundamental analysis is only specific to one market. Fundamentals in forex cannot apply within the cryptocurrency market. In the forex market fundamentals may include factors such as interest rates and inflation while in the cryptocurrency market the relevant factors could include mining difficulty.
Basically, within the cryptocurrencies markets prices are plotted in chars where we have the prices (exchange rates) on the Y-axis and the time frame on the X-axis. The chart can either be a line chart, a bar chart or a candlestick chart.
Candlesticks charts are the most used across cryptocurrency, stocks and forex market because they show a better overview of the price performance. Candlesticks shows the opening price, the closing price,the high level and the low price levels over time. For example in a 15 minutes chart the candlesticks will show the opening price at the beginning of every 15thminute, the closing price before the start of the next 15 minutes time frame,the lowest price and the highest price with the 15 minutes time frame.
In a chart, often the candlesticks will be in two sets of colours, green and red. The green candles sticks show the bull controlled the market within a specific time frame, while on the other hand, a red candlestick shows the bears controlled the market. The bulls and the bears are not a jargon; they are terms used in the markets to describe traders. The bulls are traders who buy with expectations that the prices will rise for them to sell off. The bears, on the other hand, are traders who sell in anticipations that the prices will drop for them to buy back at a lower price.
Other terms used include going long and shorting. Going long is buying of the crypto or securities, and shorting is selling, therefore whenever you hear the term short you know it means selling.
Traders utilize very many statistical tools for analyzing the market price. There are very many indicators that can be applied in doing a technical analysis; you only need to learn a few that works for you and stick to them.
The indicators are used to identify a trend in the price movements, remember the prices are neither fixed nor do they move in a straight line. If you take time to view a live feed of the prices, you will see that the prices are always fluctuating upwards and downwards every second. It’s from these fluctuations that traders capitalize on to make profits.
There are three trends that aide a trader in taking a buy, hold or sell position. These are:
A bearish trend is when the prices are on an upward movement;the prices keep on rising. A sideways trend is when the prices just fluctuate up and down with an insignificant percent, they form a consideration pattern.Finally, a bearish trend in the prices are on a downward movement; the price keeps on decreasing over time.
The trend should forever be your friend; if you can predict a pattern and trade with it, you will always be on the winning side.
The support is the level at which a crypto or stock hits and stars to move downwards. The resistance line is the level at which once the price hits that level price reverse and start to move on an uptrend.
The support and resistance can be plotted on the chart based on any time frame. You are therefore able to see the highest point the prices have reached and the lowest level they have hit.
This indicator is an average of the prices over a specified period. For instance, on your chat, you can have a 20 days moving average of either the opening or the closing price.
The moving average can be used in conjunction with the Bollinger bands to have an overview of the price highs and lows as well as the average of the prices.
This indicator is a bar chat at the bottom of a chart that shows the volumes of cryptos or stock traded with a specified time frame.The trading volume acts as a confirmation of a trend. Once your candlesticks are all green consequently you may conclude it’s a bullish trend, the trading volume can serve as confirmation to that. Once you see high bar graphs, you can confirm that the trend is forming from a majority of traders trading in its favor.
The RSI is an oscillator that determines the price momentum as it meanders up and down. The indicator measures the speed of the momentum between a range of 0 to 100. When the RSI falls below 30, the market is oversold while if it climbs past 70, the market is overbought.
The RSI therefore can help you determine if you are getting into a trend when it’s too late or at the right time, if you get into a bullish trend that has RSI above 70 showing the market is overbought the trend may not last long as most traders will start selling off after hitting their target profits.
Technical analysis is one of the lesson you should learn and master a few indicators that work out for you in making profitable trades.
There are very many statistical indicators the ones discussed are the common and widely used in cryptocurrencies, stocks and even in forex.
You can practice using the indicators with a demo account as you test which one best works for you.
Technical analysis is not always a 100% perfect; it’s also important to look at the fundamental indicators as well. One of the best ways to keep updated on the fundamentals is following the news to learn what is happening within the markets. Cryptocurrencies prices are widely affected by the fundamentals. Therefore, it’s essential to determine what’s going on; you can join our telegram channel as well as subscribe to our newsletter to be also updated.
Blockchain and Cryptocurrency enthusiast.
Founder CryptoKibao
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