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Crypto Technical Analysis | How to do Technical Analysis: Crypto Trading 101

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If you have ever seen professional traders investing in any crypto asset, you must have come across the various indicators that help them take that decision. Few indicators are used for long-term investment strategy while others are used for short-term. But all this while a question that would have persisted in your mind would be what exactly is crypto technical analysis and how to do it?

Crypto Technical analysis involves the usage of mathematical indicators that are based on the previous price action data and thus they are used to predict the future trend. But how can they predict the trend? Well, everything around you is based on certain laws or equations. In simple terms, everything around you follows the pattern. Be it a climatic pattern or a crypto price pattern. Once these patterns are established, the trends that head in the same direction continue to do the same for a long time and these indicators come in handy to understand those trends. 

If you also wish to become a crypto trader, the fundamental rule is to buy when the markets are low and sell when they are high in the future. These indicators help to understand when the market might go up or come down based on the previous trends set by it. Although, there’s not a single way to do crypto analysis since every trader has their own ways and own unique combination of indicators. However, in this blog, we will help you understand the basics of certain indicators that are used by almost every crypto technical analyst and is a must-know for anyone who wishes to learn crypto technical analysis. 

Crypto Technical Analysis: The Basic Indicators 

There’s a long list of technical indicators as well as chart patterns that one needs to memorize to conduct crypto technical analysis. However, it’s not that difficult either. Here are a few indicators that we have discussed in brief which can help you at least get started with crypto technical analysis. However, we always advise readers to learn more before conducting any analysis. Half knowledge is worse than no knowledge at all. 

But to help you get started with the basics of crypto technical analysis, here are the top indicators that you must know about.  The top and basic indicators that come in handy while doing crypto technical analysis are: 

  • Support and Resistance levels
  • Candlestick charts
  • Average Directional Index
  • Relative Strength Index (RSI)
  • Trend lines 
  • Moving Averages (MAs)

1. Support and Resistance levels

This is not an indicator but a basic graph that you must draw to better understand the market. Support and resistance levels are referred to as the positions where prices tend to bottom or make a peak respectively. Traders often try to identify these levels first to make a better and more informed decision. 

But the question still persists, how is one supposed to identify these levels? Although there are infinite ways to understand the same, here’s one that we consider simple. Support is that zone where the prices have risen to new highs repeatedly over a course of time while resistance is the zone where prices have suffered a pullback

To create support or a resistance zone using a trend line, you need to join at least three previous price points in a straight line. This maps out the support and the resistance zone. In the image below, the orange line indicates a potential resistance level while the yellow line indicates a potential support zone.

 

Support and resistance

Image showing Support (Yellow)  & Resistance (Orange) zone*

2. Candlestick charts

Candlesticks often have the power to decide the future trend that many times indicators fail to. Candlesticks play a vital role in crypto technical analysis and one must know this to become the best crypto technical analyst. These candlesticks serve as a resource for high-level detail. Candlesticks are capable of displaying four different price levels for every interval. These include ( moving from top to bottom, of a candlestick):

  • High price
  • Opening price
  • Closing price
  • Low price

This information is displayed in a candlestick with a bar and a wick. The peak of the candlestick displays the highest price while the tip of the bottom wick shows the lowest price at that time interval. 

The body of the candlestick might be either red or green. A red candlestick means the price ended at a lower value than it opened while a green candlestick indicates that the price closed at a higher value than it opened at. On a green candlestick, the top of the body indicates the closing price while the bottom indicates the opening price. For red candlesticks, it’s just the opposite. The top portion of the boy indicates an opening price while the bottom of the body indicates a closing price. 

Every candlestick is read in relevance to its surrounding data points and offers a great outlook to the investors on whether to buy or sell during the period. Different patterns of candlestick offer a different insight. 

Not sure how to read Candlestick Charts? Read How to read Crypto Candlestick Charts of our Crypto Trading 101 Blog Series.

3. Average Directional Index

The average directional index is used for short-term crypto strategy. It helps the investors to determine the strength of a trend. The higher the ADX is the higher the momentum might be behind those trends. 

What is ADX? It is the average of directional movement lines over a course of time. These lines are calculated using the present high and low prices. ADX has a value from 0 to 100. ADX rarely rises above 60. According to expert chart analysts, an ADX value above 25 indicates the strength of a trend while a value below 20 indicates no trend. A value between 20 and 25 is considered to be neutral, which also implies no trend. 

If you see the ADX line rising, this implies that the trend is getting stronger. 

4. Relative Strength Index (RSI)

Many veteran and novice traders love Relative strength indicators and often use them while doing crypto technical analysis. This is a simple line graph below the price chart. The line in an RSI oscillates between 0 to 100 with 50 being neutral. Overbought conditions are indicated using higher values while lower values are indicators of oversold conditions. 

Just like other technical analysis tools, RSI also works best when paired with other indicators. For an instance, if the price of a crypto asset approaches a well-established support zone and the RSI also indicates a low reading such as 20, the odds of an upcoming price rally might be higher than usual. 

 

RSI

Image showing an RSI Indicator*

Click here to see Technical Analysis for Polygon MATIC 

5. Trend lines 

As the name suggests, trend lines illustrate a potential trend. Trend lines can take multiple forms and sometimes multiple trendlines are drawn on the same chart to express complex patterns. 

In simple words, trend lines are nothing but single lines joining highs and lows. The more points the line connects the stronger the trend is. Different technical setups can be drawn up using trend lines. In broader terms, there are two types of trends in any market, upward trend and downward trend. There are various patterns within these trend lines that indicate a bearish or bullish market. 

 

Trend lines

Image showing an Trend Lines*

6. Moving Averages (MAs)

While ADX comes in handy to understand the strength of a trend, moving averages help to determine the direction of that trend. A moving average summarizes the data points and then divides the same with a number of data points to create an average for the crypto asset over the course of time. Wondering why is the term ‘moving’? because the number is dynamically changed or updated using the latest price data. 

Experts believe that long-term moving averages are a strong indicator since they contain more data. However, MAs can also be used for short-term crypto technical analysis. 

Moving averages are of different types, different time lengths as well as different ways in which they are used to provide direction to the trend. There are numerous bullish and bearish setups based on MAs. One such is the Golden cross. This happens when a short-term moving average moves above a long-term MA. 

Summing it Up! 

Crypto technical analysis is one of the many things that crypto investors look up to before investing in any crypto asset. However, the reader must also realize that these indicators can be very subjective at times despite being based on sheer mathematics. While doing technical analysis, experts advise using at least five indicators and deciding on the trend only when three or more indicators indicate a similar pattern. Crypto investors who are just beginning their way into crypto technical analysis must realize that there is no 100% accurate technical indicator. An average of all the indicators must be used to decide whether to buy or sell a crypto asset. 

These technical indicators only reduce the chance of making an error but do not guarantee a certain result. With that being said, always do your due diligence before investing in any crypto asset. 

Stay updated with the latest information around the crypto space with CoinDCX Blog. We also do regular crypto technical analysis of Cryptos on our blog. Start your crypto investment journey today with India’s simplest and safest crypto investment app, CoinDCX. 

*Source for all graphs – Trading View


 

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