Cryptocurrency technical analysis: a beginner’s guide

to crypto trading

This guide delves into cryptocurrency technical analysis and its application in
crypto trading. Even if you don’t know a thing about technical analysis, don't
worry; the guide removes the guesswork, and you can start honing your
newly found skills immediately after reading.

For most investors, carrying out a background check on crypto is easy. They
accomplish this by reviewing the white paper (a document that gives them
information about what the company behind the crypto is about—the real-
world problem it tries to solve, its road map, partnerships, contributions to
society, and so on). After that, they embark on a market sentiment analysis.
In this analysis, they try to know how the overall market feels about the
cryptocurrency of interest. They check out the media, social media, and
other places that could give them a hint about the general acceptance of the
crypto they plan on buying.

Once satisfied that they are investing in something of value, the next step
lies in knowing when to buy or sell. That’s where technical analysis comes
in.

What is crypto technical analysis?

Technical analysis is the study of price charts (a plot of price versus time)
using tools to forecast future price movements by studying historical price
action.

You can analyze a price chart as a line, bar, or candlestick. The candlestick
price chart is the most popular because it offers more insights into the
activities of the market.

The information you could glean from a single candlestick includes the
opening price for the day (when looking at daily candlesticks), the highest
price for the day, the lowest price for the day, and the day’s closing price.
The job of technical analysts is to study three primary parameters:

● Price
● Volume
● Momentum

Price

Technical analysts research the price action of cryptos or other securities

(stocks, options, futures, etc.) using candlestick price patterns, support and
resistance lines, and technical indicators. Indicators show which side (up or
down) of the trade is likely to be favored by a price move.

Volume analysis

Here, they seek to measure trading volume. The larger the trading volume in
a particular market direction ( buying favors the upside, selling favors the
downside), the more likely the price would continue to move in that direction.

Technical analysts use volume indicators to visually represent which side of

the trade is in control (bulls or bears). Examples of volume indicators are
OBV (On Balance Volume) and MFI (Money Flow Index).

Momentum analysis

When analysts assess the price action of financial securities, they use
momentum indicators such as the RSI (Relative Strength Index), MACD
(Moving Average Convergence Divergence), and the ADX (Average
Directional Index) to determine the strength or weakness of a price move.

Now that you understand the meaning of technical analysis: let’s go over an
example using Bitcoin to show how you can do it.

Bitcoin technical analysis

Here, the objective is to assess when to buy or sell Bitcoin using simple
technical tools with the following five steps.

Step 1: You need a price chart for your technical analysis, as the chart
contains all the tools you need. One of the best platforms out there offering
these tools is trading view. Their platform is sleek and easy to use. You can
head over there and register an account. The free account option is okay for
this analysis.

chart by the trading view

If your platform doesn’t have a black theme like mine, click on the three lines
(or the first letter of your name when logged in) at the top left to change your
theme from light to dark, or you can right-click in the middle and select from
the given options to change it, too.
Now, a quick overview of the surface of the platform.

● The yellow bar to the left highlights the technical tools

● The middle is the chart area
● The blue bar to the right is the price axis of the chart
● The red bottom bar is the chart’s time axis
● The grey bar to the right is the watchlist section
● The top green bar shows other tools you could use to change the
chart’s time frame (daily, weekly, or monthly), and the visual looks from
a candlestick to a line or a bar.

You can play around to get familiar with the chart’s interface.

Step 2: You can see that the BTCUSD pair is open on the chart. If you are
not on the BTCUSD pair, you can achieve this by clicking on the plus sign on
the top right (the watchlist section) and typing BTC in the search box that
comes up. Click the BTCUSD pair to add it to the watch list.

Now, scroll down in the watch list section and click on the BTCUSD pair,
which will bring it up on your screen.

Step 3: Click and hold onto the third technical tool to the left (Fibonacci tool,
represented by four horizontal lines), which should bring up a series of
options; from the list, select Fib retracement. Move to the chart area; click
and hold onto the mouse button at the most recent highest peak of the price
you see, and then while still holding on to the click, drag to the lowest price
point in sight. You should see a series of colored lines and numbers appear
on your chart.

If you can’t see the full chart, zoom out. To zoom out, hold down the control
key on a Windows (command on a Mac) computer and scroll the wheel of
your mouse button downwards simultaneously. Scroll up to zoom in. When
done right, your chart should look like the following picture.

chart by the trading view

Next, go to the tool above the Fib retracement (the line tool, represented by
a line that looks like a front slash). Click with your mouse and hold it down
for a few seconds; a list of options should appear. From the list, click on the
horizontal line. With the tool selected, click on each of the Fib retracement
lines. When done right, it should appear like the picture below.
To exit the horizontal line tool, click on the first tool (crosshairs, it looks like a
cross) on the technical tools’ sidebar to the left.

After that, click on the text tool (the fifth tool represented by a “T”) and type
out the percentages 100%, 75%, 62%, 50%, 38%, 23%, and 0% on each of
the Fib lines starting from the top most line to the last line as shown below.
 ~

chart by the trading view

You can now delete the Fib retracement lines by hovering your mouse over
the edge of the highlighted rectangle ( before you hover, make sure you are
on the crosshairs tool). When you see a hand sign, right-click, then click on
remove from the list of options. That should take the Fib lines off your chart.

Insights

You have just succeeded in drawing your horizontal support and resistance
lines using the Fib retracement tool. The support line acts like a floor from
which the price could rebound after falling, while the resistance line acts like
a ceiling preventing the price from upward movement. The 0-100% texts
represent the entire price move from the lowest price of $9,435.51 to the
highest price of $68,826.62.
That means Bitcoin’s price moved from $9,435.51 (September 18th, 2020) to
68,826.62 (November 12th, 2021). The price increased by approximately
629.44% (over six times the starting price) within that time frame. You can
also see that the price dropped more than 50%, as the current price is
$36,372.20.

chart by the trading view

Step 4: let’s add some indicators to the chart. To do this, click once on the
fourth icon (the icon that looks like ascending bar with a wave on top) from
the left on the top bar above the chart area. A search box will appear, type
RSI into the search box and click on Relative Strength Index. The Relative
Strength Indicator should appear on your chart. It will appear below the chart
area.
 ~

chart by the trading view

Now, mark out the main lines of importance on the RSI indicator.

Click on the horizontal line tool once more: with the tool selected, hover your
mouse cursor over the RSI. As you move along the indicator, look to your
right; you’ll see how the value of the RSI changes. The most important lines
to mark are 85, 70, 50, 30, and 15. When done right, it should look like the
picture below. Again, don’t forget to zoom in and out of the chat to suit your
viewing needs.
 ~

chart by the trading view

Insights

You have just added the Relative Strength Indicator to your price chart, but
what is its function? The RSI is a momentum indicator that measures the
speed and strength of price movements. When the price of a cryptocurrency
begins to pick up momentum, the RSI indicates it.

When the RSI is below 50, the market sentiment is bearish (there are more
sellers than buyers, and the downside is favored). If it is above 50, the
market is bullish (more buyers than sellers and favors the upside); if it is at
50 or close to it, this means neither the buyers nor sellers have control, and
the price of the security moves sideways without going in any particular
direction (up or down).
When the RSI value is 30, sellers have exhausted their move, and buyers
are getting ready to buy because the price is attractive. It’s good to buy when
the RSI is in this range. If the RSI goes as low as 15 (in rare cases), it
implies an imminent price reversal to the upside.

If the RSI is at 70, it’s a sign that the buying pressure is reducing and sellers
are about to sell and lock in profits. If you bought a financial security
(cryptos, stocks, ETFs, etc.), it’s time to sell. And when the RSI hits 85, it
signals that there’s an imminent reversal of the price to the downside.

Typically, the 70-85 range is an excellent time to sell, and the 15-30 range is
a good time to buy. Also, the highest range (70-85) corresponds to the
recent peak price of the cryptocurrency or is very close to it, while the lowest
range (15-30) corresponds to the lowest current price reached by the crypto.

Step 5:Add the MACD (Moving Average Convergence Divergence) indicator.

Navigate to the same place you added the RSI indicator, click and type
MACD in the search box, and select MACD from the options. The indicator
should appear on your chart as shown below.
 ~

chart by the trading view

Insights

The MACD indicator is a trend-following momentum indicator that shows the

relationship between two EMAs (Exponential Moving Averages). One of the
EMAs operates at 26-period (the number of days it measures), while the
other at 12-period (also known as the signal line, as it crosses up and down
the 26-period EMA to indicate a change in market sentiments).

If both the EMAs are above the midpoint (0.00), the market sentiment is
bullish (favors the upside); if they are both below 0.00, the feeling is bearish
(favors the downside). If the lines are at or close to the 0.00 midpoint, the
market is in a neutral phase (neither bulls nor bears are in control). The
cryptocurrency price moves sideways when the two lines are at the midpoint.
In summary, from the technical analysis that we carried out so far on the
BTC/USD price chart, we were able to deduce that the highest price Bitcoin
has gone as of the time of this writing is $68,826.62, and the lowest price it
has gone as of September 18th, 2020 is $9,435.51. The price dropped more
than 50% after topping out at the peak: it is currently trading at 36,750.34.

The RSI is way below the midpoint line (50) and is close to the 30-point
mark. We can say that Bitcoin is bearish right now, which is also confirmed
by both the EMAs of the MACD below the 0.00 midpoint line, which affirms
the bearish sentiments of the market.

Though the market is bearish, the RSI is close to the 30-point mark
indicating that it is time to buy some Bitcoin and hold on to it for the price to
make a significant move upwards before selling. Or a more conservative
approach could be to wait for how low the price could go before taking
action.

Note: Crypto asset is very volatile (price changes quickly): it’s always wise to
do your due diligence before putting your hard-earned money on the line.
Also, aim to invest for the long term, as investing in crypto for the short term
is akin to gambling.
Conclusion

There you have it! A basic introduction on how to get up to speed with
cryptocurrency technical analysis. Is it enough to make you a professional?
No! Is it sufficient to get you started? Yes!

More than a single blog post is needed to do justice to the discipline of

technical analysis, as we only covered some indicators, horizontal resistance
and support lines, and the Fibonacci tool.

If you are committed to developing your technical analysis skills further:

candlestick chart patterns (such as double tops and bottoms, hanging man,
hammers, and others), volume indicators, and the Elliot wave theory; should
be your subsequent research topics. The study is always ongoing when it
comes to mastering the craft.