You can easily get sucked into becoming rich with cryptocurrency. On the flip side, you could lose all your investment at once! Simply put, crypto-assets with a number of risks but vast potential rewards as well.

The Crypto market’s high volatility allows investors to make good returns due to price fluctuations. However, relying solely on intuition or luck isn’t always a good idea.

Because the crypto market is extremely volatile, investors need to have a sound strategy to guide their trading decisions. You need to regularly analyze the market to help mitigate the risk of losing your money.

Fortunately, there are numerous ways through which you can analyze the market, and of these techniques used in cryptocurrency is technical analysis. Through technical analysis, traders can gain valuable insights into the past movements and trends of cryptocurrency, helping you to correctly predict where prices will likely head in the future.

So, What is Technical Analysis in Cryptocurrency?

To be able to successfully incorporate technical analysis in your crypto trading strategies, you need to understand what it means and how it works. To put it simply, technical analysis involves the utilization of real-world data to help speculate or predict future market trends. It involves studying past statistics of the cryptocurrency in question, including parameters like movement and volume.

Within the spectrum of technical analysis, both quantitative and qualitative data is used to predict future market trends. It is imperative to note that technical analysis is majorly quantitative and metrics-based. And because it involves statistical and mathematical modeling to gauge price and market behavior, technical analysis is often widely applied in the buying and selling of cryptocurrency.

The basic principles of technical analysis:

It is imperative to note that technical analysis is guided by three basic principles that are based on the Dow Theory, named after its developer, Dow Charles. The three main tenets that apply to the industry of cryptocurrency include:

History tends to repeat itself: According to this principle, history will always repeat itself when it comes to crypto trends as pricing. Technical analysts can use this fact to derive predictions about market psychology and cryptocurrency.

The market discounts everything: Simply put, this theory suggests that pricing in the crypto market includes consideration of everything, including current, future, and past demands, investors’ expectations, market regulations, investors’ knowledge of cryptocurrency, and other considerations. In this regard, technical analysts analyze the price to see what it says about the market sentiment.

Prices move in trends: Technical analysis also is based on the idea that movements in terms of pricing are not in any way random. Rather, these price movements follow either short or long-term trends. On most occasions, when a cryptocurrency follows one trend, ultimately, it will also follow the opposite trend. As a savvy crypto trader, you will be able to manipulate these trends to make profits.

In summary, technical analysis focuses more on what is happening than why the same happens. It is centered around charting and using technical indicators to help predict the probability of short, medium, and long-term term trends based on historic and current volume and price data. Simply put, technical analysis is about determining future likelihoods based on past trends.

Common TA Applied in Cryptocurrencies:

Cryptocurrency technical analysis often relies on statistical indicators. Technical indicators are simply calculations that are based on numerous statistics, including volume and price. They are usually displayed or presented in visual forms such as charts or graphs. Indicators serve as extra tools to help investors to identify sell or buy signals. There are many technical indicators out there, including:

Relative Strength Index: This is one of the most popular technical indicators used in crypto trading. A significant number of crypt charts and graphs will always feature Relative Strength Indicators. RSI measures the magnitude of the latest price fluctuations to identify oversold or overbought conditions in the price of an asset and varies between 0 and 100. It is worth noting that when the RSI is greater than 70, the asset is considered overbought, and there is a likelihood the price will go down. On the other hand, when the RSI value is below 30, the asset is considered oversold, implying the chances are high the asset’s price will increase.

Moving averages: This is another useful tool for technical analysis that crypto traders can use to predict market trends. This tool relies on a cryptocurrency’s average price over the specified time. It is used to determine the resistance and support levels of an asset, as well as the trend direction of the price of an asset. The moving average is calculated based on past prices and this is why it is considered a lagging indicator. Moving average strategies are highly versatile and can be tailored to any time frame to suit both short and long-term trading interests.

Bollinger Bands: These are a technical analysis tool developed by John Bollinger in 1983 and has become one of the most effective technical analysis techniques used by crypto traders to predict trends. Bollinger bands use both standard deviation and moving averages to design a range of price movements. Graphically, Bollinger Bands are usually represented by a central line based on a moving average, with a band above and below the centerline based on standard deviation. Bollinger bands can be used to identify numerous crypto market scenarios in real-time.

On-Balance Volume: This is a technical trading indicator that utilizes volume flow to speculate changes in a crypto’s price. It is a cumulative indicator, implying that if the price of an asset closes up, the volume for that particular day is added to the OBV’s total. On the other hand, if the price of the asset closes down, that day’s volume is subtracted from the OBV’s total. And if it is the same, no calculations will be made. OBV predicts the direction of short-term price fluctuations. In other words, it tracks either increasing or increasing volume to help project future price movements.

The Bottom Line:

Through technical analysis, crypto traders can gain valuable insights into the past crypto trading trends and make future market predictions. Various technical analysis tools have been developed to help cryptocurrency traders and we have just outlined a few of those tools.

The rule of thumb is that you should not rely solely on a single technical analysis tool when trading cryptocurrencies because you’ll only extract limited information. It is best to combine various technical analysis techniques to have access to lots of information as possible. Thankfully, most charting software usually comes equipped with many technical analysis tools so you can combine them for the best results.

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