Hi there! Today, we will get a little technical in this piece. The reason is that price analysis is a technical subject, normally. If you aren’t new, keep in mind that the aim of this piece is to usher new crypto-asset investors into the world of technical price analysis.
In the coming days, CryptoBlockWire will publish more insightful, engaging, and very technical pieces for advanced traders. So, stay put and be on the lookout for them. Again, the aim of this piece is to provide a great starting position on a steep learning curve for new traders. Let’s get started right away!
Make no mistake, learning price movements is essential as it will help you in making more money while trading. Indeed, nobody gets it perfectly all the time. In an attempt to place trades, many traders have lost embarrassing sums of money. To start with, there are two major analyses involved in virtual currency price. These are fundamental analysis and technical analysis.
Fundamental Analysis vs Technical Analysis
Essentially, fundamental analysis focuses on forces of economy, security, or company. In contrast, technical analysis emphasizes on the direction of prices based on past market data, volume, and historical prices.
However, we will focus mainly on technical analysis (TA) because it helps traders to understand market sentiments. More importantly, it helps in isolating certain trends in the market.
Key Points to Pick Out in a Technical Analysis
- The market considers a lot of factors before settling for a particular price. Details such as prior, existing, and upcoming prices are incorporated into the price that currently displays on the screen. Multiple variables that affect price include past, current, and future demands, along with regulations. So, technicians interpret what the current prices say about market sentiments. With that, they can predict the future pricing of cryptocurrencies.
- Don’t ever think that price movements are random because they are not. However, they move in response to long or short trends. When a coin has established a trend, it follows that trend. As a technician, you must learn to isolate and profit from trends through proper interpretation of trends.
- Although multiple factors influence the price of a coin, technicians tend to pay attention to the current price. By and large, technicians tend to follow demand and supply side of things.
- History often repeats itself. By understanding how traders react to certain stimuli, you can predict its likely impact on the market (market psychology).
Simple Price Chart
As a good trader, you should be able to perform technical analysis on a coin price and volume history. To this end, you must use the price chart that displays the current market information instead of mere tables. If you have one, here are some tips you need to use it more accurately.
- Just like a typical graph, the price charts also have vertical and horizontal axes. While the price is on the vertical axis, time lies on the horizontal axis. To draw the price line, you need the closing price. Closing prices could be a day, week, month or year, depending on the scope of your review.
- In drawing this chart, you will need more data.
Without a doubt, this is the most common type of chart you see around. Just like we said for a simple price chart, you need data. Yes, that’s why the candlestick is preferable. Each “candle” on the chart represents an instantaneous price at a given period of time and the closing price. Also, prices could be the lowest, opening, and highest prices.
You need to pay attention to the color as it stands for something. “Red” represents “down-bar,” meaning that the opening price is higher than the closing price. In contrast, when it is “green,” it signifies that the opening price is lower than the closing price. The green candle is called an “up-bar.”
More Technical: Trend Lines
Stick to it, as we are making progress. Now, let’s look at the trend lines. Trend line is a phrase used to describe the direction a coin is moving toward. These lines can be helpful to cryptocurrency traders. In truth, these trends are difficult to isolate. In a volatile cryptocurrency market, there could be uptrends or downtrends.
So, as a technician, you must understand the direction a coin is moving toward. With that linear pattern, you can then establish the highs or lows. Also, you can overlook the volatility to establish an upward trend or a downward trend.
In addition to that, there are also trends that waft sideways. A trader must be mindful of such trends. Suffice it to say that they come in many forms: short, intermediate, and long term.
Interpreting Trend Lines
Going forward, you must ensure that accuracy is your watchword when you are ruling the trend lines. Here are some takeaways:
- Pay attention to the letters, L (lowest price) on the bottom; H (highest price) in the direction of the line.
- Place your line at those exact points.
- Mark off the points where L falls on the chart. Keep extending the lines as they keep making contact with the candlesticks on the trend lines.
- Use Settings – Line to auto-correct your lines. What this does is to extend the line to the desired side.
Understanding Resistance and Support Levels
The Support Level is the level where a reasonable number of traders consider a coin a good buy. This creates a “floor” for buyers. Later, this stops the decline and alters the momentum of an upward trend.
On the other hand, Resistance Level is the opposite of Support Level. Here, a large number of sellers are ready to sell, causing an excess in coin supply. Whenever the coin gets to that ceiling, it experiences supply stack and drops.
Note: when there’s a breakout of support or resistance level, it is an indicator that strengthens the current trend. That trend will be reinforced when the resistance level reaches the support level.
Basically, Moving Average (MA) of a coin is its price over a certain period of time. The MA of a coin is understood by calculating the daily price of the coin prior to the said date. When you connect all MAs, you form a flowing line. Also, you can calculate MAs by taking the average and comparing it with each day’s price. Exponential Moving Average (EMA) has to do with weighting to the most recent prices.
In addition to the tools discussed thus far, Trading Volume is another factor that identifies trends. High trading volumes accompany significant trends. Likewise, weak trends are characterized by weak trading volumes. A long-term trend of healthy growth is characterized by low volumes of declines and high volumes of increases.
This article should not be taken as, and is not intended to provide, investment advice. Users are ultimately responsible for the investment decisions he/she/it makes based on this information. It is your responsibility to review, analyze and verify any content/information before relying on them. Trading is a highly risky activity. Do consult your financial adviser before making any decision. Please conduct your thorough research before investing in any cryptocurrency and read our full disclaimer.
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