Technical analysis is a method of evaluating the strength and weakness of an asset by collecting historical price data to identify trends. It involves using tools like charts, graphs, indicators or signals in order to compare them from past data in order to make predictions about what's going to happen next with the market for a specific financial instrument such as equities, crypto, commodities etc.
Technical analysis is a method of evaluating stocks, crypto and commodities using past market data. The goal here is to determine the future price movements. In contrast fundamental analysis which involves analyzing financial statements in order to assess what fair value would be for that company.
Technical Analysis can be applied to any security with historical trading data, such as cryptocurrencies, forex (foreign exchange), commodities and stocks.
Let’s now dive into the subject and learn more about the different tools and techniques that you can use for technical analysis.
The most important step in learning how to spot a trend is to figure out what one is. For any beginner in technical analysis, knowing how to identify the trend should be the first order of business. Let’s watch this Chart below:
We can here observe the three different trends:
The Uptrend: In an uptrend, the asset is going up and making higher highs with each wave. Each high is also greater than the last one, resulting in a series of higher lows as well that push prices even further upward.
The Downtrend: A downtrend is a pattern of decreasing price that continues until it breaks. It’s called "downtrend" because the asset keeps going down, making lower highs and lows each time they form.
The sideways trend: The asset trades between a dynamic range of prices in an horizontal channel.
You may as well encounter different terms such as “Bearish” and "Bullish" to refer to a trend. The term, Bullish comes from the bull who strikes upwards with its horns thus pushing prices higher; in contrast, Bearish comes from bear who drives down markets by striking downwards with their paws.
Understanding the support and resistance levels of a cryptocurrency can help you time your buying or selling to maximize profit. A technical trader identifies these points on their chart so they know where it's best to buy in, when there is likely an upcoming breakout, as well as knowing where not be eager with new investments because prices are more likely than ever before to reverse quickly at this price point. When the resistance level is broken, it usually becomes a support level and vice versa.
Support: Support is a level where buyers tend to concentrate, and this will help the downtrend that has been occurring stop or rebound.
Resistance: A level where an uptrend can be expected to pause or rebound. This is a concentration of sellers and indicates that the market may have reached its peak for now.
Candlestick charting is a popular way to track the market trend. Candlestick chart, is also known as a Japanese candlestick chart (Developed in Japan in the 1700s, historical records indicate that this tool was first used to track rice prices). This type of financial chart is used to track stock prices or other asset prices. The candlestick's shape can vary depending on the high, low, opening and closing prices of a given day.
A candlestick shows both bullish and bearish price movement over its duration, and gives more detailed information than the simple bar charts. A candlestick looks at the prices during a specific time interval, such as a day. The main feature which distinguishes this from other charts is the ability to plot each day's open, high, low and close values on a single chart.
This method of charting involves plotting price data over time on an open, high low and close basis with wicks projecting out from each end of the body for daily bars or just one day in higher timeframe charts.
Bullish candle: The close is above the opening (green)
Bearish candle: The close is below the opening (red)
The moving average is a technical trading indicator that calculates the constantly changing stock price over time. It smoothes out this data by creating an average of different subsets to help investors make decisions on what direction prices are heading and how long they will continue to change in such directions. A moving average is a customizable indicator meaning that an investor can freely choose whatever time frame they want when calculating an average.
The Moving average convergence divergence (MACD) is a trend-following momentum indicator that looks at the relationship between two moving averages of an asset's price and gives traders an indication to changes in momentum, strength, directionality and duration of a trend for a given asset.
-A short-term moving average
-A long-term moving average
The lines on the chart below can be interpreted as follows:
-If the green line (MACD) is above or crosses over the orange line (signal), it means that momentum for a certain market is bullish.
-On conversely, if the green line is below the orange one, then this shows bearishness in terms of momentum
-When the lines diverge, it denotes a strengthening of the current trend. However, when they converge, this shows that there is likely to be an upcoming reversal in trends.
-When they cross, this signals confirmation that we have evidence for a change in momentum.
Bollinger bands attempt to measure market volatility by creating a band around a moving average. This strategy was created by John Bollinger in the 1980s. They serve as a relative indicator of whether prices are high or low on a moving average.
Bollinger bands are typically used by traders who like to use a long-term approach. This technique can be applied to any major currency pair, as well as commodities and stocks. As opposed to short term strategies that try and capture very small price movements, this strategy works best when combined with a directional view where the trader believes that the market will either go up or down in the long run.
The main disadvantage to this technical analysis is that it is not as effective when markets are flat or choppy (trading range). This strategy can also be difficult to use for novice traders who do not have a good understanding of market conditions, and an entry/exit approach.
Cryptocurrencies are heavily influenced by speculation, and even a small piece of news can trigger multiple price reactions by investors.
For example, when Bitcoin Cash was launched on August 1st 2017, it resulted in a sharp decline in the price of Bitcoin as well as other cryptocurrencies as investors feared that a new competitor could undermine the value of existing cryptocurrencies.
The use of advance statistical techniques helps you to take into consideration past data to generate price forecasts. The best way to do this would be to look at historical prices and volumes for cryptos, and compare them to current data. This allows analysts and traders to gain some degree of insight on how the market price will react to future events.
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