Cryptocurrency trading may seem to be an easy way to earn money for many newcomers. They think that the plan is to buy some crypto coins, wait for the price to go up and then sell them for a profit. But, it is actually not so easy. You are more likely to lose your trades if you have this attitude. The success rate of the cryptocurrency trader depends on the ability of the trader to interpret the market. Numerous tools are at the disposal of the crypto traders. A person must understand how to devise a trading strategy, test it and only then apply it in the real market. The novice trader can use some of the basic technical analysis to accurately time the entrance of the coin and become a more profitable trader.
The technical analysis incorporates the history of a crypto asset with the price charts and trading volumes to analyse the current market trends and predict the future market trends. It is also a vital process to establish whether a coin is over-valued or under-valued. Tech analysis is based on Dow Theory. Price movements follow trends which may be long-term or short-term. The coin will either follow or oppose the trend once it has established. Dow Theory, in turn, is based on the following points:
- In case of cryptocurrencies, the current, past, and future demand for asset prices are included in the Dow Theory. Regulations which can affect the crypto market are also considered. By studying the current and the past price movements, the traders make calculated predictions about the future price.
- From the illustrations of the charts, it can be concluded that the price movements follow the trends and are not random. These may be short term or long term. With the tech analysis approach, the traders make profits from the trend.
- The trading experts focus more on the price of a crypto asset rather than the variables that cause a movement in its price. They mainly review the Supply and Demand.
- Often the past trends are observed in the crypto market. Therefore, sometimes it becomes easy to predict the market.
Trend lines illustrate the direction in which the market is moving at present—uptrend, downtrend or horizontal trend. The market of the cryptocurrencies is usually highly volatile. Thus, watching the movement of the price of a crypto asset is more likely to divulge a series of highs and lows. When depicted in a graph, the high and low points are joined to form a linear pattern.
Resistance and Support Levels
The support level touches the lowest price of the Lows while the resistance level is the line that touches the highest price.
This technical analysis tool helps in breaking down the trendline chart. It is drawn by connecting the averages of prices of a coin or an asset over a period of time.
Strong trends are usually accompanied by a high trading volume while a weak tend can be identified by a low trading volume. In case the trading volume increases during a decrease, then the downtrend is probably coming to an end. The opposite is observed in case of the uptrend.
The head and shoulders pattern is one of the most used and trusted patterns of graphical analysis. It usually indicates towards a reversal pattern. The two versions of the head and shoulder pattern are given below:
- Head and Shoulders Top: It is observed at the peak of the upward trend mainly. This type symbolises that the price of the asset will fall once the pattern is completed.
- Head and Shoulders Bottom: Observed during the downtrend, this pattern shows that the asset’s price is going to rise on completion of the pattern.
Two shoulders, a head and a neckline are the constituents of these two types. A second shoulder is seen when the support or resistance (neckline) breaks. Pinocchio, double top/bottom, triple top/bottom, bearish/bullish engulfment are some other formations that a trader analyses to trade cryptocurrencies.
The novice traders can thus quite easily identify the trends and market condition by using technical analysis tools. They will be able to make better decisions as to when they should open or close a position. The beginners should keep in mind that technical analysis is a practical method that considers the price history of crypto assets and their trading volume. But the trader should not solely depend on technical analysis when starting a trade as there are many other factors on which the cryptocurrencies rely. The field of crypto is highly influenced by news and minor to major changes can be observed within a minute. Therefore, it is recommended to regard fundamental analysis also when devising a strategy and trading cryptocurrencies.