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Does Technical Analysis Work on Crypto?

Does Technical Analysis Work On Crypto?
Photo by PIX1861 from Pixabay

Technical analysis for cryptocurrency trading can be confusing sometimes.

Have you ever looked at the price chart and wondered why the price action seemed to bounce between a specific high price and a low price it touched in the past?

Well, it is not an entirely strange occurrence; it often happens in the financial markets. Traders can take advantage of this phenomenon to predict future price action and know when to enter or exit their trades. This is known as technical analysis. It is one of the three analytical methods of trading.

Primarily, technical analysis is a method that allows traders to know how and when to trade an asset and to predict its possible price movements through the study of past market data. It relies on the history of the asset’s price movements and is also applicable in cryptocurrency trading.

The process of using technical analysis in crypto trading is similar to how it is used with traditional assets — stocks, commodities, currencies, futures, and forex.

How does Technical Analysis Work with Crypto?

How Does Technical Analysis Work With Crypto?
Photo by geralt Neptuna from Pixabay

Technical analysis in crypto is mainly quantitative and metric-based. The method of technical analysis is borne out of the human ability to recognize patterns. Just like traditional assets, cryptocurrencies also have repeating price movement trends. Technical analysis can be used on any asset or security with historical market data.

Technical analysts believe that “history tends to repeat itself” and “prices move in trends.” Therefore, they draw on various behavioural and traditional economic principles to predict market movements. To the technical analyst, price movement is never random.

If an asset follows a specific price trend, it will eventually follow the opposite trend after a while. The job of the crypto technical analyst is to identify these price movement trends and isolate them to make a profit. Technical analysts also use chart patterns and leverage analytical tools to investigate the strengths and weaknesses of crypto assets. In combination with historical price movement data, all these tools allow traders to find the precise time to enter the market, take their profit, and exit the market.

Which Crypto Indicator is Best?

Which Crypto Indicator Is Best?
Photo by Audypicx from Pixabay

Carrying out technical analysis unaided can be problematic. Luckily for you, there are specific tools or indicators to extract data from crypto charts.

 

Some of these indicators include:

  • Bollinger Bands

    These tools help indicate the volatility levels of the market. Traders can use the bands to tell if the market is in an overbought or oversold condition. The price touching the upper bands multiple times may indicate a strong resistance level. If it touches the lower bands several times, it may indicate the price has found a good support level.
  • Trend Lines

    Trend lines help identify trends in the market. The technical analyst traces a line from the top or bottom of candlestick patterns to identify bullish or bearish trends for a particular crypto asset.
  • Relative Strength Index (RSI)

    The Relative Strength Index helps traders determine if a cryptocurrency is overbought or oversold. An RSI value above 70 means the asset is overbought, while values under 30 indicate oversold. However, the RSI is not reliable for cryptos like Bitcoin that often experience extended bull runs making it difficult to tell when the asset is overbought.
  • Fibonacci Retracement Level

    The Fibonacci retracement levels are horizontal lines that denote potential support and resistance during an uptrend or downtrend. This gives price charts their characteristic zig-zag movements before continuing the underlying trend.
  • Moving Average

    The moving average is a popular trading tool that can simplify volatile price action and show the underlying trend. It helps identify potential support and resistance levels or figure out the direction of a particular asset.

The Best Crypto Analysis Strategy

For the average trader, finding the best technical analysis strategy can be overwhelming since hundreds of analysis indicators are available for traders to use. To compound the problem, each of these tools has its strengths and limitations.

 

Sometimes, traders depend on a hybrid of technical analysis tools to build their trading strategies. Professional traders may deploy a multi-indicator trading system by combining data from various indicators to fine-tune their crypto technical analysis strategies. Inexperienced traders often depend on the so-called gurus on social media for tips and tricks, but this does not always work out for the best.

 

It is best to experiment with these tools and see which one is consistent or congruent with your type of trading strategy. In the end, picking the right technical analysis tool and building your trading system boils down to individual preference, experience, and knowledge about the behaviour of the crypto market.

What is The Best Technical Analysis Software for Crypto?

There are various apps for conducting technical analysis in cryptocurrency. These apps provide analysis tools, charts, and data to help crypto traders make sound trade decisions. Most of them are free to use and may require a sign-up. Others have premium features locked to subscription services.

Some of these apps include Catalyx, MotiveWave, TradingView, Coinigy, and many more!

Crypto Technical Analysis: Summary

Crypto Technical Analysis: Summary
Photo by geralt from Pixabay

Apart from technical analysis, traders may depend on fundamental or sentiment analysis. These other methods of analyzing assets may not be as comprehensive as technical analysis. Still, they provide valuable insights into the prospects of a crypto asset.

Fundamental analysis of crypto-assets involves examining external factors. These can include the asset’s on-chain data, project metrics, and financial metrics or market capitalization. Sentiment analysis consists of determining the position of traders regarding a specific asset.

These other two analytical methods provide the trader with valuable information unattainable with technical analysis alone. It is no surprise that experienced traders often combine all three analytical approaches to pick the right assets, market position, and exit strategy.

This blog is for informational purposes only.
This does not imply or suggest investment in cryptocurrencies.

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