Trading in Bitcoin and other cryptocurrencies is increasingly attracting new investors who want to benefit from the strong price fluctuations. However, not all of them are profitable in this volatile market. Many do not follow a clear strategy and trust their gut feeling. Technical analysis can be a useful tool for determining the course of the course.
Even if the price of cryptocurrencies is often subject to strong fluctuations, there are still situations in which the price is tied to certain factors. This means that the probability of an event occurring can be better estimated and the risk in trading can be reduced.
Technical analysis distinguishes itself from fundamental analysis and sentiment analysis because it is based on mathematical variables. As a result, it is mainly based on what is happening on the market, such as the volume of trade or the number of buyers.
This is how technical analysis works
Technical analysis is often used to determine the best time to buy or sell a cryptocurrency. It is based on the historical values of the course and is therefore independent of the business indicators (cf. fundamental analysis). The basic assumption is that certain events keep recurring and are observable. Predictions for the future can be made from these patterns.
To create an analysis, you need a diagram and the previous course. Special programs such as TradingView are available for this. Some brokers, such as the eToro broker , offer their customers the use of all the important tools for creating their own charts.
The period under consideration can take several years or just a few minutes, depending on the application example. The short-term price trend therefore plays an important role for day traders, and the long-term price trend is decisive for long-term investors. The most common forms of representation of the chart are either in lines, bars or candles. It can also be useful to display the representation on the coordinates in logarithmic form.
The most important information should be clear and visible on every chart. Additional data and indicators can be added according to individual needs.
Period and intervals
The selected period for the observation as well as the individual intervals play an important role. A chart can look very bullish on the intraday, whereas it is very bearish when viewed over a large time window.
Most cryptocurrencies can be traded against different currencies, such as Tether (USDT) or Bitcoin (BTC). This is important because a currency can go up against the US dollar while Bitcoin's value goes down. The prerequisite for this scenario is that Bitcoin itself increases compared to the US dollar.
How much potential a cryptocurrency has for a strong increase or loss depends largely on the market capitalization. Regardless of the fundamental data or news , a saturated market may offer less chances of an increase than a new market with an increasing number of fresh buyers.
Liquidity and trading volume can also have a direct impact on price developments. They are also a good indicator of the popularity and demand for a cryptocurrency. If there are divergences between the course of the price and the trading volume, there is a higher probability of a trend reversal. Rising prices with falling volumes can be a sign of a price drop. Volume analysis is a separate area of technical analysis and is very extensive.
A chart should always show on which trading venue the cryptocurrency is viewed. There are often large price differences and different liquidity among the various exchanges . This can be a way to benefit from arbitrage and trade a cryptocurrency on different exchanges at the same time.
Past rates are an important indicator and help determine the reasonable price of a cryptocurrency. The moving average is one of the most important tools in technical analysis and can be displayed both linearly and logarithmically.
Recognize different patterns in the chart
During the technical analysis of the chart, certain patterns can occur. These patterns are often independent of the periods and representations considered. These patterns can also occur across different markets for different assets.
Gaps (German: gaps) are gaps in the chart that were caused by a price jump in two successive time intervals. A distinction is made between gaps up (low point of the following section is higher than the high of the previous one) and gaps down (high of the section is lower than the low of the previous one).
A spike is a price formation in which a significant high or low has formed in comparison to the previous time interval. The tip of this formation can signal the maximum buying or selling pressure and indicate a trend reversal. The more a spike stands out from the current chart development, the higher the probability of a trend reversal. Spikes can also be associated with increased volume.
Trend line and trend channel
The trend lines are usually on the spikes and indicate the approximate trend of the course development. If a high is formed, which is higher than the previous one, one speaks of an upward trend. Hingen is called a downward trend if the current high is lower than the previous one. Trend trends can be stable over a long period of time, although there may also be short-term outbreaks from the channel.
Support and resistance
Within a trend, the course moves regularly in both directions. This automatically results in places where the price starts to rise again (support) or fall (resistance). These points mark the ideal time to buy or sell. In an upward trend, the support is consistently higher than the previous ones; in a downward trend, the situation is reversed.
The best indicators for technical analysis
In order to better determine a course, one should not rely on a single indicator. Rather, the interaction of different strategies can often lead to a more precise result. The technical analysis always depends on the accuracy of the individual factors, whereby these can intensify or weaken among themselves.
For this reason it is helpful to know and use the most important indicators. In many cases, the signals can indicate both rising and falling prices at the same time. In such a situation, it is then important to weigh the individual factors against one another or not to act until a clear situation is present.
The moving average is one of the most important tools in technical analysis because it calculates the past average price. This can be selected over a certain period of time, in most cases the last 7, 50, 100 and 200 days play an important role. The scaling can be linear (moving average) and exponential (exponential moving average).
The average price is usually shown as a line and is continuous. Wherever one line crosses another, there is often a trend reversal. So it can be a sign of falling prices if the moving average of the last seven days crosses the line of the last 50 days from above. In turn, it may indicate rising prices if the moving average of the past seven days breaks the average of the past 50 days from below.
The MACD (Moving Average Convergence Divergence) is an indicator of the trend sequence and thus shows whether there is an upward or downward trend. The calculation is carried out by the divergence of two exponentially moving averages. A trend line is also used.
A positive MACD indicates an upward trend, a negative indicates a downward trend. The distance of the MACD from its trend line also speaks for the strength of the trend (the trend increases with increasing distance). A buy signal often arises where the MACD crosses the trend line coming from below.
Relative strength index
The Relative Strength Index (RSI) is an oscillating indicator and is one of the most common indicators in technical analysis. It refers to the upward and downward movements of an underlying in relation to time. It can be represented linearly and stochastically, and it can only assume values between 0 and 100.
For the calculation, he first determines the sum of all positive and negative price changes. He then calculates an average from these sums. As a guideline, an RSI of over 70 is considered to be under-sold and thus indicates a possible fall in the price. In return, an RSI below 30 counts as oversold and thus points to rising prices. Depending on the stock market environment and market situation, these values may also change.
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The Bollinger Bands are a method in chart analysis based on the principle of normal distribution . It is assumed that a price is more likely to be near an average of the past few days than far away.
Bollinger Bands use a moving average and two empirical standard deviations. These standard deviations are shown as two bands, which accompany the average line above and below. The closer the two bands are to the average, the higher the chance of a major change in the course of the price. However, it is completely open in which direction this change will take place.
The Fibonacci retracement is based on the support and resistance in a chart. The Fibonacci sequence is based on an approach that says that market corrections are made according to a certain and predictable percentage.
After a correction, the price can rise sharply because many buyers have seen a good entry point. The same applies to resistance, as selling pressure increases and the price corrects downwards. The starting point for measuring the Fibonacci retracement is the highest or lowest point, from which the correction is made.
Since a single indicator is usually not very meaningful, you should constantly try out and get to know new indicators. A decision can often only be read in combination of different strategies.
Technical analysis at Bitcoin
As an illustration, we carry out the technical analysis using the example of Bitcoin. The Coinbase trading center is used because it can be traded against the euro. It is also one of the most popular and has a very high trading volume. The analysis is carried out for the period from March to June 2020 and indicates a trend for the following months.
Two moving averages (MA7 and MA50) and the relative strength index are used as indicators. Since the sharp drop in prices on March 12, 2020, Bitcoin has been in a stable upward trend with slight breakouts. The price has doubled since then and is dated to 8,200 euros at the end of June.
The relative strength index is at 40 and could therefore indicate a price increase. However, the MA7 (green line) is at the same height as the MA50 (yellow line) and crosses it coming from above. This could be a sign of a further drop in prices and therefore calls for caution.
In this case, additional indicators could be added to obtain a more detailed analysis of the situation. If no decision can be made, it is always advisable to wait on the sidelines and not to place on the market. In particular, the impact of the corona crisis on Bitcoin can have unforeseen events quickly impacting the market.
Conclusion: Technical analysis is one of the basics
Since technical analysis is very extensive and can include numerous different factors, it is a very useful tool for analyzing cryptocurrencies. The course can be rated from basic to advanced, making this tool suitable for beginners and professionals alike.
However, the best indicator of the quality of an analysis is always experience. The more often your own strategy has been tested and confirmed, the easier it is to design your own trade on it.
However, one should always be aware that there is no means to predict the course and all forms of analysis are only for risk assessment. In the cryptocurrency market in particular, there can be irrational developments. These strong price fluctuations entail, among other things, an increased risk when trading cryptocurrencies, but also enable participants in the market to make better profits.