What is Technical Analysis?
Technical analysis is a tool or method used to predict a cryptocurrency pair’s probable future price movement. The better the technical analysis, the better the reading of the market.
To do technical analysis, you need to examine crypto charts. The following sections describe the elements of the crypto charts that you should take into account.
Different Time Frames for Crypto Charts
When you look at a crypto price chart, different time frames can give you different information. You can get many different time frames for crypto charts. Some traders look to 15-minute charts, the hourly chart, a 4-hour chart, or the 1-day chart.
If you want to open and close your position in a single day, you would look at the short timeframe charts. If you are a long-term holder, you would look at long timeframe charts.
Cryptocurrency Market Cap
The market cap of a coin is a good indicator of the stability of a cryptocurrency.
The market cap of a cryptocurrency is calculated by taking the total circulating supply of the currency and multiplying that number by the price of each coin.
The more consistent the market cap value, the more stable the coin.
Japanese Candlestick Charts
The most popular crypto chart is the Japanese candlestick chart.
Each candle on a candlestick chart shows the price movement of the asset during a specific time interval. They are shaped like box-and-whisker charts and follow the same logic.
The top whisker (also known as a shadow) shows the highest price that the asset reached during the time interval. The box (also known as the body) shows the difference between the opening and closing price of the asset during the time interval.
The bottom whisker (also known as a shadow) shows the lowest price the asset reached during the time interval.
There are two types of candlesticks – a bullish candlestick and a bearish candlestick. The bullish candlestick will be shown in green. In a bullish candlestick, the closing price will be higher than the opening price of the asset. The bearish candlestick will be shown in red. In a bearish candlestick, the opening price will be higher than the closing price of the asset.
If read correctly, candlesticks can clearly show you where the market turned. They can help you identify different patterns that may help you predict how the market will act.
Relative Strength Index
The Relative Strength Index (RSI) measures the strength and speed of a cryptocurrency’s market price. It is a comparison of the current price of a cryptocurrency to its past performance.
When reading the RSI graph of a given coin, remember that the RSI ranges from 0 to 100. Broadly speaking, when the RSI of a particular coin approaches or crosses 70, it is considered to be overbought, or overvalued. On the other hand, if RSI approaches 30, the crypto is undervalued.
What are Support and Resistance?
A support level is where the assets tend to stop falling. This is a predetermined level at which the price of an asset tends to reverse its trend. Traders often buy at the support level.
The resistance level is the opposite of the support level. It is the level where the asset tends to stop increasing. Traders often sell at the resistance level.
Participants in the Market
The support and resistance levels are determined by the participants in the market. In a market, there are typically three types of participants:
1. Traders who are going long and waiting for the price to rise.
2. Traders who are going short and waiting for the price to fall.
3. Traders who don’t know which way to go.
When the price of the asset reaches the support level, all three participants buy-in. The long traders are happy with the state of the market and may try to add to their position, the short traders buy more to breakeven, and the undecided trader’s buy-in at the support level.
The price chart is a graphical representation of the emotions of the participants in the market. When the price falls to the support level, emotions like greed or optimism kick in for the long traders, whereas when the price goes up, fear and pessimism kick in.
Market emotions are reflected in support and resistance levels. It is important to be able to read these levels from a crypto chart because they attract a lot of attention and create anticipation. This attention attracts a large number of volume and traders.
Knowing how to read crypto charts is an important skill if you want to trade in cryptocurrencies.
To make good crypto trades, you need to be able to do a sound technical analysis supported by the Dow Theory. The first step of sound technical analysis is knowing how to read crypto charts.
You need to be able to read the Japanese candlestick charts to determine the support and resistance levels. Being able to read the market emotions in this way will give you the best chance of predicting the market trends.