Are you wondering how to accurately predict Bitcoin’s price movements? Are you looking for a way to get an edge on the crypto market and capitalize on your investment strategies? Cryptocurrency technical analysis can help you do just that, giving you insight into short-term trends and insights that could be invaluable in timing and preventing losses. In this article, we’ll discuss what cryptocurrency technical analysis is, how it works and how to do technical analysis when trading with Bitcoin. Whether you’re a beginner trader or savvy investor, learning about technical indicators can give you the knowledge needed to take control of your portfolio.
Contents of the article:
Three basic assumptions behind technical analysis
Charts and support/resistance levels for crypto assets
Technical indicators for crypto assets
Today’s Bitcoin technical analysis
Limitations of technical analysis
What is technical analysis?
Cryptocurrency, like any other market asset, is influenced by external factors that can lead to fluctuating prices. To help traders make informed decisions, technical analysis is a tool that is used to predict price movements. Technical analysis is the study of past market trends to identify patterns and signals that could suggest the future direction of an asset’s price. Cryptocurrency technical analysis involves analyzing market charts and applying various technical indicators to better understand market trends and predict future behavior. By using technical analysis effectively, traders can minimize their risks and make more informed decisions that lead to profitable investments in the cryptocurrency market.
Three basic assumptions behind technical analysis
Technical analysis is an approach to studying market behavior that is built around three fundamental assumptions.
First, the market discounts everything, meaning that all information necessary to determine a cryptocurrency’s price is already reflected in the current market price. As a result, technical analysts look primarily at price and volume data, as they believe these two variables capture all available information about the market.
Second, prices always move in trends, meaning that markets tend to follow a pattern of moving up, down, or sideways for extended periods of time. TA experts assume that regardless of the time frame, price movements always are part of a trend. Once the trend is formulated, prices move in the same direction. Finally, history tends to repeat itself, meaning that past patterns and trends are likely to recur in the future. Market participants usually exhibit consistent reactions to market happenings over time. Even though some chart patterns formed a long time ago, they are still considered important as they could happen again.
Charts and support/resistance levels for crypto assets
Line Charts
Line charts are the most basic type of chart used in technical analysis. They usually use only one data point: the closing price. To identify the trend, a series of closing prices is plotted on a chart and joined to form a line.
Candlestick Charts
Candlestick charts have become an indispensable tool in the world of trading as they offer an incredible insight into the movements of crypto assets. These charts, which originated in Japan, offer a visual representation of trading that allows traders and investors to quickly understand trends and make better investment decisions. Candlestick charts display the open, high, low, and close prices of an asset, and the shape of the candlestick body and wick reveals information about the market sentiment and the overall strength of buyers and sellers.
Candlesticks are popular among cryptocurrency traders and are used in the same way as traders use them for other securities. For short-term traders, there are charting services that will provide time frames from intervals of as little as one-minute charts and various intervals up to daily charts. For the longer-term trader, daily, weekly and monthly charts are useful.
Each candle has two parts: the body, and the shadows or “wicks”. The body indicates the difference between the opening and closing price of the crypto coin in a time interval. The top wick shows a cryptocurrency’s highest price during a time interval. The bottom wick reveals the lowest price of the crypto asset in a time interval.
A long wick at the top of a candle’s body can, for example, suggest traders are taking profits and a sell-off may be occurring soon. On the contrary, a long wick at the bottom could mean traders are buying the asset every time the price drops.
Similarly, a candlestick in which the body occupies almost all of the space and has very short wicks, may mean that there’s strong bullish sentiment if it’s green or strong bearish sentiment if it’s red. On the other hand, a candlestick with almost no body and long wicks signals that neither buyers nor sellers are in control.
Support and Resistance Levels
Support and resistance levels are important levels recognizable on a chart, where supply and demand meet. Learning to recognize these levels can help the trader with successful entries and exits.
Support levels: If the level of demand matches supply for a crypto asset or other security, it stabilizes price and creates a support level. Traders test this level multiple times before entering long trades. But, if the support level breaks after multiple tests, the prices will move lower until a new support level is determined. Then, prior support becomes the new resistance level, making or breaking trading opportunities.
Resistance levels: When supply meets demand, resistance levels are formed. During uptrends, prices escalate until demand can no longer exceed supply, causing more traders to sell and creating a ceiling on prices. Often, these levels are tested multiple times, and successful tests indicate traders' comfort in shorting the security. On occasion, prices break resistance and continue to rise until they reach a new level of resistance. Typically, the old resistance level becomes the new support level just like in the case of support.
Technical indicators for crypto assets
Trend lines
By studying trend lines, investors can gain valuable insight into the direction of a particular asset's price movements. Upward trends indicate that demand for the asset is growing, potentially leading to higher prices. Conversely, downward trends suggest a decrease in demand, which could signify a good time to sell. Consolidation trends, on the other hand, point to a period of stability where the asset’s value is neither rising nor falling sharply.
Moving average
Moving averages calculate the average price of a digital asset over a specific timeframe, such as the last 50 or 200 days. By comparing the current price to the moving average, analysts can determine whether a cryptocurrency is overbought or oversold, indicating a potential buying or selling opportunity. This can be especially useful in volatile markets, where quick decisions are crucial.
The most commonly used moving averages are used for 10, 20, 50, 100, or even 200-day periods. These make market trends more visible, with a 200-day moving average being considered a support level during an uptrend, and a resistance level during a downtrend.
Moving average convergence divergence (MACD)
The Moving Average Convergence-Divergence (MACD) Indicator is a popular technical analysis tool that traders use to identify potential trend reversals and buy-sell signals in different securities. It consists of two lines, the MACD line, and the Signal line, both of which are derived from exponential moving averages (EMA) of different periods. When the MACD line crosses above the Signal line, it generates a bullish signal, while a crossover below the Signal line is considered bearish. The distance between the two lines also indicates the strength of the trend at any given point in time. The MACD Indicator is a versatile tool that can be customized to suit different trading styles and time frames.
By showing the relation between two moving averages of an asset’s price, it reflects the momentum of trends. MACD has three main components, i.e.
- MACD = 12-period EMA - 26-period EMA
- Signal Line = A 9-period EMA of the MACD.
- MACD Histogram = MACD - Signal Line
Note EMA - Exponential Moving Average i.e. a moving average type that prioritizes the most recent data points.
MACD is dependent on moving averages i.e. past prices which means the indicator is lagging. However, given its strong fundamentals, the accuracy of the MACD indicator is high and reliable.
General interpretations of the MACD indicator are as follows:
- Positive MACD = Increasing momentum of an uptrend (price rise),
- Negative MACD = Increasing momentum of a downtrend (price fall),
- If the MACD increases and crosses above the Signal Line, it is a bullish crossover,
- If the MACD falls below the Signal Line, it is a bearish crossover.
By coupling trend and momentum, MACD has evolved into a popular, yet reliable trading indicator. Also, it provides enough flexibility because MACD can be applied to price charts of different time frames.
On-balance volume indicator (OBV)
On-Balance Volume, or OBV for short, is a popular technical analysis tool used to track the flow of volume in the cryptocurrency market. This indicator is based on the idea that when volume increases, prices are likely to follow suit, and that when volume decreases, prices may decrease as well. Essentially, the OBV helps traders identify trends and price movements by analyzing the total volume of buy and sell orders. When the volume on up days outpaces volume on down days, the OBV rises. When the volume on down days outpaces the volume on up days, the OBV falls. By providing a clearer picture of supply and demand, the OBV can be an essential tool for traders looking to make informed buying and selling decisions in the highly volatile crypto market.
Relative Strength Index (RSI)
The Relative Strength Index, or RSI, is a popular technical analysis tool used by traders and investors to measure whether a security, such as a stock or cryptocurrency, is overbought or oversold. The RSI formula calculates the strength of price movements over a set period of time, typically 14 days, and provides a reading between 0 and 100. A reading above 70 is generally considered overbought, indicating that the security may be due for a price correction, while a reading below 30 is considered oversold, indicating that the security may be undervalued.
Bollinger bands
Bollinger bands are represented on a chart by a moving average line and two outer bands that are calculated from the standard deviation of price movements. As the price of the cryptocurrency fluctuates, the Bollinger Bands will adjust accordingly and provide valuable insights into potential buying and selling opportunities. The bands that often will encompass price expand and contract as volatility expands, and decreases are based on +2 standard deviations above the center line and -2 standard deviations below the center line.
The interpretation of price action depends on the trading environment. In bullish conditions, it is often more profitable to trade in the direction of a price breakout. In bearish markets, short in the direction of the breakout. The idea behind Bollinger Bands is that prices eventually will return to the mean. Periods of high volatility eventually will become periods of low volatility
Today’s Bitcoin technical analysis
Funding rates remain positive in crypto markets
Bitcoin perpetual futures funding rates remain positive, a sign that sentiment in the market remains positive for the moment.
Perpetual funding rates represent payments within the futures markets between participants who are long or short the asset. When funding rates are positive, holders of long positions pay a fee to holders of short positions. When funding rates are negative, the opposite is the case.
The interpretation is that funding rates can often indicate bullish or bearish sentiment, with the former represented by positive rates, and the latter represented by negative ones.
For bitcoin funding rates have been positive in 8 of the most recent 10 trading days. Ether by comparison has shown positive funding rates in 7 of the most recent days, declining to zero 3 times, but not falling below zero since April 6.
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD reaching $27,666 on Bitstamp.
Bitcoin on Bitstamp held strength on hourly timeframes after a weekly close just below the $27,000 mark.
With United States equities in a tight range on the day, crypto analysts looked for cues over where markets might go next.
For Michaël van de Poppe, founder and CEO of trading firm Eight, the outlook was good.
“Bitcoin breaks upwards and tests $27,600. Good signs,” he summarized.
“Weekly timeframe; Holding 200 MA and EMA. I think we’re continuing towards $38,000-42,000 from here.”
Van de Poppe referenced the 200-week moving average and exponential moving average, these seeing a retest late last week after functioning as support for two months.
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Limitations of technical analysis
As with any type of financial analysis, technical analysis for cryptocurrency has its limitations. While it can be a useful tool for predicting price movements and identifying trends, it is important to remember that this method relies solely on historical price data. This means that unforeseen events, such as major news events or changes in regulations, can cause sudden and dramatic shifts in the market that may not have been predicted by technical analysis alone. Additionally, the cryptocurrency market is still relatively new and rapidly evolving, which can make it difficult to accurately apply traditional technical analysis methods. As such, it is important for traders to keep these limitations in mind and to not rely exclusively on technical analysis when making investment decisions.