Common folk believe that the financial markets, crypto or otherwise, are just another form of legalized gambling. They believe that the markets move randomly and have no connection to market psychology or to the fundamentals, such as the state of the economy or the people behind a block chain technology.
If you’re reading this, we hope you’re not one of those people. In case you are, it’s time to open your eyes to a new world of crypto trade analytics. Nothing too fancy but just some really solid basics, that all.
In essence, technical analysis of crypto trading is the art of studying the history of an asset’s price action to predict its future. The reason it often works is the result of a bunch of factors, including the following:• Investor behavior: Research in behavioral finance shows that investors make decisions based on a number of psychological biases that repeat themselves. • Crowd psychology: Many market participants use the same technical analysis methods, therefore strengthening the key price levels. When the price movement patterns repeat themselves, investors who spot them early can get an edge in their strategy development and get better-than-average returns. Even though the cryptocurrency market is relatively new, the patterns are already forming in short- and medium-term time frames. The following give you basics on chart types, time frames, and psychological factors.
You can use different types of charts to plot the behavior of any cryptocurrency’s price against other currencies, fiat (government backed) or not. Technical analysts love charts because they can visually track an otherwise number-oriented activity. Charts have evolved in the past decades as an increasing number of investors have used them to develop their strategies across different markets, including the stock, foreign exchange (forex), and cryptocurrency markets.
Some charts are simple and track only the price at the end of a session. Other charts are more complex and track every price movement during the session. Some of the most popular charts include these:
Line charts: Line charts display only the closing prices of the market. That means for any given time period, you can know only what the crypto’s price is at the end of that time period and not what adventures and movements it’s had during that time period. A line is drawn from one closing price to the next closing price, and you can see the general movement of a currency pair over a period of time.
Bar charts: A bar chart shows you the opening market price, the price action during that time frame, and the closing price. The little horizontal line to the left shows the price at which the market opened. The little horizontal line to the right is the closing point of the time period.
Candlestick charts: Candlestick charts look like bar charts, but the area between the open and close prices show you the general movement of the market during that time period. If the market generally moved up during the time period (known as bullish market sentiment), the area is normally colored green. A candlestick chart also shows the low and high price of the asset during the time period.
Depending on the type of investor you are, you can choose different time frames to conduct technical analysis. For example, if you’re a day trader and want to take advantage of the crypto markets’ fluctuations, you can study the market prices in the past 30 minutes, hour, or four hours. On the other hand, if you’re a long-term investor and want to let the markets find their way toward your buy/sell limit orders, then you can analyze the price actions in the past days or months to find repetitive patterns and key psychological price levels.
All types of charts can be used in different time frames. A one-hour line chart shows you the closing price at the end of every hour. A daily candlestick chart shows you the open, close, low, and high prices during one-day periods as well as the general market movement over a longer time frame
As you study market movements, you may start finding patterns and prices that keep showing their faces on the chart. A lot of this repetition has to do with market psychology and the crowd’s general feeling about the cryptocurrency.
One of the most eye-catching formations on a chart is a trend. A trend on a chart has nothing to do with trends on Twitter or in the fashion world, but the idea behind it is similar. When you notice that a cryptocurrency’s price keeps going up on a chart, that movement means the market participants are feeling good about the crypto. They keep buying it and therefore pushing its price higher. You may even say that the crypto is trending.
You may have heard the famous investing phrase “the trend is your friend.” If you spot the trend early enough, you may be able to take advantage of the rising prices and make some money. Same goes for when the crypto’s price is moving down, or is on a downtrend. If you spot a downtrend early enough, you may be able to either sell your cryptocurrency or set a limit order to buy more at a lower price.
The whole point of technical analysis is to identify the best prices at which to buy and sell. Ideally you want to buy at the lowest price the cryptocurrency can drop to in the foreseeable future. And you want to hold on to it and sell at the highest price it can reach within your preferred time frame. In well-established markets with a ton of historical data, you can identify these prices by spotting key price levels that have created some sort of restriction for the market movements in the past.
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