A Primer on Cryptocurrency Technical Analysis |
Crypto currency trading has expanded exponentially over the past 18 months. Most of the notoriety followed a surge in prices in December of 2017. Crypto currencies focus on different needs including payments, as well as smart contracts allowing developers and miners to create and market products. The most widely held crypto currency is bitcoin, which is based off of blockchain technology. This new asset class has attracted investors from all over the globe, many of whom are looking to trade these products as opposed to using them for payments or smart contracts. Following December’s rally and subsequent drop, traders are focusing on the technical analysis to determine the future movements of some of the more popular crypto currencies.
What is Technical Analysis?
Technical analysis is the study of price movements. The concept is based on the idea that all the current available information is incorporated into the price of a crypto currency. If this is the case, the best way to determine the future direction is to study past price action. There are several different studies that you can use to help you determine the future movements of cryptocurrencies. These include momentum, sentiment, trend following and support and resistance.
Support and Resistance
Support and resistance help you determine levels where supply and demand are strong. Support is a level where prices cannot move below. Resistance is the opposite and is a level where prices cannot move above. You can use several different tools to designate support and resistance. The most common techniques including trend line, and moving averages.
Trend Lines and Moving Averages
A trend line is a line that connects 2 or more points. A trend line can be upward sloping, downward sloping or horizontal. Generally upward sloping trend lines connect 2 or more lows. Usually downward sloping trend lines connect 2 or more highs. A horizontal trend line can connect 2 or more highs or lows. You can also use a close only chart and connect high and low closes to form a trend line. When a trend line breaks, as it did in the graph of bitcoin, there is usually a follow through.
A moving average is the average of a crypto currency for a specific period. For example, a 10-day moving average calculates the average of the past 10-days. On day 11, the first day is removed from the calculation. You can use moving averages to designate periods of support or resistance. For example, the 10-day moving average in the graph is currently resistance. The 50-day moving average is seen as support.
There are a few good technical indicators that measure momentum. The most popular is the moving average convergence divergence index (MACD). The MACD measures momentum by evaluating changes to moving averages. The default for the MACD is the 12-period moving average minus the 26-period moving average which creates the MACD line. The MACD signal line is the 9-period moving average of the MACD line. When the MACD line crosses above or below the MACD signal line, a buy or sell signal is generated respectively.
You can use technical analysis to attempt to determine the future direction of a crypto currency. Technical analysis is the study of historical price movements to forecast future changes to a crypto currency. By using support and resistance as well as momentum, you can increase the chances that you will be able to forecast the future movements of most crypto currencies.