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Cryptocurrency Technical Analysis for Beginners

Published
November 29, 2021
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    Most crypto traders and investors have seen trend lines and may have heard terms like candlesticks and fibonacci, but the jargon may seem impossible for beginners to understand. Fortunately, it's easier than you think to get started with technical analysis. After learning the basics, you'll be using these terms and spotting new opportunities in no time.

    Let's take a look at how to get started with technical analysis and where you can go to learn more.

    Technical analysis may seem intimidating to beginners, but it's easier than you think to get started! Take a look at our guide for beginners.

    What is Technical Analysis?

    Technical analysis is simply the study of price and volume changes. For example, a simple moving average might take the average of the past 30 days and plot that point on the current day. That way, you can see how the current price compares to recent prices (e.g., if the cryptocurrency has been trending higher or lower over the past 30 days).

    You can think of technical analysis as a weather forecast for the financial markets. Like a weather forecast, technical analysis uses statistics and probabilities to predict the future. But, also like a weather forecast, the predictions don't always come true. The goal is to tilt the odds in your favor and prepare for upcoming market conditions.

    There are many ways to use technical analysis, depending on your trading style and goals. For example, day traders may look at 5-minute charts to spot sudden breakouts, whereas longer-term position traders may look at daily chart patterns that suggest a change in trend. You can even use technical analysis to set take-profit targets and stop-loss levels.

    Getting Started with Charts

    Most technical analysis takes place on charts. While most people are familiar with line charts, financial charts tend to use candlesticks to show each period's open, high, low, and closing prices. Charts may also contain technical indicators on the top or bottom, overlays on the chart itself, and volume plotted along the bottom as a bar chart.

    Crypto Technical Analysis
    A Bitcoin chart on TradingView with MACD and RSI Indicators. Source: TradingView

    In the chart above, you can see a candlestick chart for Bitcoin, where each bar represents one day. The bars below the price reflect the volume, or the number of trades, for each day. And, below the volume are two separate technical indicators. Both of these indicators show the direction (bullish or bearish) and strength of the trend.

    Many crypto exchanges, such as Coinbase Pro and Kraken, offer technical analysis tools. But, many third-party charting platforms provide more powerful tools. The most popular technical analysis platform is TradingView (seen above), which includes thousands of different technical analysis tools and an active community of technical analysts.

    Trend Lines & Chart Patterns

    Most technical analysts start by analyzing trend lines and chart patterns. When looking at a chart, you can draw trend lines by connecting the highs and lows. These tend to be areas of support or resistance. For example, if the price is falling toward a lower trend line, you might expect the price to rebound (or see support) at that level—especially if it has in the past.

    Crypto Technical Analysis
    Upper and lower trend lines on a Bitcoin chart. Source: TradingView

    In the chart above, the two trend lines show areas of support and resistance. You might interpret the chart to indicate that Bitcoin prices have support at around $65,000 and could see resistance at about $75,000. Of course, you may add more forms of technical analysis to confirm these sentiments before placing a trade.

    Different chart patterns emerge when drawing trend lines:

    • Ascending Triangles: Ascending triangles are bullish patterns that form when there’s a rising lower trend line and a horizontal upper trend line.
    • Descending Triangles: Descending triangles are bearish patterns that form when there’s a falling upper trend line and a horizontal lower trend line.
    • Price Channels: Price channels form when there are two parallel trend lines that are moving higher (bullish), lower (bearish), or horizontal (trending market).
    • Head & Shoulders: The H&S is a bearish chart pattern that occurs when there are two peaks with a sharp spike between them.

    Technical Indicators

    Technical indicators are computations that use historic price, volume, or open interest. Depending on the type, they may be overlaid on the price or displayed above or below the chart. Most traders use technical indicators to predict future price direction or better understand current market conditions, such as if a market is trending or range-bound.

    Crypto Technical Analysis
    MACD indicator on a Bitcoin chart. Source: TradingView

    In the chart above, you might have purchased Bitcoin when the MACD indicator experienced a bullish crossover and sold it when it encountered the first significant pullback. There are thousands of other indicators that range in complexity from a basic line to a chart full of lines and shaded areas (see the Ichimoku indicator).

    Some popular technical indicators include:

    • Bollinger Bands®: Bollinger Bands® are price envelopes set at standard deviations away from the current price to show potential support and resistance levels.
    • Volume By Price: Volume by price (VbP) is an overlay that shows the price levels where the most historical volume occurred.
    • Relative Strength Index: The relative strength index (RSI) is a momentum indicator that shows whether the price is bullish or bearish at any given time.
    • Moving Average Convergence/Divergence: The MACD is another momentum indicator that compares the convergence or divergence of two moving averages.

    Next Steps

    Technical analysis is a diverse field with thousands of different indicators and patterns. Rather than trying every tool, focus on building your skills using a handful of powerful tools. For example, some traders focus on using a handful of chart patterns, such as Elliott's Waves, or a specific set of technical indicators to time their trades.

    Many technical analysts develop trading systems to automate their analysis. Using a specific set of rules, you can backtest a strategy to see how it would have performed in the past and ensure that you realize the most consistent results in practice. However, it's important to remember that past performance doesn't guarantee future performance.

    The Bottom Line

    Technical analysis is essential for cryptocurrency traders, but it's also useful for long-term investors. While some of the terms may sound intimidating, it's relatively easy to get started with technical analysis and start seeing real value.

    If you're trading cryptocurrencies, ZenLedger can help you aggregate transactions, compute your capital gains and losses, and auto-fill IRS forms. Try it for free today!

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