What is Technical Analysis: How to Predict Prices?

Olga Shirimova
September 10, 2020
Technical Analysis

The crypto market is highly volatile, so it’s essential for traders to master special tools to foresee price trends. One of the main instruments here is technical analysis (TA). If you want to succeed in crypto trading, understanding the TA basics is a good place to start. 

What is Technical Analysis or TA?

Technical analysis (TA) helps traders identify market opportunities and take advantage of them. It applies real-world data to foresee the future of the market or a particular asset. As a result, you can make smart trading decisions like buying low and selling high.

Technical analysis stands on the idea that history repeats itself. As for tools, it deals with statistics, price patterns, trading volume, market caps, candlestick charts, etc. 

Why You Need Technical Analysis in Crypto Trading?

Technical analysis in crypto trading helps you:

  • understand the market ‘psychology’;
  • evaluate your crypto against other digital assets;
  • predict where the price of this crypto will move based on the historic data.

On the whole, analytical data coupled with a solid trading strategy increases your chances of making profits.

Uptrend, downtrend, and sideways trend. Image source: Capital.com

What Are Price Trends?

Before we dive deeper into technical analysis, let’s make some basics clear. One of them is a price trend.

Probably, you are already familiar with the slang terms “bullish” and “bearish” that refer to uptrend and downtrend.

An uptrend (or a bullish trend) means that your crypto or the overall market is going upwards, making new highs. In a downtrend (a bearish trend), your crypto or the whole market underperforms.

There is also a sideways trend when the price heads neither north nor south. Instead, it moves more or less horizontally. Sadly, there is no animal to represent this trend. 🙁

Resistance and support levels shown on a graph. Image source: Swissborg

What Are Resistance and Support Levels

In any case, the price movement doesn’t look like a perfectly straight line. When it goes up, at some point it meets with resistance. When it goes down, it faces support. These “glass ceilings” are called resistance and support levels.

The resistance level is where the increasing price of an asset stops growing or even starts going down. It happens because there are too many traders wishing to sell high.

The support level is where the falling price stops going down or even starts going up. The reason is, there are too many traders who want to buy low.

What Tools TA uses?

Technical analysis holds the view that prices don’t move randomly. Instead, there are short- and long-term price patterns traders can identify and use for their benefit. To do it, they apply various TA tools and indicators.

It’s time to see what these tools are.

Various candlestick chart patterns that give useful hints to traders. Image source: Company Web Solutions

Trading Charts

The most popular of them is a candlestick chart — the centerpiece of any crypto exchange interface. This chart is easy to recognize as it consists of red and green rectangles looking like candlesticks.

A candlestick chart shows the price behavior over the time-frame you set. An advanced trader can read a candlestick chart at a glance. If you want to train this skill, start with reading our brief Candlestick Chart Guide.

The lines indicating an uptrend and a downtrend on the chart. Image source: Online Broker Reviews

Trend Lines

Trend-lining is an art of connecting dots. A trader draws straight lines between certain points on a chart, thus highlighting the dominant price trend and ignoring minor ups and downs. It may be an uptrend (a positive slope), a downtrend (a negative slope), or a sideways trend we explained above.

Also, trend lines help you make resistance and support levels visible. As a result, you get a clear picture of how the price has been doing over the period you specified. Following the pattern, you can extend these trend lines to the future and try to figure out where the price will move next.

The graph showing BTC trading volume across several major exchanges. Image source: Data Bitcoinity

Trading Volume

Trading volume is a TA metric reflecting the demand for a coin. Naturally, if a crypto is popular, there’s a lot of trading activity around it, as many people seek to sell or buy it. In this case, we say it has high trading volume.

High or low trading volumes also help you understand if the price trend is strong (and important) or weak (and insignificant). 

The coins with the biggest market cap include BTC, ETH, LTC, and BCH.

Market Cap

This metric reflects the market value of your crypto. To calculate the market cap of your coin, multiply its circulating supply by the current price of 1 coin. Also, you can view all the market caps on this website.

The bigger is the market cap of your coin, the more stable this coin is. Predictably, the leaders are Bitcoin ($208 609 926 925) and Ethereum ($44 097 367 883).

A moving average on a candlestick trading chart, indicating a strong uptrend. Image source: Trading With Rayner

Moving Averages

Moving averages is a TA indicator that helps you smooth down the price fluctuations of your crypto. It shows the average price over a chosen number of days. Normally, you take the past 20 days.

A trader uses moving averages to recognize and predict uptrends and downtrends. 

Bollinger bands: the red circles show the right moments to sell, and the green ones signal good buy opportunities. Image source: FXS Street

Bollinger Bands

Bollinger Bands (BB) is another popular and time-tested analytical tool. it consists of upper and lower bands with a moving average (a middle band) between them.

The upper and lower bands show the volatility against the average price action the middle band represents. For instance, when the price rises/drops sharply, the upper/lower band moves away from the middle one. If the price has been more or less stable, the outer bands come closer to the moving average.

Therefore, a graph with Bollinger bands gives you a picture of price fluctuations over a certain time-frame and help indicate its resistance and support levels. Together with other instruments, they help you predict upcoming price moves.

Fundamental and technical analysis: market data versus market research.

Technical Analysis and Fundamental Analysis In Crypto Trading

As you see, technical analysis in crypto trading relies on numbers and graphs for more or less short-term price prediction. Therefore, it’s a must-have tool for active traders who seek to “seize the moment”.

Fundamental analysis (FA) is a broader approach. It assumes that the price of an asset depends on its value for the economy. To assess the long-term potential of the project, you should know the team’s background and understand the underlying technology, with its strong and weak points.

In one phrase, TA is a quantitative approach that uses math data, and FA is a qualitative approach with a focus on use value, reputation, technology, competition, and general market context. 

Technical Analysis In Crypto: Closing Thoughts

Technical analysis looks like a precise method, but it’s not a magic wand. First, don’t forget that you are not the only trader using the TA tools. Many other people come to similar conclusions and then act in sync.

Second, the crypto market is very mood-dependent, so it’s sometimes impossible to predict what will happen tomorrow, and why.

At the same time, mastering TA gives you an important advantage over traders who rely solely on intuition.

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