What is Technical Analysis

Technical analysis is a trading method that analyzes what’s happening in the markets, what prices are doing, and what levels they’re at to make predictions about what will happen next. 

It can be used by traders of all types – from those who trade stocks in traditional markets to crypto derivatives on platforms like eToro or SnapEx.

Technical analysis is also used by long-term investors looking for a buying opportunity.

In this article, we’ll introduce you to technical analysis and learn the most common types of indicators to help you trade better and smarter.

What is Technical Analysis

Technical analysis is the act of studying financial market trading charts, prices, statistics, and other data that can be used for forecasting what might happen next in the markets. 

The most fundamental form of technical analysis is simply reading price charts over time to help predict what will happen next with various assets. 

Chartists use these tools alongside news events like central bank meetings to make their forecasts – they are primarily interested in what has happened already so as not to miss out on any opportunities for profit. 

The primary goal of technical analysis is to predict upcoming moves by charting historical patterns and trends including volume levels, moving averages, trading channels (support and resistance), among others.

Technical analysis can be useful because it does not rely on what people think will happen but rather what has actually happened in the past. This usually makes trading far more accurate, especially when combined with other forecasting methods like fundamental analysis.

How Does Technical Analysis Works

Technical analysis involves analysing what is called the “price action.” 

This can include a number of different indicators, such as the volume at which an asset has been traded and what event (or what information) might have led to sudden changes in trading behavior.

The goal is to understand how all these factors work together or if there are any external influences that could cause fluctuations in prices. 

Understanding charts and technical analysis requires both time and effort. But it almost always makes a huge impact on a trader’s win rate.

Why is Technical Analysis Important for Crypto Traders

Most traders rely on technical analysis because it provides them with data and insight into what other traders are thinking about what’s happening with their assets. 

It’s a great way of understanding what’s happening in the market, what other investors are thinking, and how that affects prices. 

It’s also worth noting that technical analysis relies on price data alone. This means there aren’t any emotional factors affecting the outcome. Just supply and demand based on what those trading an asset think others will do in response to certain information. 

Using this method removes some psychological bias from trading decisions. It allows you to think clearly and enter trades in a more informed manner, instead of relying solely on your gut feeling for whether you should buy or sell a coin.

Types of Charts Used in Technical Analysis

There are many different charts that traders can choose to use, depending on their personal preferences. These charts can be both static or interactive. Static graphs include line, bar, and candle charts. 

Interactive charts are what you’ll find on trading platforms. They allow traders to make trades by clicking a buy button or selling order as the price changes in real time. 

Many trading platforms also allow traders to view a variety of different technical indicators, making chart analysis much easier and more accessible.

Here are the most common types of charts used in technical analysis:

Bar Chart

The bar chart is the most popular type of chart. It has a set of lines which represent closing prices for each day over a period of time. These can be horizontal or vertical bars depending on what makes sense to read from what perspective. 

A bar chart uses rectangular bars to illustrate what has happened at certain times during a period of interest – usually days, months, or years. The horizontal axis on this kind of graph corresponds to calendar dates, so you can see the time frame covered on each bar. 

The vertical axis shows what happened at a given time: the closing price for that day or the change in prices from one trading session to another. When there’s no change between sessions (when it is closed), then you’ll see either “0” or “-“.

Candlestick Chart

A candlestick chart – also known as Japanese Candlesticks because of their origins – uses an inverted style with white bars on black backgrounds and vice versa. 

The name comes from how they resemble traditional candles where three lines represent measuring sticks used during olden times before modern technology had been invented. 

Each candlestick has a rectangular body and two short lines extending outwards called ‘shadows’ which are the upper and the lower shadows. 

The term ‘shadow’ is what distinguishes this type of chart from a line graph, because each candlestick has two directional lines known as the body of the candle or wicks. 

The top one – called the ‘upper shadow’ – represents how far its price rose above what it was at opening (also referred to as “high”). Conversely, low indicates how much below what it started out trading that day. 

And then finally you have what’s known as ‘open’ which sits on the left side and refers to what we call today market open time (at 11:30 UTC). When there are no changes between sessions, these three values will either be shown in black with white text for  the body or what we call a “zero line.” 

Candlestick Chart 

The candlestick chart is what traders used for centuries before there were any computers.  

It has a set of lines which represent closing prices for each day over a period of time. 

The main difference between candlestick charts and bar charts is the color in the body of the candle, what it represents, what that means about what happened at what point during trading on that day. 

Ichimoku Chart 

This type of chart is one whose roots are not with technical analysis but instead come from Japanese rice traders who used this to predict when they should start harvesting their crops.

It’s made up primarily of four components:

  • Tenkan Sen (the signal line)
  • Kijun Sen (a trendline often thought of as resistance)
  • Kumo or Cloud
  • Chikou Span (lagging span)

Point and Figure Chart 

A point and figure graph use dots instead of lines as well as two axes – one represents price while the other represents volume traded.

The point and figure chart show price movements as columns of Xs or O’s. The point and figure column are filled when the market goes up and left blank when it moves down while each row represents one unit of movement in either direction from opening to closing value. 

When you look at an open position on a table which is compiled over a number of days, you are looking at what they called “the body”

Line Chart 

The line chart is the most basic and easiest to understand. It shows what is happening over time as a series of points connected by straight lines.

The line chart’s x-axis represents the date, while its y-axis typically displays prices or rates, such as inventory levels or production in units per hour. Line charts are often used for displaying data that varies in quantity continuously (such as temperature), but they can also be used with discrete data sets (such as those from opinion polls). 

How to Read Charts Using Chart Patterns

There are just many different chart patterns that traders typically use for making buy or sell decisions.

Reading chart patterns are usually done in a combination (i.e., by using several different patterns) in order to understand the direction of a particular cryptocurrency chart.

Chart patterns generally follow two type of patterns:

  • Bullish Pattern: A classic sign of this type of trend occurs when prices steadily rise over several days without too many interruptions from sellers. Signs warn investors not to get involved with buying until it becomes clear which way price may be heading (upward or downward) making it possible to make what is called an “entry point.” 
  • Bearish Pattern: A classic sign of this type of trend occurs when prices steadily drop over several days without too many interruptions from buyers. Signs warn investors not to sell until it becomes clear which way price may be heading–upward or downward–making it possible to make what is called an “exit point.” 

Each chart pattern will show whether or not the price action of an asset is showing a bullish or bearish trend.

Some popularly used chart patterns include:

Flag

The flag is a chart pattern that indicates  a possible “entry point.” The pattern looks like what would be created by a flag waving in the wind. 

The flat part of the flag is when price falls. The short upward slope at either end is where buyers are showing up and pushing prices higher for those brief moments before they subside again to lower levels. 

This means that if you buy after one of these small increases (known as buying on a pullback), you will have avoided what could otherwise be an even larger drop down ahead. And you might get out at or near your target level for profit because prices stop falling right there.

Pennant

A pennant can be seen on a chart  as a series of what look like two upward slopes followed by a shallow downward slope. 

It indicates that some traders are becoming less interested in the asset, but others remain committed to holding it and buying more if prices go down or at least hold on as long they can before capitulating. 

The flat top also gives an indication about what will happen next: Prices either continue declining (if the low point is below where the pennant started) or start rising again (if there’s enough demand from buyers).

Flagpole

When you see what looks like a flagpole formation with its “flag” stuck inside its own shadow, this pattern usually means price has peaked and will now decline further. It may seem counterintuitive , but what’s happening is that buyers are  becoming exhausted, and sellers are picking up more of the slack. 

The flagpole looks like a triangle with its point downwards. The pennant formation is what happens as buyers step in to buy at lower prices again before giving out entirely in late stages of what will become an extended bear market or correction. 

This pattern can also be seen as price consolidating after there’s been some wild movement – but what it really means is that we’re getting close to what could turn into either another bull run (if this current period starts doing well) or continuing to slide downward (if not).

Rectangle

The rectangle  is what happens when price is trending sideways and neither buyers nor sellers have the upper hand.

This pattern can be seen as a consolidation period, or what happens after there’s been some wild movement but what it really means is that we’re getting close to what could turn into either another bull run (if this current period starts doing well) or continuing to slide downward (if not). 

A rectangle looks like two parallel trend lines going in opposite directions with no other indicators included. Usually one will break upwards while the other breaks downwards for an upward-slanting reversal pattern called “bullish flag.” 

This often precedes a new uptrend. Alternatively. if both of them continue moving sideways without breaking out then a bearish continuation pattern may be what we’re looking at.

Parallel Channel

The parallel channel consists of two trend lines parallel to each other; the upper resistance line (selling) and lower support line (buying).

These go up and down, respectively, over time with some indication of what direction they’re going in at any given moment on a chart. 

It can be considered bullish when price breaks out upwards (and out of the channel) from this pattern or bearish if it breaks downwards.

Wedge

A wedge is a pattern that has two converging trend lines with what looks like the point of an arrowhead poking out from either side. 

This can be considered as bullish if price breaks upwards and out of this formation or bearish if it falls downwards to break below one of these lines.

If both continue moving sideways without breaking out then a bearish continuation pattern may be what we’re looking at. 

Double Top/Bottom

The double top or bottom can be indicated by two highs or lows in price that are high or low enough to make up what’s called a peak or a trough. 

When this peak or trough occurs twice without much interruption between peaks or dips, it may signal what could be considered an important turn in direction for prices.

Head and Shoulders

A head and shoulders chart pattern indicates a bearish movement. The pattern comes from what looks like a head followed by two shoulders with the second shoulder being lower than the first and then finally, an actual head.

This pattern signals what could be an important turn in the direction of prices. On the other hand, an inverse head and shoulders signals a bullish price action. 

Cup and Handle

This pattern can take the shape of what looks like two cups, one with its tip cut off (the handle) and another with its top elongated into a similar triangular shape as that at the end of the first cup’s handle, but in reverse direction. 

The second cup should have  a small “handle” at its top, and the pattern signals what is known as a potential reversal of what has been seen before. 

Pitchforks

This pattern consists of what looks like three converging lines, the central one at a slant and two more horizontal ones on either side.

The “three-line” formation is said to signal what could be an important drop in prices , but what’s more, what it looks like is a pitchfork. 

A bullish signal has been seen in that the price has actually risen since both lines met. This pattern may be an indication for traders to expect another rise as well, and thus buy (or go long) again.

Triangle

One of the most common patterns seen in technical analysis is what’s known as a triangle. 

A typical pattern will show what looks like two converging lines, what are called trendlines, and then a horizontal line drawn across them which forms what’s known as an “ascending triangle.”

The formation can signal that it would be wise to either sell (or go short) because prices have been rising too fast for long enough now and could surge higher on increased buying from those who see this type of shape forming up ahead. 

On the other hand, if you’re looking to buy at lower prices before they rise again then this might not be such bad news. After all, once the price starts going up again, you’re going to be able to buy at what is now a relatively low price with the expectation that prices will keep rising.

Dead Cat Bounce

A Dead Cat Bounce is what traders call the brief, temporary recovery that sometimes occurs after a long decline.

The Dead Cat Bounce is a bearish indicator that can happen many times before prices finally start moving lower again or reverse their trend altogether.

This type of chart pattern is what can be called a “fake out,” where it shows indication of a bounce in price action that seems to be swinging upwards (i.e., usually a good time to buy or go long). But instead, it experiences a weak bounce and prices keep going lower (i.e., a bearish signal).

Now that we’ve gone through a short list of popular chart patterns that are used in technical analysis, let’s now look at some popular indicators (that can be used alongside chart patterns).

There are dozens and dozens of indicators that you can use to analyse patterns and trends on a cryptocurrency chart. 

When doing technical analysis, you shouldn’t rely on a single indicator. Instead, you’ll need to use a combination of several technical indicators to give you as much data as possible to understand where the price is and where it might be after a certain timeframe.

Technical indicators can be divided into three main categories, which are:

  • Trend indicators. These technical indicators measure the direction and strength of a trend by comparing prices to an established baseline. 
  • Volatility Indicators. Volatility is a measure of the uncertainty in an asset’s price, and it can be measured by comparing how far apart high and low prices are.
  • Volume Indicators. These types of technical indicators provide traders with a variety of data to help determine the direction and strength of an asset’s price action.

For each category of indicator, there are several types of methods you can use to analyse a given chart or pattern.

Here is a breakdown of some common methods of technical analysis:

Trend Indicators

The trend (or momentum) indicator is a measure of how sharply prices are moving in one direction. This indicator is what traders watch when they want to move their stop-loss order closer or farther away from the current price.

Here are the most widely used trend indicators:

1. Support and Resistance  

These two terms refer to areas on a chart where traders believe would be pointing at which sellers or buyers could come into play and balance out any excessive upward or downward movement respectively.

They’re important because if trading volume is low enough, then those levels might not hold. In other words, they don’t really act like walls but more as guidelines when trading.

These types of lines come from drawing other horizontal lines on your charts for what you expect would be areas where buyers could enter into a trade (support) or sellers could exit out (resistance). 

They’re usually drawn by connecting two points on your chart with vertical lines so as not to confuse them with indicators like moving averages which have different meanings entirely. 

2. Relative Strength Index (RSI)

The RSI shows the ratio between up and down movements in an asset, so it’s useful for seeing what factors have been driving prices lately. 

It can also show when there has been too much volatility which may indicate that the trend will reverse soon.

3. Moving Average Convergence-Divergence (MACD)

The MACD is one of the most popular types of momentum indicator used by traders.

MACD is what some people might call a “signal” indicator because it’s what traders watch for when they think the trend is changing. It shows how two different moving averages interact with each other, so you can see both short-term and long-term price trends by looking at its line charts.

Oftentimes when the lines are diverging or converging this means that a change in trend could be coming soon. You’ll also notice if there is too much volatility which may indicate what direction the next trend will take might reverse very quickly. 

Basically, it tells you what factors have been driving prices lately, as well as showing when there has been too much volatility in the market.

4. Stochastic Oscillator

This momentum indicator is used by traders for comparing the current closing price of a stock over a particular period of time.

It tracks the momentum as well as the speed of the market and does not consider volume and price.

Stochastics help in identifying the overbought and oversold zones and oscillates in the range of 0 and 100. When this indicator is above 80, then it is considered to be an overbought zone and when it is below 20, then it shows an oversold zone.

5. Average Directional Index (ADX)

The ADX, which was developed by Welles Wilder, is a tool for measuring both the momentum and direction of price movement. Values above 20 indicate that the market is trending; values below 20 mean that it’s “directionless” or consolidated.

The Directional Movement System (DMS) consists of three indicators: The Average Directional Index (ADX), Minus Directional Indicator (-DI), Plus Directional Indicator (+DI). 

When all are at least equal to two in number they work as an indicator when trading with trend following strategies but if any one index falls under 2 then traders may want to think about exiting their trade because this would signal lack of directional strength from either side.

6. Fibonacci Retracements

Fibonacci Retracements is a fascinating technique that is used to show what the potential for a correction or pullback in price may be.

The Fibonacci Retracement levels are measured from one high to another, and then plotted onto a chart as support and resistance levels. This allows traders to get an idea of what the general sentiment of different factors might be before making their trading decisions.

Fibonacci Retracement values are plotted based on Fibonacci numbers, where in the case of chart analysis comprises of 0.236 (23.6%), 0.382 (38.2%), 0.618 (61.8%), and 0.786 (78.6%). While 0.5 (50%) is not a Fibonacci number, it’s still used in Fibonacci Retracement tools.

Volatility Indicators

Volatility indicator is a technical analysis tool that is used to predict what the price of a currency will do next. There are two main types:

1. Moving Averages  

Moving average is what we use to track what is the average price of an asset. It’s what charts are usually drawn on, and what technical analysts will look for in determining what a trend looks like. Generally speaking, different types of moving averages have different meanings when they cross with each other.

There are three main types of moving averages:

  • Simple Moving Average (SMA)
  • Exponential Moving Average (EMA)
  • Smoothed or Weighted Average

The first type of moving average is what traders refer to as a “simple” or “linear” moving average. This type of average is calculated by adding up the day’s price and then dividing it by what number you want. 

For example, if you wanted an exponential 20-day simple moving average that would be (Day Price + Day Price + …) ÷ (20). 

The next type of moving average is what traders refer to as “exponential” and it’s calculated in a similar way but with more mathematical precision. 

Again, you start by adding up the day’s price and then dividing it by what number you want: for example, if you wanted an exponential 30-day simple moving average that would be (Day Price + Day Price …) ÷ (30). 

Another form of moving averages is called weighted or smoothed because they’re adjusted based on what price level has more weight than others. 

For instance, a 20-day SMA could take into account days where prices were higher or lower depending on what makes sense statistically; this will produce a smoother line rather than one constantly going up and down.

2. Bollinger Bands

Bollinger bands have certain rules, such as one standard deviation above and below each other before it can be considered an overbought or oversold condition. 

Moving averages work by smoothing out volatility over time in order to produce what’s called a “signal line” at which point traders could buy or sell depending on what they’re looking for.

Slow-moving averages would indicate slower than normal trading while fast-moving averages would suggest faster than usual trading.

Volume Indicator

Volume indicators are used to confirm the strength of trends. Lack of confirmation may warn of a reversal.

This is what happens when a lot of people are trading an asset at the same time, either driving the price up or down. It’s important to track it because, without volume, there can’t really be any support or resistance levels that work; they just simply don’t exist in general.

Common types of volume indicators are:

On Balance Volume (OBV)

OBV is a cumulative total of volume, which is what it sounds like – the sum of all trades. It tracks the accumulation and distribution of a digital asset in a market over time. 

Accumulation Distribution Line (ADL)

ADL tracks the accumulation of volume in a market for an asset by adding up all trades on rising prices, while distribution occurs when there are more trades than usual during declining periods.

Conclusion

As you can see, there are many different types of indicators that you can use when doing technical analysis. It may look complicated now, but all it really takes is familiarising yourself with the basics and practising reading charts.

There’s no exact science to technical analysis. And it’s not a sure-fire way to get 100% accuracy on your trades. But with technical analysis, you’ll be able to trade better, more profitably, and most importantly, you’ll take the guesswork out of the equation.

The best traders almost always trade by analysing charts and using technical indicators. It’s time you do too.

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