Regardless of the type of asset a trader plans investing in, it is crucial to understand some elements of technical analysis. That way, you can make smart decisions regarding buying and selling.
In particular, Bitcoin traders should have key information regarding technical analysis, considering this is the most tried and true method for evaluating the crypto market. Technical analysts or technicians look at the history of the cryptocurrency and then apply analytical tools to understand how the market as a whole feel about that crypto.
Distinguishing between technical and fundamental analysis is important. The fundamental analysis aims to determine the correct value of an asset. Technical analysis, on the other hand, only pays attention to the actual price movements. Using that information, a technician will look for patterns, including resistance and support.
One of the most critical parts of technical analysis for any trader, including Bitcoin traders, is identifying trends. Because of the volatility of the cryptocurrency market, it can be more challenging to spot trends in Bitcoin than with other assets such as stocks. However, experienced technicians have the expertise required.
The previously mentioned resistance and support levels are another essential tool for Bitcoin traders. Support level is the price that a large quantity of traders is willing to pay for Bitcoin believed oversold. As Bitcoin approaches that price, the market participants buy it, which makes a “floor.” Resistance is the opposite, meaning it is the price level at which traders want to sell the security, believing it is overbought.
These levels provide a better feel for the supply and demand of Bitcoin. Technicians can even combine support and resistance levels to view a range, leading to “rangebound trading.” Once a technician completes a technical analysis to get the resistance and support levels, rangebound trading lets them sell Bitcoin when it is near the top of the range and buy when it is closer to the top.
Bitcoin traders that utilize technical analysis can use moving averages to evaluate the cryptocurrency. These moving averages essentially smooth the fluctuations in price. The easiest version is a “simple moving average,” which analysts get by averaging the price of Bitcoin over a specific period of time, whether five or 20 days. “Exponential moving averages” are similar but place additional emphasis on recent prices during the calculations.
After calculating moving averages, a technician can use that information to see when the momentum for Bitcoin moves, particularly when comparing various moving averages. If, for example, a technician notices the five-day moving average is higher than the 20-day, it could indicate a bearish market is becoming bullish.
Bitcoin traders must also be aware of the role in volume in technical analysis, which directly correlates with the strength of a trend. In this case, higher volumes indicate strong trends. Anytime that Bitcoin goes through a large change in price, technicians will look at the volume. While low volume can indicate a small fluctuation, something likely overcome, high volume may indicate a more permanent change to the trend.