How to Do Technical Analysis for Crypto

Technical analysis for crypto: how important is it? The answer to this question is not that simple. Technical analysis is complicated and one might argue that technical analysis alone might not actually help your win rate in crypto.

However, almost all professional traders always mix technical analysis with fundamental analysis to help their trades. This is why it’s still quite important to understand the basics of technical analysis in crypto.

Here we explain different types of indicators and tools used by traders and investors alike that you can use to enhance your technical analysis strategies. But before we get there, let’s learn all the basics first.

Technical analysis in crypto is about doing some calculations to predict price movement before you make a trade. Trading becomes a gambling activity if all you do is place an order based on intuition or guesswork. This is where technical analysis steps in to increase your chance.

Technical analysis is the process of analyzing prices by studying past market data and identifying trends within the price action movements. It consists of three main components: technical indicators, chart patterns, and support/resistance levels.

The goal of technical analysis is to identify potential buying opportunities before they become too expensive. It also helps identify when you should be selling. When used properly, technical analysis can provide investors with valuable insight into future price action.

Fundamentally, technical analysis uses mathematical formulas to analyze historical price movements and volumes to identify patterns within markets and predict future movements. This allows traders to anticipate potential price swings before or when they occur.

These techniques rely on the theory that historical data regarding cryptocurrencies' past performance and price fluctuations will repeat themselves in the future. Using technical analysis, it’s possible to identify parterns and use these to make assumptions about where prices are going.

One of the most common assumptions in the crypto space is that everything moves within trends. That means we are either in a bullish trend (prices trend upwards) or a bearish trend (prices trend downwards). Check the above chart for visualization of bullish and bearish trends.

Trends occur over all timescales. There may be a bearish trend on the 5 minute chart that is actually part of a daily or weekly bullish trend.

Crypto price action often shows obvious trends, even during periods of less volatility - whether we observe prices over short or long timeframes. The trend patterns and directions of the price often move in the same trend line before the market cycle eventually changes. 

If prices move higher, then this indicates that demand for the crypto asset is increasing; however, if prices drop, it means that supply is greater than demand. Prices usually stay within the same range over time.

Many technical crypto traders often draw higher-high and higher-low bar patterns to confirm the bullish trend, or lower-high and lower-low bar patterns to confirm the bearish trend. To learn more about these bar pattern formations, you should read our crypto intraday trading guide.

However, there are plenty of examples of when a bullish trend line breaks higher-high and higher-low patterns, and when a bearish trend line breaks lower-high and lower-low patterns. There’s no certainty and the decision to use these patterns is up to you.

Another important point about crypto technical analysis is the fact that history often repeats itself. Analyzing past trends can give insight into how the crypto market moves forward. This helps traders prepare for potential changes in price movement.

Market participants often show similar responses to events occurring within the markets. While some charts come from many years ago, they often remain relevant because they could occur again.

If you are wondering why this works, it’s simply because other crypto traders use the same technical analysis techniques. When everybody believes the same thing might happen, they will all act in the same way, and the market will move as a response.

Nonetheless, just because history often repeats itself does not mean it will always repeat itself. You may be able to increase your odds by using these techniques, but you will still have plenty of losses. This is where risk management becomes super important.

There are many cryptocurrency trading tools and indicators out there. Different traders will use different indicators and settings, but there is always a lot of overlap. Here are some of the most common indicators and tools that professional traders often use in their technical analysis, and how you can use them for your benefit.

Candlestick patterns provide traders with valuable insight into market movements. Candlesticks display the volume at the open, close, high, low, and middle of the candle. The size of the candles indicates how much prices changed during that period. Large candles generally indicate high volatility, while small candles indicate low volatility.

Candles come in various shapes and sizes, but they all have three main parts: the body, the upper wick, and the lower wick.

A green candle indicates that the open price exceeded the close price; this means that the market moved upward during the trading session. A red candle indicates that the open price fell below the close price; this means that the market declined during the trading session of that candle bar.

The height of the body of the candle represents the range between the opening and closing prices of the period. The upper wick tells us the highest price from the period, while the lower wick tells us the lowest price from the period.

Imagine the price of an asset opens the period at $10. There’s a bit of selling going on, so it dips down to $7 before going back up to $10. People keep buying, so the price goes up again to $20, before coming down to $15 at the close of the period. What would this candle look like?

As the price closed higher than the open, we would have a green candle. The bottom of the body would be at $10, while the top of the body would be at $15. This candle would have a lower wick extending down to $7, and an upper wick extending up to $20.

When crypto traders analyze their chart using candlestick patterns, they often try to find pin bar, engulfing bar, inside bar, and other bar patterns. These bar patterns indicate the market will reverse after the closing of that bar.

If you intend to learn more about these candlestick bar patterns, you should read our intraday trading guide for a more in-depth explanation.

Understanding S&R (Support & Resistance) levels will help you interpret key levels easily.  A support level is the point where prices have stopped moving lower in the past. Meanwhile, a resistance level is the point where prices have stopped moving higher in the past.

The above chart is a good example of how to draw S&R levels. As you can see here, $40,825 is a resistance level since the Bitcoin price bounced back down from that level multiple times. Meanwhile, $31,009 is a support level since the Bitcoin price bounced back up from that level multiple times.

On many occasions, you will find resistance levels become support and vice versa.

Once you've identified these levels, you can use them to predict future prices. Unfortunately, there’s no hard math on how often they bounce back from S&R levels. Every trader has different opinions on how often one support level or one resistance level might hold.

The Moving Average (MA) indicator is perhaps the most basic indicator for all kinds of technical analysis (not just in crypto, but also in forex and stock). The MA lines allow you to track the price trend by averaging past prices of a cryptocurrency over a specified period.

This tool offers valuable insight into the current market trends and helps identify potential opportunities for profitable trades. These lines provide information regarding the future movement of the market.

There are 2 main types of Moving Average; Simple Moving Average (SMA) & Exponential Moving Average (EMA). Both are very useful tools to analyze past data trends. They both give us information regarding future market direction. SMA calculates the entire data’s average while EMA gives more weight to the current data.

There are multiple ways to analyze the chart using Moving Average lines. The most common way to use it is to see whether the latest candle bars have crossed or bounced back from the Moving Average lines.

In the above example, we can see that the price bounced back off the moving average line somewhere around $48,500. Had the candle broken through the MA line and closed above it, it could be seen as a bullish indicator. However, as with all Technical Analysis, this is not always the case.

The relative strength index measures momentum by analyzing an “overbought” or “oversold” situation. An RSI reading below 30 signals an oversold market condition; anything higher than 70 suggests an overbought situation.

Some technical analysis crypto traders use different numbers to indicate oversold and overbought situations. They might use 10 for oversold and 90 for overbought instead of 30 and 70. Combined with Moving Average, RSI might become pretty useful, especially when you use higher timeframes for your chart analysis.

Bollinger bands are used by traders to indicate overbought and oversold, just like RSI. They are based on historical data and provide insight into future price movements. Basically, Bollinger bands draw “potential” support and resistance lines. Here is an example:

The bands are usually calculated using a 20-day simple moving average by adding and subtracting a standard deviation from the moving average. If the market price is above the upper band, it signals overbought; while if it is below the lower band, it shows oversold.

Some of the main critiques of technical analysis include its accuracy because historical data does not necessarily indicate future movements. More often, most indicators are “lagging”, which means price movements do not occur exactly the same way each time, or only form patterns that are identifiable after they have already played out. This makes technical analysis less reliable than it looks.

However, technical analysis does work in many situations and provides higher odds of you winning, especially if you combine it with fundamental analysis.

Crypto trading is not just looking at charts and trying to predict what direction prices will move next. Technical analysts study how markets work and try to understand why prices behave the way they do. 

Crypto technical analysis becomes useful and insightful especially when markets move in an obvious bullish or bearish direction. There are times when the market moves sideways and this is where usually technical analysis becomes weaker.

Hopefully, the above technical tools and indicators will become helpful additions to your cryptocurrency trading strategies.

And while some traders rely on technical analysis alone to make trade decisions, we strongly recommend that you use both technical analysis and fundamental analysis when making trade decisions. On top of that, you need to have strict risk management. You need to know when to cut losses and when to start taking profits. Don’t let one or two losses ruin your entire portfolio.

Having a good risk management strategy is actually more important than having a good trading strategy.