Does Technical Analysis (TA) Work In Cryptocurrency?

Look around on Steemit and other numerous sources for cryptocurrency information and you will undoubtedly encounter technical analysis in the form of a candlestick chart with lines and labels drawn on it.

Technical analysis in traditional stock market investing is a staple of good traders, but does it work in cryptocurrency where things move one thousand times faster and investors are more irrational, inexperienced and emotional?

Yes, it works.

There are many people who believe that technical analysis works, many swear by it. And ironically part of the reason that technical analysis works is because of people believing in it, it works because enough people who can read the charts can spot the same patterns and signals, using it as the basis of their trades.

Using data to make decisions is a concept that works not only in finance, but for a lot of things. Technical analysis explained in the simplest terms is just making trading decisions based on market data, it's a psychological

Sometimes it works, sometimes it doesn't. Technical analysis can sometimes come down to luck and trusting your instincts, the data can tell you one thing but sometimes

TA alone is not enough.

Technical analysis is just one tool in your trading toolbox, but if you rely on it as a sole indication as to whether or not you should buy or sell your chances of succeeding are reduced quite significantly.

In-fact, there are situations where smart traders can use technical analysis to trick traders who are solely relying on TA. A smart trader can set a trap using TA to give the illusion of there being a profit opportunity and more traders need to be aware of this.

I find a good combination of watching the charts, keeping an eye on news stories as well as what people are saying on Reddit/Twitter can help you make some smart trades.

You should learn (but not limited) these basic TA concepts

There are only a few concepts that traders should learn, to immediately become better traders and I've put these below.

There are numerous TA concepts, these are the basics that helped me stop blindly throwing money into coins without knowing what I was doing (we all start somewhere). Unless you're fortunate enough to come from a finance/investment background, chances are you're learning as you go.

Something we do not touch upon below is identifying patterns and using the fibbonaci retracement tool to easily identify levels in a chart to make smarter trades.

I do recommend that you take the time to do some reading before you go making life changing trades that result in losing money. You wouldn't go buying a used car without driving it first, so why go trading without understanding what you're doing first?

Support and resistance levels

I strongly believe that it is imperative and one of the first things you do as someone learning technical analysis is to learn about support and resistance levels.

By identifying these levels, cryptocurrency traders can help get a better sense of the supply and demand. Identifying support and resistance points can help you identity entry and exit points, to make better trades.

Support

When people talk about support levels, they're talking about the price level where a large number of traders are willing to buy a cryptocurrency, believing that it is oversold (the price below its perceived value). As the price falls to meet the price, traders pull out their wallets and buy it, this creates a floor.

Say Bitcoin was trading around the $10,000 range for a couple of weeks and it starts to drop. The support level might be around $10,000 and as the price falls, buyers step in to keep the price above the support level.

Resistance

Resistance is the exact opposite of support. Remember support is where traders perceive something to be oversold and below what it's worth, resistance is where a large number of traders believe something is overbought (the price is above its perceived value because too many traders buying at high prices) and sell.

And to throw another spanner in the works, support can become resistance and this usually happens when a price drops beneath the support line (the floor). In this case, the previous support now becomes the resistance point making it harder for the price to go back up.

Round numbers

One thing you will learn pretty quickly and perhaps already know if you have ever traded stocks before, is traders love round numbers. This is why at the time of writing this, the $10k mark is a psychologically signficant price point for Bitcoin. In the case of Bitcoin it seems traders love even numbers; $2k, $4k, $6k, $8k, $10k, $12k, $14k and so on.

Take a look at any chart for a cryptocurrency or stock and pay close attention to even number points. As a cryptocurrency goes up in value, you'll see resistance start to appear and as that resistance is broken, new barriers being formed.

Using this acknowledged psychological fact you can use it to set buy and sell orders at the right points in time to get in and out of trades.

Volume

When it comes to Bitcoin or any cryptocurrency for that matter, volume plays a very significant part in determining price trends.

High volume usually correlates directly to strong price trends, while low volume indicates weaker trends. If a particular cryptocurrency experiences a large gain or loss, as a trader you should be paying close attention to the volume.

For example, say Bitcoin enjoys a long uptrend like we saw in December and then rapidly declines one day, it is worth checking out volume to get a better sense of whether this downward movement represents a new trend or if it is simply a temporary pullback (the race car has pulled over to refuel with gas before re-entering the race).

In most cases, rising prices coincide with increasing volume. If your investment sees an uptrend, but the currency's upward movements take place amid weak volume, this could mean that the trend is weakening and could soon be over.

Trading low volume coins can be a rewarding experience, but also a risky one. This is why sometimes you see a coin you've never heard of go up a few hundred percent because the amount required to move the market up and down (whales) is a lot less than a market like Bitcoin or Ethereum where it takes more than one person to move the market.

If you ever look at a low volume coin chart, you will see dramatic spikes in price, usually followed by a sharp drop. Unless there is a reason that coin is going up in value, chances are it's being pumped and dumped.

TL;DR

Buy low and sell high.