Trading in the crypto market is not as easy as it sounds. Till this moment, some traders are still trying to navigate their way in the market. This is because the market is big, and trading requires various instruments called technical analysis. The instrument is something that traders across the market have used to navigate through the market. Though technical analysis will not tell you what will happen, it will point you in the right direction. Traders also use technical analysis to gather knowledge of what will likely occur based on past occurrences. To do that, the reader needs to have a level of expertise. In this article, we will be looking at technical analysis and all there is to know about the tools to read the market.
What is Technical Analysis?
Technical analysis is generally studying the movements of the price of an asset by looking through charts. Over the years, traders have used technical analysis to make profits in the crypto sector. This is because the technical analysis can be used to bring in profits even when tokens are seeing losses. Some people outside the crypto space always think that assets could one day fall to zero.
Unlike them, the people in the space hold assets for the long term, thinking it could skyrocket. Technical analysis makes traders understand that one movement is not just random. With this school of thought, the price movement can be categorized as short term or long term. Technical analysis tells traders what is happening in the market regarding a coin. It focuses on supply and demand, leaving out other factors that affect the price of assets.
Candlestick Charts
Traders use the candlestick charts to read the technical analysis of a token. Though it looks complicated, it is easily understandable when one gets the hang of it. The chart is named candlestick in the sense that each trend point looks like a candlestick. Candlesticks have three distinct colors. Some are red or pink, while others are green. The candlestick has all the information that a trader needs about a coin. This is because they vary in length and are of different colors.
The opening price and the closing price of digital assets can be seen through the top and bottom of the candlestick. Green candlesticks mean that the coin saw a price increase, while red indicates a loss in price. Usually, a green candlestick means that the asset opened the day at the bottom and closed at the top. However, a red candlestick means that the asset opened the day trading at the top and closed the day at the bottom, signifying a loss.
Elements Of Technical Analysis
Now that we know what technical analysis is, we can look at some of its elements. The elements are things that a trader must know and be able to navigate. With this, the trader will read the technical analysis of a coin and translate it into profits.
Trend Lines
Trend Lines is the first element that a trader needs to familiarize himself with when reading technical analysis. Trend lines show where digital assets will trade at, but treaders need to analyze it to know. This is mainly due to the volatile nature of assets in the crypto market. Despite volatility, a token can only move upwards, sideways, and sideways. While upwards and downwards trades are known to be profit and loss, sideways trades mean another thing entirely. Sideways trade by a token means that the asset has not accumulated any profit or made any loss. Traders use software to track their portfolios, which have trend lines to monitor the performance of the tokens.
Support And Resistance Level
Resistance and support levels are also another element that traders must understand in technical analysis. Traders can draw the support and resistance line on their trading chart to get more information about the token. The support level is the point that traders need to buy a lot of digital assets. Traders demand more for the token because the price is always low at this level.
The demand at this point pushes the digital asset in question upwards, stopping the decline at the time. Unlike the support level, the resistance level is characterized by less demand despite the token being in abundant supply. Traders feel that the price of the token is high enough and do not purchase. After the crypto reaches this level and there is no demand despite the supply, its price makes a nosedive.
Trading Volumes
Traders can determine if an asset is on a significant trend judging by its trade volumes. A token with high trading volume shows a strong trend that traders should note. Low trading volumes also indicate that there is a weak trend. Traders use the trading volume to determine the movement when the price of crypto drops. A high trading volume shows that an asset is likely to grow in the long term.
Market Capitalization
The market capitalization of a token goes a long way to determine how stable the coin is. To know the market cap of a token, you can easily multiply the token’s price by its circulating supply. Most stable coins tend to have a larger market capitalization.
Relative Strength Index In Technical Analysis
Most technical analysis charts have the Relative Strength Index. To determine the RSI of a token, you can use the formula, which is 100-(100/(1-RS). In this calculation, RSI will be represented by the ratio of the days the coin traded up against the days it traded down. The chart usually does all these calculations, and they are always at the foot of the candlestick chart. Relative Strength Index range between 0-100. Tokens with an RSI of 30 or below have a high chance of increasing in value. However, tokens with an RSI score of 70 or above have a high probability of a bearish run.
Moving Averages
Moving averages is a fundamental technical analysis that helps traders recognize trends and patterns. The moving average of crypto is determined by its average price over a time frame. Typically, most people calculate the moving averages of tokens based on their price in the last 20 days. Traders can then connect everything to make any predictions. To gain deeper knowledge about the moving average of a coin, you can use it over a longer period. If the moving average on a short term moves over the long term moving average, then the coin is about to go bullish.
Adding Other Methods To Technical Analysis
It would be best if you learned not to rely on only technical analysis when trading digital assets. This is because using just one method will limit the information that you get. Using only technical analysis means that you will not gain insights into other factors that affect assets. The price of digital assets is also affected by several things such as regulations and mining hash. Technical analysis does not consider these things.
Conclusion
Traders can use technical analysis to determine the price of a token in the future. This is because it gives them certain insight into the past actions of the token. Using certain technical analysis tools in charting software can help alongside your research. For the best results, you should carry out your research too using other methods.