Technical analysis is the study of historical prices and can be a helpful analysis tool that can help you determine future price movements. There are several categories of technical analysis including support and resitsance levels, trend following and momentum. Technical analysis can help you determine the best entry and exit levels, which can be the foundation of your trading strategy. Here are some of the most common technical analysis tools and the techniques that can be used to drive your trading decisions.
Support and Resistance
Before you start to trade you should become familiar with some of the basic tools that you can use to help you determine the potential future movement in a cryptocurrency. Support and resistance levels are supply and demand points, that are key in determining market sentiment incrypto trading.
A support level is a level where prices are buoyed. This means that the price is more likely to rebound off this level rather than break through it. However, once the price breaks through support by a specific amount, it is likely to continue falling until it meets additional support. A resistance level is the opposite of a support level. It is where the price tends to find a cieling. The price of a cryptocurrency is more likely to be regected from this level rather than break through it. However, once the price of a cryptocurrency breaks through a resistance level it is likely to continue to rise.
Support and resistance levels can be a trend line, horizontal lines and moving averages. It can be the high or low of a day, week or month.
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In the chart of Bitcoin, there is a downward sloping trend line that was resistance until prices closed above that trend line. Bitcoin is consolidating above that former resistance leve now support (green arrow). Below that trend line is the 20-day moving average which is considered additional support. A moving average is the average of a specific number of days. The average is considered moving, as on the 21st day the first day in the calculation is dropped.
Above the breakout level is a horizontal trend line that touches the highs in October, which is considered a target resistance level.
Finding a Trend
When you look for the future direction you should consider that prices generally move in two distinct motions. Either the price consolidates and moves sideways, trading up and down in a range. Alternatively, prices can trend in one direction or another.
One of the most effective ways to find a trend is to look for a moving average crossover (green arrow). When a short term moving average crosses above or below a longer term moving average, a trend is likely in place. If you want to evaluate a short term trend, you can use short-term moving averages. For example, a 5-day moving average crossing above or below a 20-day moving average could help you with short term trends. When the 20-day moving average crosses above the 50-day moving average (green arrow), a medium term up trend is in place.
Momentum and Oscillation
Another technique that you can use to find the future movement of a cryptocurrency is to determine momentum. This describes the acceleration in price movements. You can use several oscillators or indicators to help you evaluate momentum.
The fast stochastic is a momentum oscillator that can help determine momentum as it generates crossover buy and sell signals. When a crossover sell signal occurs momentum is turning negative. When a crossover buy signal is generated positive momentum is occurring.
Another indicator that helps with momentum is the MACD (moving average convergence divergence) index. The MACD also generates crossover buy and sell signals to describe changes to momentum.
There are several technical analysis techniques that you can use to help you with your trading strategy. This could include support and resistance, trend following and momentum. By developoing a methodology using technical analysis you can provide yourself with a trading toolkit that will be the backbone of your trading strategy.