Yes, technical analysis works.
Bitcoin and other cryptocurrencies are the “hot topic of the day.” This, in addition to the high appreciation of virtual currencies, which has attracted the attention of the investment community, is due to the increased interest in blockchain technology by financial institutions.
Investors are faced with the following question – will traditional bitcoin continue to rise in price from now on?
How can you trade bitcoin using technical analysis?
First – what is technical analysis? This is the application of analytical techniques to determine the future direction of trade of an asset, mainly based on its historical performance.
The methods of technical analysis are many and varied, which allows traders to choose the most suitable for them, based on their trading style, trading goals and risk appetite.
In fact, technical analysis is one of the few types of analysis you can apply to bitcoin. And part of the reason for this is that fundamental analysis is virtually inapplicable to it.
First of all, (which is one of the main problems and refrains large institutional investors from directing funds to bitcoin) is the fact that the currency has no “intrinsic value”.
Or how much the cryptocurrency will cost is determined entirely by what market participants think is fair. In this way, it is very similar to gold.
And the lack of intrinsic value makes it impossible to use the techniques of fundamental analysis to determine the “fair price” of bitcoin. We can only recall that Buffett does not like gold precisely because of the lack of intrinsic value.
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.
We 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.
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 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.
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.
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.