Crypto price predictions are much looked upon by investors as it gives them an upper hand on upcoming prices. The crypto market is highly volatile, but the value of the coins has grown rapidly since its inception, and the user base and platforms have spread across countries.
Technical analysis in the crypto market is crucial to be understood by investors and traders as they can make informed decisions after understanding the market trends. Technical analysis was initially used to analyze stock prices, but the same principles benefit the crypto market. Let us get to know more about technical analysis in crypto.
What is Technical Analysis?
Technical analysis is a method of using historical market data to predict future price movements. Traders can benefit by understanding better trading opportunities by analyzing market behaviors, rather than studying the assets being traded.
Technical analysis can be made use of to predict prices in stocks, commodities, cryptocurrencies, and anything that can be traded with a history of trading data. It is very common in trading platforms like forex markets, where short-term price movements are likely to happen. The analysis studies the price patterns that occurred over time by identifying the support and resistance zones.
As technical analysis uses historical data to predict prices, it won’t be always accurate and doesn’t guarantee great profits. Technical analysis uses certain indicators like Moving Averages to predict patterns in price movements.
Key Indicators in Technical Analysis
Indicators in technical analysis are mathematical calculations that use the price, volume, or open interest data to predict stock, crypto, or trade movements. The calculations using the technical indicators are done to understand the market behavior, supply and demand in the market, the best time to buy or sell assets, and make price predictions and trading decisions. Technical indicators use the price or volume in different plotting methods for the analysis. The final confirmation always relies on the price.
Moving Averages (MA) and Exponential Moving Averages (EMA)
Moving Average (MA) is a technical indicator that is used to identify price trends. It calculates the average by adding the data points over a time period and dividing that sum by the total number of data points.
This technical indicator is called the moving average as the prices move and it should be recalculated continuously based on the latest prices. There are different types of moving averages, and one of the most commonly used is the exponential moving average (EMA), which focuses on recent data points.
Exponential moving average (EMA) is also called exponentially weighted moving average and gives more significance to recent data points. The formula to calculate EMA is
EMA (today) = (Value (today) x (Smoothing / 1 + Days)) + EMA (yesterday) x (1 – (Smoothing / 1 + Days))
The smoothing factor determines the influence of recent observations on the EMA.
Moving averages are used to measure the trend direction of data like the rise and fall of prices. The trend direction of prices can be indicated on charts. The moving average can also represent price fluctuations and volatility.
Relative Strength Index (RSI)
Relative strength index (RSI) is a technical indicator that measures the speed and magnitude of price changes in security. It is a momentum oscillator that detects overvalued or undervalued securities. RSI was developed by J Welles Wilder in 1978. The RSI value fluctuates between 0 and 100.
If the value goes below 30, the asset is determined to be undervalued, termed as an oversold condition, and would be a better opportunity to buy the asset. If the RSI value crosses 70, the asset is overvalued, which is termed an overbrought condition and this is the best time to sell the asset. RSI can help determine trends and trend reversals.
The formula to calculate RSI is
RSI (step one) = 100 – (100 / 1 + average gain/average loss)
Bollinger Bands
Bollinger Bands are technical indicators that are used to identify potential entry and exit points, along with assessing price volatility. These are secondary indicators that can confirm the results of other analysis methods. Bollinger bands are placed above and below the moving average and can determine if they are overvalued or undervalued.
The bands are represented in three lines that move with the price. The middle band or the line at the center is the simple moving average (SMA) of the asset’s price over a period of time. The upper and lower bands are set at a certain number of standard deviations. Bollinger Bands help in identifying volatility as the bands expand when the prices become more volatile and contract when they become stable.
MACD (Moving Average Convergence Divergence)
Moving average convergence divergence (MACD) is one of the most popular technical indicators. Developed in the 1970s by Gerald Appel to determine the price trends of securities by measuring the relationship between two exponential moving averages (EMA). It is calculated by subtracting the 26-period exponential moving average from the 12-period exponential moving average.
It appears on the chart as two lines that oscillate. The crossover speed can be analyzed to determine if the market is overbought or oversold. If the MACD line crosses the signal line, it is a bullish signal, and if it crosses below, then it is a bearish signal. This technical indicator provides a better up-to-date market representation.
Chart Patterns
Chart patterns are repeated price actions when prices are graphed in a chart. These are used to predict the price movements of securities. It is a technical tool used in technical analysis and can be said as a shape that appears in the price chart by the movements created by the fluctuations in prices in the chart.
- Candlestick Patterns
Candlestick patterns are a graphical representation of daily price movements that would appear on candlestick charts. Each candlestick shows the market’s opening, closing, and price movements at a given time. Some popular examples of candlestick patterns are hammer and engulfing candles.
- Support and Resistance Levels
Support and resistance levels are price points on a chart in which the price is more likely to change direction or stop. The price levels are expected to bounce back up in support levels, whereas the prices tend to bounce back down in reverse levels. This is crucial in technical analysis as it can determine the market behavior, supply, and demand. When the graph moves up or down surpassing the support or resistance levels created, those levels should be moved to create new ones.
Bottom line
Technical analysis uses tools to determine the future price of a security like stock or the crypto market. Most traders tend to use fundamental and technical analysis together to benefit them in buying or selling their assets. Technical analysis in such cases is used to determine the best time to buy an asset. Even though, technical analysis uses tools with equations to determine market behavior, it is not based on proper scientific evidence and is therefore subject to interpretations.