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Technical Analysis

Technical Analysis

The Basics

There are two methods used by traders to analyze assets in order to make educated speculations on investment decisions: fundamental analysis and technical analysis. Fundamental analysis is a method of evaluating an asset in an attempt to measure its intrinsic value, by examining related economic, financial and other factors. In this article, I will break down technical analysis and the basic indicators used by traders to best identity trends and direction.

The main gateway for Fiat → Crypto is via Coinbase. Some of the popular exchanges where altcoins are traded are Gemini, Binance, KuCoin, and Bittrex. On these exchanges, you can buy, sell and hold hundreds of different coins. For the most part, these exchanges have good volume and decent liqudity.

Technical analysis is a method of evaluating coins that involves a statistical analysis of market activity — price, volume, cash flow, momentum, etc. Technical analysts do not measure a coin’s intrinsic value, but rather, use charts and indicators to identify patterns that can be used as a basis in the investment decision making process. For a more in-depth breakdown of Technical Analysis, refer to the article below:

Technical Analysis
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by…

When the market moves up and then pulls back, the highest point reached before it pulled back is referred to as resistance. As the market continues up again, the lowest point reached before it started back is referred to as support. In this way, resistance and support are constantly forming as the market oscillates over time. The reverse is true for the downward trend. Keep in mind that this is not perfect, support and resistance levels are not exact numbers —think of support and resistance as zones rather than precise numbers. You will typically see a support or resistance level that appears broken, but soon after find out that the market was just testing it.

More About Support & Resistance Levels

  • When the price passes through resistance, that resistance could potentially become support.
  • The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support.
  • When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.

In their most simplistic form, an uptrend line is drawn along the bottom of easily identifiable support zone. In a downtrend, the trend line is drawn along the top of easily identifiable resistance zone.

Channels are another tool in technical analysis which can be used to determine good places to buy or sell. Both the tops and bottoms of channels represent potential areas of support or resistance.

  • To create an upward channel, draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line.
  • To create a downward channel, draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you create the trend line.

When the price hit the lower trend line, this may seen as a buying area.
When the price hit the upper trend line, this may seen as a selling area.

  • Charts typically use a red color to show a loss and green color to show a gain.
  • The “bar” of the chart shows you the opening/closing price for a time period.
  • The “wick” is showing you the highest/lowest price reached during the time period.
  • Long green Japanese candlesticks show strong buying pressure.
  • The longer the white candlestick, the further the close is above the open. This indicates that prices increased considerably from open to close and buyers were aggressive.

Characteristics: A long upper shadow, long lower shadow and small real bodies.
Indicates: Indecision between the buyers and sellers.

Neither buyers nor sellers could gain the upper hand, and the result was a standoff.

Green (White) Marubozu
Characteristics: A long green body with no shadows.
Indicates: A very bullish candle as it shows that buyers were in control the entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.

Red (Black) Marubozu
Characteristics: A long red body with no shadows.
Indicates: A very bearish candle as it shows that sellers controlled the price action the entire session. It usually implies bearish continuation or bearish reversal.

Doji candlesticks have the same open and close price or at least their bodies are extremely short. A doji should have a very small body that appears as a thin line. Doji candles suggest indecision or a struggle for turf positioning between buyers and sellers. Prices move above and below the open price during the session, but close at or very near the open price.

Traders use the Fibonacci Retracement Levels as potential support and resistance areas. In order to find these Fibonacci retracement levels, you have to find the recent significant Swing Highs and Swings Lows.

A simple moving average (SMA) is the simplest type of moving average in forex analysis. Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X. If you plotted a 5 period simple moving average on a 1-hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5.

Since simple moving averages (SMA) can be distorted by spikes, exponential moving averages (EMA) give more weight to the most recent periods.

Bollinger Bands are used to measure a market’s volatility. This little tool tells us whether the market is slow or whether the market is moving! Notice on the chart below that when price is quiet, the bands are close together. When price moves up, the bands spread apart.

Moving Average Convergence Divergence (MACD) is used by traders to identify moving averages that are indicating a possiblenew trend — a bullish or bearish trend. When using th eMACD indicator, you will usually see three numbers that are used for its settings.

  • The first is the number of periods that is used to calculate the faster-moving average.
  • The second is the number of periods that is used in the slower moving average.
  • The third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.

There is a common misconception when it comes to the lines of the MACD.

The two lines that are drawn are not moving averages of the price. Instead, they are the moving averages of the difference between two moving averages.
If you look at our original chart, you can see that, as the two moving averages separate, the histogram gets bigger.
This is called divergence because the faster moving average is “diverging” or moving away from the slower moving average.
As the moving averages get closer to each other, the histogram gets smaller. This is called convergence because the faster moving average is “converging” or getting closer to the slower moving average.
Parabolic SAR (Stop And Reversal) helps traders identity where a trend might stop. The Parabolic SAR places dots on a chart indicate a potential reversal. From the image below, notice the dots shift from being below the candles during the upward trend to above the candles when the downward trend begins.

When the dots are below the candles, that is considered a buy signal.

When the dots are above the candles, that is considered a sell signal.

Relative Strength Index (RSI) helps traders identify when a coi nis overbought and oversold in the market. It is measured from 0 to 100; typically readings below 30 indicate the coing being oversold, while readings over 70 indicate the coin being overbought.

The Stochastic oscillator is used by traders to determine when the market is overbought or oversold. Like RSI, the Stochastic is measured from 0 to 100. When the Stochastic lines are above 80, that means that the coin is overbought. When the Stochastic lines are below 20, that means that the coin is oversold.

At its core, first and foremost, trading in the crypto markets is a psychological game. Do not risk more than you are willing to loose and do not add to a loser — learn to take a loss. Not every trade will be a winner. Do not become greedy because greed is a bottomless pit. While I take no pleasure in others’ misfortunes, I have made most of my profits from others behaving in a panicked and irrational fashion and selling their coins at evaluations far below their true value. More volatility equals cheaper coins, which equates to higher returns. I do not rely solely on technical analysis when setting up a trade, but it is a core aspect I take into account when executing such trade. If anything, never forget this: Do not force lines. If the line does not fit, the play is invalidated.

A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.

- Robert Frost

Finance is not merely about making money. It’s about achieving our deep goals and protecting the fruits of our labor. It’s about stewardship and, therefore, about achieving the good society.

- Robert J. Shiller

It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.

- Robert Kiyosaki

Too many people spend money they buy things they don’t impress people that they don’t like.

- Will Rogers

To be a super-trader, you'll need an edge to overcome the laws of probability and the uncertainty of the marketplace. That edge comes from information flow, the ability to correct your habits in terms of the market's characteristics, and being able to take risks, cut losses, expand your information network, ferret out ideas, and take recommendations.

- Ari Kiev