Learn the Basics of Technical Analysis
What is a Candlestick?
A candlestick is a type of price chart used in technical analysis that displays the high, low, open, and close of an asset traded for a specific time period. Candlestick charting is commonly used to track the price action on any given traded asset. A candlestick is formed from price action during a specific limited amount of time. To explain further, every candlestick on a 1-minute chart shows the price action for 1 minute, while every candlestick on a 1-hour chart shows price action during a 1-hour period.
Support & Resistance
A level of support is a level where the price tends to find support as it falls. This means that the price is more likely to “bounce” off this level rather than break through it. However, once the price of the asset has broken down below the level of support by a substantial amount, it is likely to continue falling until meeting the closest support level.
A level of resistance is the exact opposite of a level of support. It is where the price tends to find resistance as it rises. This means that the price is more likely to “bounce” off this level rather than break through it. However, once the price of the asset has broken down below the level of support by a substantial amount, it is likely to continue falling until meeting the closest level of resistance.
Accumulation & Distribution
The accumulation area on a technical analysis chart is characterized mainly by sideways price movement, which is seen by technical analysts and investors as indicative of large institutional investors accumulating, or buying, a large number of shares during the market cycle bottom support levels.
The polar opposite of the accumulation area, is the distribution area. The distribution zone is also characterized mainly by sideways price movement and signals institutional investors distributing, or selling their shares. Being able to recognize whether a stock is in the accumulation zone or the distribution zone is crucial to success in investing. Obviously, (this is going to sound like a broken record) the goal is to buy in the accumulation area and sell in the distribution area.
In addition to the levels of support & resistance, trend lines are equally as important in technical analysis. Many of the principles that apply with support and resistance levels can be applied to trend lines as well. Trend lines are a visual representation of support and resistance in any time frame. Trend lines are easily recognizable linear lines that traders draw on candlestick charts to connect a series of prices together or show some data’s best fit. The resulting line is then used to give the trader a good idea of the direction in which an investment’s value might move.
A trend line is a linear line drawn over pivot points, high or low, to show the prevailing direction of the share’s price. Trend lines can be identified as either an uptrend or a downtrend.
Fibonacci Extension Levels
Fibonacci extensions can be highly utilized in different trading strategies and trading styles. These extensions can validate significant support and resistance levels as well as find potential reversal points and trend reversal areas. A combination of support and resistance levels with the Fibonacci extension tool can greatly help traders elevate their game and increase their consistency.
As Fibonacci extensions can be used on all and any time frames, a convergence of different extensions on different time frames on the same key level can make that extension a very crucial and important area. Extensions can be drawn out on the chart by simply using the Fibonacci Extension indicator and in this next section I’m going to breakdown how to analyze certain Fibonacci levels.
In order to consistently make money in the markets, traders need to learn how to identify an underlying trend and trade around it accordingly. The two primary variables for technical analysts are the time frames considered and the particular technical indicators that a trader chooses to utilize. A time frame refers to the amount of time that a trend lasts for in a market, which can be identified and used by traders.
The time frame an investor or technical analyst selects to use to make informed trading decisions is generally determined by that individual trader’s personality and trading style. Day traders, traders who open and close positions within a single trading day, tend to favor analyzing price movements on charts with smaller time frames, such as but not limited to: 5-minute (5m), 15-minute (15m), and 1-hour (1H). Long-term traders and investors who hold market positions for a significant period of time are more inclined to analyze the market using higher time frames, such as: 4-hour (4H), daily (1D), weekly (1W), and the monthly chart (1M).
A profit target is a predetermined point at which an investor will exit a trade in a profitable position. Also called take profit levels, they are part of many trading strategies that investors and technical traders use to manage risk. Choosing a profit target is a key factor and just as important as the entry price in your trading strategy. You need to be able to determine a suitable profit target for your trading – one that gives you a realistic profit target, but also gives you a sensible risk to reward.
Establishing a set position on where to get out before even entering a trade and calculating the ratio of profits compared to the stop-loss is called the risk/reward ratio. Polar opposite of a profit target, the stop-loss determines the potential loss on a trade. In an ideal situation, the reward potential should greatly outweigh the risk at a factor of 1:4 (risk to reward).
Market cycles are not only common for Bitcoin and cryptocurrencies, but also found regularly in traditional stock markets. In the US Stock market, such cycles happen over longer periods of time on average than Bitcoin and cryptocurrencies.
The previous famous lows of the US Stock Market were in the years 2000, 2008, and 2020. These three years in the market became globally know as the dot-com bubble, the sub-prime real estate crash, and the COVID-19 pandemic financial crisis.
As it can clearly be seen, the saying that “markets take the stairs up and the elevator down” is true for any other financial market or instrument and is especially evident in cryptocurrencies. The major differentiating factor between crypto and the traditional US stock market is simply volatility. While a sharp daily movement of NASDAQ is considered to be 1-2%, Bitcoin, which is considered the most stable cryptocurrency and the base asset, can fluctuate more than 20% in a single day.
Volume in technical analysis refers to the number of units or shares of an asset that have been traded in a given time period. Volume is used by technical analysts and investors as an additional key metric to make the best trading decisions. Having a good understanding of the entire market’s trading volume versus the volume of a single holding can be one important comparison that helps technical analysts to discern volume trends.
High volumes of trading in a specific period can offer a lot to an investors’ outlook on the market or individual asset. A significant price increase along with a significant volume increase, for example, could be a valid sign of a continued bullish price action or even a bullish reversal to the upside. On the other hand, a significant decrease in price with a significant volume increase can point to a continued bearish price action or even a bullish reversal to the upside.
In the world of finance, the concept of capitulation is brought up into conversation when an investor is no longer interested in making a valid effort to regain lost profits due to the declining price of the underlying asset on his position. Though there is no specific time frame set for capitulation, it commonly takes place when there is high volatility in the markets as the asset is sliding downwards. Usually, the bear market influences investors to capitulate or make a forced sale.
Once the capitulation is underway, the smart money investors are jumping up and down for the opportunity to purchase their favorite assets at a discounted price. However, the hard truth here is that these capitulations in the market are the result of the psychological pressures borne by day traders and market makers liquidating their position. Investors usually cannot figure out that they’re in a stage of capitulation until the market is already on the reversal to the local highs.
Relative Strength Index (RSI)
The relative strength index (RSI) is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought and oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator and can have a reading from 0 to 100, originally developed by the famed mechanical engineer turned technical analyst, J. Welles Wilder.
Traditional usage of the RSI is that values of 70 or above indicate that an asset is becoming overbought or overvalued and may be primed for a trend reversal or pullback. On the other hand, an RSI reading of 30 or below indicates the asset or security is oversold or undervalued in price.
The moving average (MA) is a simple technical analysis indicator that smooths out previous price data by creating a constantly updated average price. The average is taken over a specific trading period, depending on whatever time period the trader chooses. It is called a “moving” average because it is continually recalculated based on the latest price data according to the MA’s time frame. Moving average strategies are popular and can be tailored to any time frame, suiting both long-term investors and short-term traders.
Moving averages are generally calculated to identify the trend direction of an asset to determine its support and resistance levels. Moving averages are a trend-following, otherwise known as lagging, indicator because it is based off of historical price data. The longer the time period for the moving average, the greater the lag. So in saying this, a 200-day moving average will have a much greater degree of lag than a 20-day moving average because it contains all of the historical price data for the entire past 200 days.
Moving Average Divergence Convergence (MACD)
The Moving Average Convergence / Divergence (MACD) indicator is a momentum oscillator popularly used by day traders and swing traders to trade trends. Although the MACD is an oscillator, it is not typically used to identify overbought or oversold conditions. The MACD appears on the chart as two lines which oscillate without boundaries, which gives traders a similar feel to a two/three moving average charting system. If you would like to try the latter on your chart analysis, click ‘Easy Loot Golden / Death Cross’ and favorite this in order to add it to your TradingView list of indicators.
The Moving Average Convergence / Divergence (MACD) is considered bullish when the line is crossing above zero, while bearishness is when the line is crossing below zero. Let’s move onto at this next section where we explain the math formula behind the pretty indicator.