A beginner's guide to buy and sell digital currencies
Technical analysis
Technical analysis (TA) is a method of analyzing
past market data, primarily price and volume in order to forecast price action.
While there are a wide variety of TA indicators, ranging in complexity, that a
trader could use to analyze the market, here are some basic macro- and
micro-level tools.
Market structure and cycles
Just as traders can
spot patterns within hours, days and months, they can also find patterns over
years of fluctuating price action. There is a fundamental structure to the
market that makes it susceptible to certain behaviors.
The cycle can be
partitioned into four main parts: accumulation, mark-up, distribution and
decline. As the market moves between these phases, traders will continuously
adapt their positions by consolidating, retracing, or correcting as they deem
necessary.
The bull and the bear
are very different creatures and behave in opposition to one another within
shared environmental conditions. It is critical that a trader knows not only
under which role they fall but also which one is currently dominating the market.
Technical analysis is
necessary not only to position oneself within this ever-changing market but
also to actively navigate the ebbs and flows as they occur.
Chasing the whale
Price movements are
largely driven by “whales” — individuals or groups who have large funds with
which to trade. Some whales operate as “market makers,” setting bids and asking
on both sides of the market in order to create liquidity for an asset while
turning a profit in the process. Whales are present in virtually any market from
stocks and commodities to cryptocurrencies.
A cryptocurrency
trading strategy must be aware of the tools of the trade favoured by whales
such as their preferred TA indicators. Simply put, whales tend to know what
they’re doing. By anticipating the intentions of whales, a trader can work in
concert with these expert movers to turn a profit with their own strategy.
Psychological cycles
With a zoo full of
metaphors, it can be easy to forget that real people — for the most part — are
behind these trades and, as such, are subject to emotional behaviors that can
significantly affect the market.
This aspect of the market is represented in the classic chart “Psychology of a Market Cycle:”
While the bull/bear
framework is useful, the psychological cycle depicted above provides a more
detailed spectrum of market sentiment. While one of the first rules of trading
is to leave emotion at the door, the power of group mentality tends to take
hold. The rally from hope to euphoria is driven by FOMO — the fear of missing
out — from those who have yet positioned themselves in the market.
Navigating the valley
between euphoria and complacency is crucial to timing an exit before the bears
take hold and people panic sell. Here, it is important to factor in high-volume
price action, which can indicate the general momentum of the market. The “buy
low” philosophy is quite apparent, given that the best time to accumulate
within the market cycle is during the depression following a drastic drop-off
in price. The greater the risk, the greater the reward.
The challenge faced by
the serious trader is to not let emotion dictate their trading strategy amid
the deluge of hot takes and analysis by the media, chat rooms, or so-called
thought leaders. These markets are highly subject to manipulation by whales and
those that can affect the pulse of the market. Do your homework, and be
decisive in your cryptocurrency trading actions.
Basic tools
Being able to detect
patterns and cycles in the market is crucial for having clarity from the macro
perspective. Knowing where you are positioned in relation to the whole is
paramount. You want to be the experienced surfer who knows when the perfect
wave is about to arrive instead of paddling listlessly in the waters hoping for
something great to happen.
But, the micro
perspective is also crucial in determining your actual strategy. While there
are a vast number of TA indicators, we will only go over the most basic.
Support and resistance
Perhaps two of the most
widely used TA indicators under the terms “support” and “resistance” relate to
price barriers that tend to form in the market, preventing the price action
from going too far in a certain direction.
The support is the
price level where the downward trend tends to pause due to an influx of demand.
When prices decrease, traders tend to buy low, creating a support line.
Conversely, the resistance is the price level where the upward trend tends to
pause due to a sell-off.
Many cryptocurrency traders use support and resistance levels to bet on the direction of the price, adapting on the fly as the price level breaks through either its upper or lower bounds. Once traders identify the floor and ceiling, this provides a zone of activity in which traders can enter or exit positions. Buying at the floor and selling at the ceiling is the usual standard operating procedure.
If the price surpasses
these barriers in either direction, it gives an indication of the market’s
overall sentiment. This is an ongoing process, as new support and resistance
levels tend to form when the trend breaks through.
Trendlines
While the static
support and resistance barriers shown above are common tools used by traders,
the price action tends to trend higher or lower with barriers shifting over
time. A sequence of support and resistance levels can indicate a larger trend
in the market represented by a trendline.
When the market is trending upward, resistance levels begin to form, price action slows and the price is pulled back to the trendline. Cryptocurrency traders pay close attention to the support levels of an ascending trendline, as they indicate an area that helps prevent the price from dropping substantially lower. Likewise, in a downward trending market, traders will keep an eye on the sequence of declining peaks to connect them together into a trendline.
The core element is the
history of the market. The strength of any support or resistance levels and
their resulting trendlines increases as they reoccur over time. Hence, traders
will record these barriers to inform their ongoing trading strategy.
Round numbers
One influence on
support/resistance levels is the fixation on round-number price levels by
inexperienced or institutional investors. When a large number of trades center
around a nice round number — such as generally occurs with Bitcoin each time
its price approaches a figure that is evenly divisible by $10,000, for example
— it can be difficult for the price to surpass this point, creating a
resistance.
This frequent
occurrence is a testament to the fact that human traders are easily influenced
by their emotions and tend to resort to shortcuts. Certainly with Bitcoin, if a
certain price point is reached, it tends to produce an enthusiastic burst of
market action and anticipation.
Moving averages
With a market history of support/resistance levels and the resulting downward/upward trendlines, traders often smooth out this data to create a single visual line representation called the “moving average.”
The moving average
nicely traces the bottom support levels of an upward trend along with the peaks
of resistance throughout a downward trend. When analyzed with respect to
trading volume, the moving average provides a useful indicator of short-term
momentum.
Chart patterns
There are various ways
to chart the market and find patterns within it. One of the most common visual
representations of market price action is the “candlestick.” These candlestick
patterns present a sort of visual language for traders to anticipate possible
trends.
Candlestick charts originated in Japan in the 1700s as a method of assessing the way that traders’ emotions act as a strong influence on price action, beyond simple supply-and-demand economics. This visualization of the market is one of the most favoured by traders since it can encapsulate more information than the simpler line or bar charts. A candlestick chart features four price points: open, close, high and low.
How does this relate to
cryptocurrency trading? They are called candlesticks because of their
rectangular shape and the lines above and/or below that resemble a wick. The
wide portion of the candle is where the price either opened or closed,
depending on its colour. The wicks represent
the price range in which an asset is traded during that set period of the
candlestick. Candlesticks can encapsulate different timespans, from one minute
to one day and beyond, and show different patterns depending on the timeline
chosen.
If you want to learn more about Cryptocurrency Trading, feel free to
leave your valuable comments. We are happy to assist you. All the best for your
future.
(All the material in this article are only the views of
the author, and couldn’t be taken as “Financial Advice”)
To Be Continued..............
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