5 months ago ·
9 min read
Traders and investors analyze charts in order to better understand the current situation on the market. Applying known indicators and patterns to historical price data they try to forecast the future performance of an asset.
There is an abundance of advanced chart patterns that cover any edge case, and you can dive into this world with a bit (a lot) of experience under your belt. But first: What is the purpose of a chart?
A chart, when you see it on TV, mostly consists of a squiggly up-and-down line. But that doesn't help you understand the respective market at all. These very basic depictions of a price curve are mainly there to give you a rough idea of the price development over a long time period. To be able to more closely examine a chart, most traders turn to charting tools such as TradingView, in order to get very detailed and granular price data sourced from various crypto exchanges along with a set of tools to analyze these charts. This practice is commonly referred to as “technical analysis”.
We believe that you can develop an edge over the majority of crypto market participants by understanding a few very basic principles of technical analysis. In this article, we’ll therefore walk you through the most useful heuristics and commonly used terminology in order to provide a glimpse into the world of technical analysis.
Caveat: Technical analysis is not a science that can be blindly trusted. It can provide useful heuristics to make an educated guess where the market might be headed. Most traders use a combination of technical analysis and fundamental analysis to make informed bets.
The most common form to visualize the price on any asset is the “candle.” It conveys, at a first glance what exactly happened during the observed time period. A candle usually consists of three parts:
(If you wonder what “bullish” and “bearish” refer to, we encourage you to read up on “The A-Z of Trading”).
In most charting software (we use Tradingview), candles can be configured to range from “yearly” to as little as “one second”. Your configuration depends mostly on the horizon of your investment - if you want to trade bitcoin today, you need not worry about the next 5 minutes or days, you’re more interested in guesstimating where it might be headed over the next weeks, months or years.
Here are two representations of the bitcoin chart in two different configurations:
Each vertical candle represents the price development of seven consecutive trading days. Since the chart is mostly composed of green candles, we can infer that the price has risen all throughout, and that we're on our way to a new ATH (“all time high”).
Each vertical candle represents the price development of 30 to 31 consecutive days. You can see that in the period circled in both charts, the price action is displayed less detailed (ie “smoothed”) and does not distract from the overall view as much as in the weekly view. Increasing the interval of the candles can remove some “noise” that is irrelevant to your investing timeframe.
When looking at the chart of an asset the first time, it’s a good idea to zoom out and digest the complete history of prices the asset has traded at. You can then easily ascertain the relative performance of the coin in question. Most importantly, you can grasp where the respective highs and lows for an asset lie, if historically it is trading “rather high” or “rather low” in relation to recent prices. Additionally, you’ll be able to deduct areas of “resistance” and “support”.
Although bitcoin’s narrative of “lambo moon” tells us a story of ever increasing prices, in reality there have been numerous periods where price has either oscillated around a specific region or “chewed” at breaking above or below a certain number.
These levels are commonly referred to as “support” or “resistance”, depending on whether the price is above or below these levels. If the current price of a crypto asset is above a region around which the price has traded intensely, we refer to the region as a “support”. If it is trading below the line we label it as a “resistance”.
These lines tell us that around a certain price level a large number of market participants has in the past felt comfortable selling their asset (“resistance”) as it has reached a “high” price or buying the asset as it is historically not likely to become cheaper (“support”). They are mostly applied in the shape of a horizontal line that touches as many closing or opening prices as possible.
With very basic knowledge, one can attempt to make an educated guess whether the price is likely to meet this area again, and, if it does, how it could perform thereafter.
A basic example of a support- and resistance formation can be found in the monthly chart of Bitcoin starting end of 2017.
First, we mark the ATH from December 2017. A line extended from there (the top end of the wick of the December 2017 candle) will cut through to the present day without touching the price curve. This tells us the price level hasn’t been crossed and thus the line serves as a (weak) resistance.
Then, from the bodies of the December 2017 and January 2018 candles, we draw another parallel line. Notice that the line has a total of five touchpoints with no interference:
We can apply the same technique to the weekly chart of the same interval and come to different conclusions.
First, we mark the ATH from December 2017: A line extended from the top end of the wick of last week of 2017. This line “hangs free” until present day and has no further touchpoint. As the current price trades below this line, it serves as a (weak) resistance.
From the bodies of the candles (last week of December and first week of January), we draw a parallel line. Notice that the line has only three touchpoints:
This then puts the current price below both of these lines - they are resistance lines.
Interpretation: From looking at both charts, we can infer that:
short term (weekly), it might be difficult to reach a new all time high very soon (because of two resistance lines above the current price)
long term (monthly), we face only one resistance line (the ATH), and one support which, if established, could serve as a base for repeated recovery attacks on the ATH
From there you can make an informed decision. If you are a short-term investor, you might face the risk of both weekly resistances being confirmed: The price may drop, so you don’t buy. If you are a long-term investor, you could proceed with the buy and set a stop-loss at the support (automatically selling if the support price is reached).
A variant of the horizontal support or resistance is the “trend line”. It is, while also straight, applied at an angle across as many closing or opening prices as possible. It can equally serve as support or resistance, depending on the relative location in regards to the current price.
A perfect example would be the 2018 bear market (daily candles):
You can see that the price of bitcoin over the course of months has touched (“tested”) the $6000 mark without breaking below. In addition, we notice a tendency of the movements away from the $6000 price becoming weaker of time. To market participants, it became obvious that the price would either fall dramatically if it didn’t break the resistance, or move up sharply if the support held and the price moved outside of the trend line. The rest, as they say, is history.
Here are some things to consider when looking for trend lines:
Make sure most price movements happen within the desired price corridor you’re looking to observe.
Make sure the line is touched, not breached, by a majority of open/close prices in the timeframe you’re looking to observe.
The bigger the timeframe, the more meaningful the line.
More than one line can be applied to a chart, but don’t overdo it, you won’t see the forest for the trees.
Moving Averages are technical indicators used to smooth out the price data from volatile markets by creating a constantly updated average price. Moving averages are a good way to evaluate momentum, confirm trends and define support and resistance areas. There are two main types of moving averages: simple and exponential. Simple Moving Average (SMA) is calculated by taking the arithmetic mean of a given set of prices over a certain number of days. For example it can be a 20, 50, 100 or 200 day moving average. Exponential Moving Averages provide greater weight to the price on more recent days, making it more responsive to the most recent data points. For our purposes we will apply the SMA.
Essentially, Moving Averages filter out the “noise” when trying to interpret charts. Because it is a lagging indicator based on what happened in the past, it cannot be used to predict the price, but rather provides confirmation to an analysis.
Looking at the daily chart post-2017, we observe that the three Moving Averages:
We are looking for moments when the Moving Averages not only trend together, but when one MA is crossed by another MA of a smaller time frame. In particular, we are looking for “Golden Crosses”, which form between the 50 and the 100 as well as the 100 and the 200 MAs respectively, as they bear significant relevance statistically.
Towards the end of the time series, there’s a spectacular convergence of three “crosses'' that markets look for when analyzing moving averages.
(1) the 50MA crossing the 100MA: A “Golden Cross”, indicating that the price is rapidly climbing
(2) the 50MA crossing the 200MA.
(3) finally, the 100 MA crossing the 200MA: Another Golden Cross!
This second Golden Cross confirms our assumption from the previous Golden Cross.
Notice that at this point, while price has already recovered to pre-crash prices around the $6000 mark, there is still a massive upward trend that follows.
Here are some key points to take into account when observing Moving Averages:
The “longer” the MA the more significant the price resistance or support at that level
Crossing Moving Averages indicate a meaningful change in trajectory of the asset.
“Golden Cross” (a shorter Moving Average crossing the next-longer Moving Average from below to above) implies movement to the upside: The “newer” average prices are trending higher than the “older” average prices.
A “Death Cross” (a shorter Moving Average crossing the next-longer Moving Average from above to below) implies movement to the downside, ie. the “newer” average prices trend below the “older” average prices.
You don’t have to make a decision immediately after detecting a crossing of Moving Averages. If you are a long-term investor, you may wait for your assumptions to be confirmed, then make an informed decision.
Equipped with this knowledge, you should be able to read a basic chart, ascertain the key price levels of any coin, given it has decent volume and a long enough trading history to provide at least a handful of candles and enough track record to enable calculation of Moving Averages. But as the mantra goes: “DYOR”, and this will definitely help you to do your own research. Remember, time in the market beats timing the market, so don’t pay attention to very short-term price fluctuations. Instead, zoom out, take a step back and paint some lines!
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5 months ago ·
9 min read
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