The Basics of Crypto Technical Analysis

Technical analysis provides traders and investors with detailed information that can be used to make more informed cryptocurrency trades — but it can get complicated quickly. Here’s everything you need to know about the basics of technical analysis. This guide will explain what technical analysis is and explore a number of popular technical analysis tools and indicators.

What is cryptocurrency technical analysis? 

There are many tools and techniques used by cryptocurrency traders to analyse market trends which can be overwhelming for beginners. Technical analysis (TA) is a practical approach to market analysis that aims to identify key trends within crypto markets in order to create efficient trading or investing strategies. 

Technical analysis refers to taking data from cryptocurrency markets and applying statistical analysis to it in order to create predictions of future price movement. Although this may sound both technical and difficult, when broken down it can be quite simple and fun!  

If you’re new to the cryptocurrency market, you’ll notice that most information regarding cryptocurrency prices is presented via charts and graphs. These charts provide crypto traders with the ability to implement technical analysis tools. When executed accurately and correctly, TA can potentially help traders predict whether the cryptocurrency market will be bullish or bearish, terms that are used to refer to a market that is trending up or down respectively. 

Why is technical analysis used?

Technical analysis focuses on studying the current and historical prices of an asset. It assumes that the price changes of an asset are not random but can instead be predicted by identifying trends over specific time periods. The core assumption of TA is that the price of any asset is determined by market sentiment. The tools used by traders and investors that leverage technical analysis are called technical indicators. These indicators can assist in identifying trends and provide insight into any future market movements based on these trends. 

Some well-known examples of indicators are simple moving averages, relative strength index (RSI), and Bollinger Bands. Traders and investors that use technical analysis typically present these indicators on past market data of the asset they are analysing. As useful as indicators can be, experienced traders often use multiple indicators together as this can generate much more reliable predictions.

Crypto market cycles

Advanced traders will also usually consider market cycles, which are long-term patterns that play out across all financial markets and often impact price movements.

Technical analysis vs. fundamental analysis 

Technical analysis is only concerned with the analysis and interpretations of patterns and trends from a quantitative perspective (i.e. price charts). Fundamental analysis, however, takes a broader scope, incorporating qualitative factors. 

Fundamental analysis, unlike technical analysis, assesses the future performance of an asset, based on a wide range of factors that include on-chain metrics that indicate the level of attention and engagement a cryptocurrency receives, the team behind a project, and broader industry health or competitors.  

Neither technical nor fundamental analysis is a superior means of analysing market behaviour. Technical analysis is more likely to be adopted by short-term traders, while fundamental analysis is more likely to be adopted by long-term investors. That said, many traders and investors use both fundamental and technical analysis when making investment decisions.  

Technical analysis basics 

TA is primarily concerned with identifying trends. Within the context of market analysis, trends are when assets move in a specific direction that is expected to continue. 

Trends within TA are generally classified into three directions — upward, downward, or sideways. When mapping trends on a chart using technical analysis, traders and investors use a combination of chart patterns and indicators. 

Chart patterns are formations created by mapping the movements of an asset over time on a price chart. Indicators are calculations based on the price or trading volume of an asset and are typically more complex than chart patterns. The first step in understanding crypto TA is learning how to read basic chart patterns and trend lines.  

Swyftx recommends TradingView to chart cryptocurrencies and test out your TA strategies. This powerful tool has a broad spectrum of technical analysis tools. The Swyftx crypto exchange even has TradingView charts integrated into its crypto trading platform!

Candlestick chart patterns 

Candlestick chart patterns take the form of green or red rectangles on a chart, with lines emerging from both the top and bottom — resembling a candlestick. Candlesticks provide traders and investors with instant perspective on the asset’s price movements within a specific period. 

Each rectangle, or candlestick, on a candlestick chart represents a specific time period. Charting tools allow technical analysts to alter this time period — traders typically select the time period they want to view, such as monthly, weekly, daily, four-hour, hourly, or even one minute. 

Candlesticks represent the difference in asset price over the time period selected. A green candle indicates a price increase, with the bottom of the candle representing the opening price of the time period and the top of the candle representing the close. Red candles represent declining prices, with the open at the top of the candle and the close at the bottom. 

The lines, emerging from the top or bottom of the candle, referred to as wicks, represent the highest price and lowest price of the asset during the time frame. 

Candlesticks provide traders and investors with insight into investor sentiment and can potentially be used to predict market movement. A long wick on the bottom of a candle, for example, may indicate that traders are purchasing an asset as prices fall. A long wick at the top of a candle, however, can indicate that a potential sell-off may occur due to traders taking profit.  

Trading volume 

Trading volume is another important metric that can be viewed via a cryptocurrency price chart. When assessing cryptocurrency markets, trading volume is typically displayed in columns along the bottom of the price chart.  

The height of each column indicates the level of volume, while the colour of each column indicates buying or selling pressure. Green volume bars indicate an increase in interest in the asset, as well as buying pressure. Red volume bars indicate a decrease in interest in the asset and selling pressure. 

Volume can provide traders and investors with insight into the momentum of price movements — high volume paired with an increase in price may indicate significant momentum in a price swing the continuation of an upward trend. 

It’s possible to combine multiple indicators. A significant increase in trading volume paired with a long wick at the top of a candlestick, for example, may indicate that the price of an asset is no longer being pushed upward and may enter a downward trend, potentially representing an exit point.  

Low trade volume, however, may indicate that the current price trend — either upward or downward — is unlikely to continue. Sudden significant spikes in volume may coincide with major announcements from a blockchain project or news updates that precede major price changes. 

Trend lines 

Trend lines are diagonal lines drawn on charts that connect relevant data points. Using trend lines, investors and traders are able to better visualise market trends and price movements. These lines are generally considered one of the most basic tools in technical analysis but they can also be very effective.  

Trend lines can be divided into two categories — uptrend lines, which are drawn from lower to higher chart positions, and downtrend lines, which are drawn from higher positions to lower positions.  

Both uptrend and downtrend lines are used to indicate points at which the price of an asset challenged a trend then returned to it. Technical analysis with trend lines focuses on extending these lines to predict future market movements.  

An upward trend line can represent an increase in demand and a decrease in supply, indicating a rise in buying force. Downward trendlines can indicate a decrease in price catalyzed by higher supply than demand. Trend lines are an essential tool used to identify support and resistance levels.  

Support and resistance levels 

Support and resistance levels are used to highlight specific data points on a price chart. To put it simply, this refers to when the price of an asset finds a level at which it is unable to breakthrough. The support level is when the price finds a floor and bounces upward, whereas resistance hits a ceiling and bounces downward.  

Traders and investors use support and resistance levels to reflect key price points that previously saw increased trading activity and market interest. Market psychology plays a key role in the placement of support and resistance levels — many traders may take note of the same support and resistance levels, which could cause market changes such as increased liquidity. 

Accurately identifying support and resistance levels can potentially provide traders and investors with a variety of trading opportunities. Should the price of an asset approach an area of support or resistance, this may present a buy signal (if approaching support level) or sell signal (if approaching resistance level). Alternatively, if the price breaks through the area of support or resistance and continues in the direction of the trend, investors could see this as an opportunity to buy or sell depending on the direction of the trend.  

Moving averages 

Cryptocurrency traders and investors that use technical analysis use a range of different metrics and indicators to identify and predict market trends. Checking candlestick trends, support and resistance levels, or volume can provide a general impression of current market trends, but it’s important to consider a wider range of information when creating robust trading strategies.  

Moving averages provide a greater level of insight by revealing trends across longer time frames, such as weeks or months. There are two commonly used types of moving averages — the simple moving average (SMA), and the exponential moving average (EMA). 

Simple moving average (SMA) 

The simple moving average displays the average closing price of an asset over a specific period of time. A simple moving average for a seven-day period, for example, will move up and down across a chart due to the change in close price for each day — this is why it’s referred to as a moving average. The simple moving average provides context across time within a market, allowing traders to eliminate volatility noise from within a 24-hour context and gain a deeper understanding of current market trends. 

Exponential moving average (EMA) 

The exponential moving average is slightly more complex. Rather than simply calculating the average close price across seven days, treating the closing price each day with the same importance, the exponential moving average assigns greater weight to closing price values closer in time to the current day.  

When calculating the exponential moving average of an asset, the most recent day is given more weight within the calculation than the day preceding it, with the first day in the time period assigned the least weight. 

Moving averages become important when determining resistance levels. If the daily closing price for an asset falls below the moving average, it could indicate resistance — prices lower than moving averages suggest traders are selling at a specific point. A daily closing price that exceeds the moving average, however, could indicate a bullish market.   

Relative strength index (RSI)

A relative strength index (RSI) is an indicator that applies mathematical formulas to pricing data in order to produce a reading that falls between 0 and 100. Using an RSI, it’s possible to gain insight into whether a coin is overbought or oversold — a reading of 100, for example, would indicate that an asset is overbought. 

The RSI is calculated by averaging the gains of an asset over a 14-day period and dividing it by the average losses. This then provides information on whether the asset is experiencing an extended period of gains — or losses. As a general rule, an asset can be considered oversold if the RSI falls below 30, and can be considered undersold if the RSI is above 70. 

Other technical analysis indicators 

Other more complex TA indicators include Bollinger Bands, consisting of two lateral bands surrounding a moving average. Bollinger Bands are used to measure market volatility, or, like an RSI, identify potentially overbought or oversold market conditions. 

It’s also possible to use complex indicators that rely on other simpler indicators to gain greater insight. A stochastic RSI, for example, integrates a standard RSI in a mathematical formula. Another complex technical analysis indicator, the moving average convergence divergence (MACD) indicator, relies on two EMAs as part of the calculation process.  

Wrap up 

Technical analysis is a powerful analysis and evaluation tool. When combined with in-depth fundamental analysis, it can provide traders and investors with highly actionable insight into present and future crypto market trends.  While the higher-level technical analysis may seem complex, understanding the basics of candlestick charts, support and resistance levels, and simple moving averages are useful tools. Learning cryptocurrency technical analysis can help traders forecast short-term price movements based on both market sentiment and historical trading data.

If you’d like to learn more about fundamental analysis or any of the specific terms used in this guide, head to Swyftx Learn where there are lots of great resources on a range of different cryptocurrency and trading topics!