If someone had invested USD5 in Bitcoin back in April 2011, s/he could have become reach enough today to buy a 2-bedroom condominium in New Jersey, USA. The sapling of USD5 would have become a banyan tree of USD189,685 with the increase in the value of Bitcoin. It’s not a fantasy, but a reality and the new normal of the crypto trading world.
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Bitcoin and cryptos have become the talk of the town, and that’s not without a reason. The above Statista graph supports the example we discussed in the beginning well. Bitcoin has scaled unprecedented height, and there is no limit to it. If you are a beginner but want to invest intelligently, here is a technical analysis on bitcoin or crypto trading in general.
What is Technical Analysis?
The technical analysis involves establishing a correlation between trends and the current market sentiments and then making a projection on the price action for the security (stock, bond, commodity, cryptocurrency, or something else) to make a profit from the trade.
The technical analysis may not be as simple as it sounds, particularly for a beginner. PCEX Member, the leading cryptocurrency exchange platform in India, provides here a simple explanation starting from its beginning, i.e., the Dow Theory.
What are the Four Pillars of the Dow Theory?
Asset Price and Underlying Factors
The price movement of an asset – whether up or down – is a manifestation of the underlying factors like levels of demand, market-moving news, regulation, etc.
Price Moves Aren’t Totally Random
The price movement becomes a trend – short or long – when it’s driven by sentiment. The movement of the asset’s price continues in a particular direction till the time it’s overtaken by an opposite momentum, governed by opposite sentiment.
Descriptive Analysis Dominates Over Diagnostic Analysis
In technical analysis, descriptive analysis is more important than diagnostic analysis, i.e., the investors or traders are more interested in the outcomes than in the underlying factors.
History Tends to Repeat
Taking lessons from the past is human psychology. Taking clues from the past profit or loss incident in trading, investors are more likely to act in the current, i.e., repeat or not to repeat a particular action. This is general human psychology that brings volatility as well as stability in the market.
What Information Do Bitcoin or Crypto Investors Need for Technical Analysis?
- Trend
Based on the type of BTC or crypto trading option you choose – Spot or Futures, take a look at the rise or fall in the value of Bitcoin or the particular currency. The opportunities or risks are hidden in the volatility of the price rather than in its stability. Trends are also important even when you are trying to make gain or avoid risk using some short straddle or long straddle hedging technique. The quantity and quality of data matters.
PCEX Member provides historical as well as live trends. Depending upon where you are investing, and what’s the type of market, you can find the respective chart showing the volatility. Some experts also recommend using candlestick charts as below to collect insights.
Understanding the Chart
Candlestick charts guide traders to determine possible price movement based on past patterns. The four points are described below for your reference.
- Open — The first recorded trading price of the asset within that particular timeframe.
- High — The highest recorded trading price of the asset within that particular timeframe.
- Low — The lowest recorded trading price of the asset within that particular timeframe.
- Close — The last recorded trading price of the asset within that particular timeframe.
2. Moving Average
Moving average is an important tool of technical analysis. What’s it? Moving average is an average of the price fluctuation over a period of time. It distributes the bidirectional averages over a period of time, say one week, fortnight, month, or year.
The below example will make it easier for you. Suppose the bitcoin’s price changed or moved over a 5-day period as follows:
- Monday: +10%
- Tuesday: -15%
- Wednesday: +25%
- Thursday: -8%
- Friday: -20%
The average of the moves comes out to be -1.6. So, this is the moving average of bitcoin price over the 5-day period, and depending upon it, the investors build up a narrative that the price is to decline. Now, depending upon their psychology and future anticipation– bullish or bearish, they may sell or buy the asset. Selling would incur a loss as the price is declining while making a purchase would fetch a profit.
3) Support and Resistance
At support level, buyers are bullish about the asset’s price inflation. The number of buyers outnumbers the number of sellers, and a floor (support) is created and the bid price goes up. The support level prevents steep declines. The momentum shifts back in a bullish direction.
The resistance level is just the opposite. It leads to a negative sentiment in the buyers. They start believing that the price will fall as the supply (selling volume or number of sellers) is high at resistance and the demand (buying volume or buyers) is low. Setting buy orders around the support price and sell orders around resistance, you can make some easy profits. However, you should be on alert about the price breach at support and resistance level. It marks the beginning of a new trend that is just opposite of the one that prevails.
4) Decoding Trading Volume (Bull Trap)
The trade volume provides an important clue about the underlying current. Volume can be an indication for the number of traders participating in the particular pair of asset trading. High volume signals a high conviction price trend where more traders are either buying or selling at the same time, while low volume indicates an opposite trend.
It’s important to understand how bitcoin’s price and volume correlate. Let’s suppose the bitcoin’s price dropped from USD10,000 to USD1,000. There can be two factors, genuine and apparent. The genuine one doesn’t need an explanation. Let’s pick up the other one. A high volume may signal there is a high probability of a reversing price trend, i.e., the price may move up. When there is a sudden drop in price, new investors who do not have much understanding of the dynamics end up selling their assets out of fear. What has caused a sudden drop? It might have been an act of some small number of big investors to influence the psychology of others and make them sell their assets at a low price that they can buy and make a profit when the market becomes normal. It may also work in the opposite direction, where the big investors buy a large number of assets to inflate the price first and then sell it to lock in the profit margin. This trick is called a “bull trap”.
Hope the above technical analysis was helpful. Drop your comments, or concerns if any!
