How To Do Bitcoin Technical Analysis

Muhammad Naeem

Blogger

Investing in Bitcoin, a widely recognized cryptocurrency requires a grasp of its technical analysis. Without technical analysis, trading in cryptocurrencies becomes risky based purely on speculation. Price prediction in trading requires calculations. Relying solely on intuition or guesswork to make a buy or sell order transforms trading into a risky game of chance. Technical analysis is a crucial tool used by traders to gain insight into the market's activity.

Why Should Beginners Start with Bitcoin?

Navigating the world of blockchain and cryptocurrency can be challenging for those who are new to it, as it can be difficult to differentiate credible cryptocurrencies from unreliable ones. In recent times, the emergence of several "meme coins" like Dogecoin, Shiba Inu, and Poocoin has has led to significant financial losses for inexperienced investors. These cryptocurrencies have gained popularity but can be risky investments. Bitcoin is a more secure investment option, if not the most secure, among cryptocurrencies. It has the distinction of being the first cryptocurrency with a deflationary structure. Here are further reasons to trust Bitcoin:

• Most decentralized cryptocurrency • Deflationary token • Publicly available whitepaper • Proof of Work (PoW) mechanism • Crystal clear tokenomics

An Overview of Technical Analysis

In the world of Bitcoin investing, there are two main types of investors:

1. HODLers purchase Bitcoin to hold it for several years without selling.

2. Traders buy Bitcoin and quickly sell for a profit.

To grow your money more quickly through Bitcoin investing, it's essential to master technical analysis.

Technical analysis involves studying past price patterns and using technical indicators to analyze market charts and predict future price movements. This concept applies to any market, including cryptocurrencies like Bitcoin (BTC). When performed correctly, technical analysis allows for accurate prediction of Bitcoin price lows and highs across various time frames. This knowledge can enable informed, data-based decisions to buy Bitcoin at favorable prices and sell for a profit. What is technical analysis and what tools and indicators are required to perform it?

What Exactly Is Technical Analysis?

Technical analysis involves using mathematical indicators to analyze statistical trends and make predictions about future price movements in the cryptocurrency market. This is done by examining past price and volume data to gain insight into market behavior and predict how it will impact future price trends. Technical analysis techniques assess cryptocurrency markets and spot trading opportunities through charted price patterns and trends, since a cryptocurrency's past performance and price movements can be valuable indicators of future price and market activity.

Three Fundamental Assumptions Behind Technical Analysis

This section will briefly overview the three assumptions underlying technical analysis.

1. The market reflects all information in its price

The "Market Discounts Itself" assumption states that all information that could impact a cryptocurrency's price is reflected in its current price. This means that a trader doesn't need to consider external factors to understand a cryptocurrency's price movements, as they are all represented in the chart. For instance, if you observe a cryptocurrency's price dropping, the technical information on the chart, such as the candlestick pattern and the magnitude of the price decline, can provide insight into whether or not it's a good time to invest in the coin.

2. Price Changes in a Trend

This assumption states that price movements in crypto markets exhibit patterns and trends, even amidst seemingly random fluctuations.

Technical analysis uses this idea to identify the direction of price movements, indicated by green and red candlesticks, and to predict future price trends. The trend could be upward, downward, or sideways, and future price movements are more likely to follow an established trend.

3. History Repeats Itself

The crypto market has a repetitive nature and by studying past patterns, you can make predictions about future market movements. Market participants tend to react consistently to market events, and even older chart patterns remain relevant as they may repeat themselves in the future.

Six Fundamental Tools and Indicators for Technical Analysis

Technical analysis in cryptocurrency trading often utilizes the following six tools and indicators.

1. Candlestick Chart

Candlestick charts are a popular tool for technical analysis in cryptocurrency trading as they provide more information about price changes. Each candlestick displays the price movement over a specified time frame, such as four hours. Candlesticks are made up of a body and wicks, where the body can be green to indicate an increase or red to indicate a price decrease. A green candlestick means the closing price was higher than the opening price, while a red candlestick indicates that the closing price was lower than the opening price.

The bottom represents the initial price, while the top represents the closing price. The candle's wick represents the high and low prices within the specified time frame, with the top wick showing the highest price and the bottom wick showing the lowest price.

2. Support and Resistance

Support and resistance levels are crucial indicators in technical analysis, they refer to specific price points that are difficult for the market to break through. Support levels are the points where prices stop falling and start to rise again, while resistance levels are the points where prices stop rising and start to fall. Support acts as a floor for asset prices and resistance acts as a ceiling, making it difficult for prices to move beyond these levels.

By determining support and resistance levels, you can make market price predictions. The resistance level is where a potential upward trend may stall and the price could start to decrease, while the support level is a point where a potential downward trend may reverse and the price could start to rise again.

3. Trend Lines

Trend lines are used to identify potential trends in the market, which can take various forms. By connecting various high and low price points with a single line, traders can draw out more intricate patterns. The more the price points connect with the line, the stronger the trend.

4. Moving Average

The moving average indicator helps traders monitor the price trend by computing the average of past prices of a cryptocurrency over a defined time frame. By adjusting the period, traders can generate relevant signals for real-time trading analysis.

The two most common types of moving averages are the simple moving average, which takes the average of all prices over a set period, and the exponential moving average, which gives more weight to recent prices while ignoring older prices. The most commonly used moving averages are 10, 20, 30, 50, 100, and 200-day moving averages.

5. Relative Strength Index (RSI)

The Relative Strength Index (RSI) is an oscillatory indicator that helps to determine whether an asset is overbought or oversold. The RSI oscillates between 0 and 100, with a value below 30 indicating that the asset is oversold, and a value above 70 indicating that it is overbought. A low RSI reading can be interpreted as a potential buy opportunity, while a high RSI reading signals a potential sell opportunity.

6. Bollinger Bands

The Bollinger Bands indicator is used to gauge the price movements of assets by measuring the price relative to a moving average and adding/subtracting a standard deviation. If the market price is above the upper band, it's considered overbought, and if it's below the lower band, it's considered oversold. This indicator usually uses a 20-day simple moving average and calculates the standard deviation from it.

Technical Analysis Limitations

Critics of technical analysis argue that it is inaccurate because past patterns do not always repeat themselves exactly. They believe that price patterns are not very useful. Additionally, technical analysis produces inconsistent results and only works in some cases. Another limitation of technical analysis is that it focuses only on chart patterns and market trends and ignores factors like the workings of the crypto community or other fundamental factors that influence the price. The technical analysis becomes meaningful and informative only when the market moves in a certain way and cannot predict movements that require analysis of fundamental background information.

Conclusion

Using technical tools and indicators can enhance your cryptocurrency trading strategy. Many traders rely solely on technical analysis, while others believe in a combination of technical technical and fundamental analysis. A more balanced approach to trading would be to incorporate both methods. By combining technical and fundamental analysis, traders can get a better understanding of the market, both in terms of short-term trends and long-term investment strategies.

Technical analysis provides information on short-term market trends, while fundamental analysis gives insights into the underlying factors that drive market sentiment, both in the short term and long term. This combination is considered to provide more comprehensive and effective results in trading.