How to Trade Cryptocurrencies: Technical Analysis Made Simple
Technical Analysis (TA) is the process of trying to predict the future outcome of an asset, based on the history, pattern and formation on the graph. Alongside fundamental analysis (Which can be found in the Wholistic Coin Analysis section of ‘The Cryptocurrency Handbook’, or here when you sign up to CMS Prime), Technical Analysis is being utilized by trading professionals all over the globe.
Keeping it as simple as possible, here are the definitions of a few words you should know, which will help you grasp the patterns below:
When a digital asset is on an upward trajectory (ascending in price).
When a digital asset is on a downward trajectory (descending in price).
A price you set to automatically sell an asset, if it falls below a certain price, essentially acting as a safety net to close a trade if the price suddenly drops, to minimise losses.
A breakout is the movement of an asset which pushes through a previously identified line of resistance, usually followed by a large trading volume and increased volatility.
Technical Analysis Patterns
Cup & Handle
The cup and handle can be one of the easiest formations to recognise, due to the large U shape, followed by a slight downward drift just afterwards. This is a bullish pattern that usually indicates a rise about to happen, as you can see by the picture above.
A double top is a bearish pattern which indicates that there is a strong resistance at the top level, which the price can not seem to break through. A double top usually indicates that the price will drop shortly afterwards.
A double bottom is a bullish crypto asset formation, showing a strong support line that the price bounces off. After the second bounce, it usually ascends higher, leading to an upward push.
The ascending triangle is a bullish formation can be recognised by the higher lows, with a top line which seems to stay the same. If the trend breaks through the upper triangle line, then there will be a breakout upwards.
If the price does not go above the top line of the triangle, there is a chance that it can fall downwards (about the size of the left side of the triangle)
A descending triangle is where the highs get lower but the bottom support stays the same. If price falls below the support line at the bottom of the triangle, there is a high chance that the price will fall lower.
If the price does not fall below the bottom line of the triangle, there is a chance that it can break out upwards (about the size of the left side of the triangle)
A symmetrical triangle can indicate a breakout either way, depending on which side of the triangle it breaks through first.
Head and Shoulders
A head and shoulders formation usually leads to a reversal of the trend that was taking place prior to the formation occuring. For a head and shoulders formation, it usually manifests after an upward trend which will then lead to a downward trend, whereby an Inverse head and shoulders, which looks like the opposite way round (see photo below), generally indicates that the market will turn bullish, usually forming after a downward trend.
Flags and Pennants
A flag or pennant formation usually leads to the continuation of the prior trend; if it was bullish, it will likely continue so, and vice versa.
Always set a stop loss
Nearly every time you hear of traders being “cleaned out” with one trade, it’s usually due to one factor; not setting a stop loss.
The graphs don’t lie, so if you use the formations here to help you with your trading, you will have a higher probability of success when executing your trades.The stoploss will be of great benefit to you because if a price breaks a certain pattern and does not go the way you want it to, it automatically takes you out of the trade before too much damage is done.
Don't buy the green candle
When you see a spike in price upwards, it can be tempting to FOMO (Fear of Missing Out) and enter the trade on a high, expecting it to go higher. When there is a breakout or the price spikes, there is a good chance that the price will come back down.
This can be one of the easiest ways to lose a large chunk of your money, quite easily. With variables such as pump n’ dumpers (who artificially pump up the price of a coin so others buy in before they sell there positions) or momentum traders (who like to take advantage of large trading volumes), one should usually enter a trade on a red candlestick (when the price has dropped and is on a dip).
Prices fluctuate every day so remember it is not the last day on earth to enter in on a position, unless they have a partnership with Jesus himself on the table.
Research is critical to your trading success
Even if it is a quick Reddit or social media check-in, it is important to make sure that there is no news which can play a dramatic role in the price fluctuations of a cryptocurrency that day.
If a price has dropped and you think, “it’s a perfect time to enter into a position”, but you haven’t checked to see that there has been a hack on a reputable exchange which has lead to a load of said crypto asset to be stolen, you could lose a substantial amount in the downward movement until it hits the bottom.
The only way to know if something is happening around the digital asset which you want to enter is to open Google (or Brave Browser, or the search engine of your choice), and search for daily news in regards to the coin you want to trade.
Keep up to date with cryptocurrency roadmaps
One of the main reasons why trading cryptocurrencies can be seen as advantageous over Forex, is that there are so many more variables which come into play, that if you keep up-to-date and well researched, should be in good standing when trying to determine the movement of a cryptocurrency in the market.
You should be planning in advance, looking when the digital asset mainnets / other important milestones on their roadmap are coming into play. You will usually see a steady rise up of price until a event or roadmap milestone, then a drop in price, then a gradual rise again or a sudden spike which goes even higher than the previous price.
Timing is important in the crypto space so make sure that you keep an eye on events, and keep in mind many traders follow the rule, “buy the rumour, sell the news”.
Only trade with coins that you believe in
It can be tempting to trade with ‘sh*t coins’, due to their volatility and potential for massive profits if they get pumped, however you do not want to be left with bags of a useless currency.
Time is on our side in this era of digital assets; the more time that passes, the closer we are to an influx of institutional money flowing into the market, turning it into a 3.5 trillion dollar industry, up around 10x. What this means is that you want to be holding, or trading high (intrinsic) value cryptocurrencies because even if the price was to drop, you know that you haven’t actually lost money, until you sell.
So trading or holding valuable digital assets is like riding the current down the stream on a canoe; whether you paddle (day trade) or just sit there (HODL), you should find your way to good profits down the stream, paddling will just get you there faster.