Technical analysis is a critical part when it comes to trading, no matter you are a stock trader or a crypto trader, the study of historic price movements, patterns and other trading related data would able to help to identify trading opportunities and forecasting the direction of prices. Technical analysis has been widely used in stocks, futures, commodities, FX and other asset classes. In the era of blockchain, cryptocurrency traders have been adopting the old-world methods into the crypto space, while trying to develop some new kind of analytics tools which tailored for this emerging asset class.
This is one of the most used indicators in trading, is named after John Bollinger, an American asset manager and technical analyst. Bollinger Bands defined by a set of lines plotted two standard deviations (positively and negatively) away from a simple moving average (usually 20-SMA) of the security’s price. Because standard deviation is a measure of volatility, when the markets become more volatile the bands widen, therefore the greater the possibility of exiting a trade; during less volatile periods, the bands contract, that could be a potential sign of the increasing volatility, and could be an entry point of a trade.
Moreover, many traders believe when the prices move closer to the upper band, it could be overbought in the market. Conversely, when the prices move closer to the lower band, it indicates oversold in the market.
The following is a BTC/USDT daily chart with Bollinger Bands, it’s an example of how the bands predicted the price directions and indicated possible entry and exit points.
At the time of writing, the pair traded just merely below 12000, and it has already reached the upper band, meanwhile, momentum was relatively low, it suggests that the recent BTC rally could be running out of steam.
However, Bollinger Bands are just one of the many indicators to help traders to make decisions regarding market volatility and it is not a standalone system. Traders usually use it alongside other technical indicators in order to get a clearer picture and analysis.
This is a technical indicator that allows analysts to identify possible areas of support or resistance by using a set of special ratio, which based on Golden Ratio, a special number with unique properties in mathematics and geometry, and widely been seen in nature, art, and architecture.
The primary Fibonacci Retracement levels are 23.6%, 38.2%, 61.8% and 78.6%. 50% is also widely used by traders, however, it’s not an official Fibonacci ratio. So why these percentage numbers matter? Because they show how much of a prior move the price has retraced or corrected.
Have a look at the ETH/USDT daily chart with Fibonacci retracement levels. The three white boxes are examples of finding reference levels. The pair have been in range-trading since mid-July, and the support at around 200 seems strong, which is the 23.6% of the Fibonacci retracement in respect to the high and low. However, the pair has made two attempts to break the 38.2% level but unsuccessful, that considered a significate resistance.
Same as other indicators, traders should not solely rely on Fibonacci Retracement to set their stop loss or determine an entry point. Many more use the Fibonacci studies in conjunction with other forms of technical analysis.
The Relative Strength Index or RSI is a momentum indicator that measures the speed and change of price movements. It helps traders to evaluate whether the asset is overbought or oversold. The RSI reading is from 0 to 100. When the RSI value reaches 70 or above, the asset is considered overbought. When the RSI value drops to 30 or below, that indicates the asset could be oversold.
More importantly, the divergences of the RSI and the asset price could indicate a development of a possible new trend. For example, the BCH/USDT daily chart here. In April we have seen the pair range-traded between 250 to 325, however, the RSI produced an overbought reading and occurred a bearish divergence, and that followed by a price correction for about 2 weeks. The same thing happened again in May, anther bearish divergence occurred, that followed by a price correction in June.
There is a lot to explore in the field of technical analysis, hundreds of signals, patterns and indicators have been used by traders and analysts in the financial world. Technical studies enable traders to make wiser decisions and better prediction of future price movements based on historical data and statistics. On the other hand, fundamental analysis is just equally important during the process of making trade decisions. In the world of traditional finance, if the fundamental analysis is a study of the intrinsic value of a company, in the crypto space, that will be a process of finding out if a coin is over or undervalued. Investors will able to get a bigger and more complete picture when engaging their own fundamental and technical due diligence before investing or entering a trade.
Risk Warning: Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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