Technical Analysis for Crypto: Getting Started

Gianluca Lombardi, 7 min read
Last Updated: 4 November, 2023

A trader using Technical Analysis for Crypto

Certain investors lean towards a long-term approach, maintaining their investments with the expectation of seeing them grow over time. Conversely, a number of traders actively engage in the market, employing technical analysis as their compass to uncover the successful crypto trading prospects.

At its core, technical analysis is an examination of past market figures and price fluctuations to forecast the trajectory of future prices. It operates under the premise that the current sentiment in the market manifests itself through established price trends and discernible chart configurations.

This introductory guide is designed to assist you through the essential principles and instruments pivotal to crypto technical analysis. Gaining proficiency in these will significantly refine your trading methodologies.

Overview of Technical Analysis for Bitcoin and Crypto

Technical analysis utilizes various tools and indicators to analyze market conditions and identify trends and patterns. Some of the key things traders look at include:

  • Price charts – These visually show price movement over time. Traders look for trends, patterns, support/resistance levels, volume changes and more in the charts.
  • Indicators – Oscillators, moving averages, and other indicators help traders confirm trends, overbought/oversold conditions, momentum shifts and potential reversal points.
  • Volume – Trading volume indicates market interest and whether a trend/movement has strong or weak backing. High volume points to a significant movement while low volume suggests a reversal.

The goal is to use these tools to forecast where prices are heading next and pinpoint optimal entry and exit points. Technical analysis assumes historical trends and patterns will continue into the future.

Explore more concepts and indicators crypto traders utilize.

Support and Resistance Levels – A Must for Traders

Support and resistance represent key price levels where downtrends tend to pause/reverse (support) and uptrends stall/reverse (resistance). Traders watch these levels closely to spot potential entries and exits.

Support is formed when downtrending prices halt and reverse at a particular level multiple times as buyers enter the market. This area attracts more buyers as many view it as an optimal price to get in.

Resistance occurs when uptrending prices stall and reverse multiple times at the same level as supply overwhelms demand. This price attracts sellers looking to exit their positions.

Ideally, traders look to buy cryptocurrency near identifiable areas of support and sell them at or near resistance. Support and resistance levels can form on any time frame (1 min, 5 min, 1 hour, etc). The more often a level holds, the more significant it becomes.

These dynamic levels tend to switch roles once broken. Previous resistance becomes support and vice versa. For example, if an uptrend breaks through a key resistance level, that level often morphs into strong support going forward.

Paying attention to support and resistance is critical for spotting potential trend reversals. A break below established support signals potential weakness and downside ahead. Conversely, breaking well above resistance indicates shifting momentum to the upside.

Trend Lines

Drawing trend lines connects a series of highs or lows to show the prevailing direction of price action. This helps traders spot the emergence of new trends or reversals. The key is identifying multiple touch points along a trend line – the more the better.

Uptrend lines connect a series of rising lows as prices stair step higher. The trend line acts as support until broken.

Downtrend lines connect descending highs as prices continue moving lower. This acts as resistance until breached.

Trend lines don’t always fit perfectly. Instead, they show the general direction prices are trending overall. Traders look to buy on pullbacks down to the trend line in uptrends or short near the trendline in downtrends anticipating further continuation.

A break above or below the trend line signals a potential trend reversal. Technical traders take special note when price breaks major long term trend lines indicating a shift in the prevailing trend.

Crypto Chart Patterns

Certain chart patterns emerge repeatedly providing insights into market psychology. Recognizing these patterns forms the basis for pattern recognition analysis.

Let’s examine some of the most common chart patterns crypto traders watch for.

Flags & Pennants – These compact patterns signal a brief pause in a strong uptrend or downtrend. A flag shape consists of a rectangular tightening trading range while pennants taper to a point.

The pattern represents a period of consolidation before prevailing trend resumes. Traders watch for pennant and flag breakouts for new entries in the direction of the prior trend.

Wedges – Wedges signal a transition from an uptrend to a downtrend or vice versa. These form as prices get compressed into a narrower range before ultimately breaking out.

Ascending wedges show lower highs and higher lows as buyers lose control. Descending wedges feature higher highs and lower lows as sellers lose steam. Wedge breakouts hint at potential reversals ahead.

Channels – Channels consist of an upper and lower price boundary as prices oscillate between support and resistance lines. Channels depict rangebound action and work well for short term swing trading.

Breakouts above resistance or breakdowns below support signal the potential end of a channel as buyers/sellers take control. Traders play bounces along channel lines or trade the breakout expecting further momentum.

Cup & Handle – This popular pattern forms a rounding bottom base (cup) followed by a slight pullback (handle). It indicates shifting momentum as buyers regain control after a downtrend.

Cup & handle breakouts above prior resistance provides favorable entry points and upside profit targets. Targets based on the pattern’s depth match the cup’s high with breakout price.

Head & Shoulders – This reversal pattern forms two swing highs (shoulders) separated by a higher peak (head). It shows waning momentum where prior support becomes resistance.

H&S neckline breakouts signal potential reversals as upside momentum stalls. Measured targets based on pattern height help set exits. The inverse head & shoulders reversal sees upside breakouts.

These are just a few of the common chart patterns crypto traders watch for. Mastering pattern recognition takes screen time and experience. Keep analyzing charts to sharpen your skills.

Read this to go deeper – charts and candlesticks explained in detailed.

Key Crypto Trading Technical Indicators

Indicators add additional context to the price action shown on the charts. Let’s explore some of the most popular technical indicators used in crypto trading.

Moving Averages (MA) – MAs smooth price action and help identify prevailing trends. The longer the time period, the more smoothing applied to the price action.

  • Simple moving averages (SMA) apply equal weighting to all data points within the period.
  • Exponential moving averages (EMA) add more weight to recent prices for faster responsiveness.

Traders look to buy when price crosses above the moving average and sell when it crosses below. Moving average crossovers can signal shifts in momentum.

Relative Strength Index (RSI) – RSI measures the size and speed of recent price changes to evaluate overbought or oversold conditions. It oscillates between 0 and 100.

  • Readings above 70 indicate overbought conditions where prices advanced too far too fast.
  • Readings below 30 signal oversold conditions setting up mean reversion bounces.

Traders often look for reversals when RSI reaches extremes. For example, oversold RSI levels help identify potential support zones and areas to buy cheaper.

Bollinger Bands (BB) – BBs plot standard deviation bands above and below a simple moving average. Wider bands indicate higher volatility and uncertainty.

During uptrends, look to buy when price pulls back to the lower band. In downtrends, look to short at the upper band. The squeeze and expansion of bands also reveals shifts in volatility.

Moving Average Convergence Divergence (MACD) – The MACD subtracts a 26-period EMA from a 12-period EMA to identify changing momentum through crossovers and divergence.

  • Bullish crossovers occur when the MACD line crosses above the signal line hinting upside momentum.
  • Bearish crossovers signal downside momentum ahead as the MACD line crosses below the signal line.

Stochastic Oscillator – This momentum indicator shows overbought/oversold levels within the range of 0 to 100. It confirms trend strength or weakness for potential reversals.

  • Readings above 80 indicate overbought conditions while levels below 20 signal oversold conditions.
  • Bullish crossovers occur when the fast line crosses above the slow line.
  • Bearish crossovers happen when the fast line crosses below the slow line.

These represent just a few of the many indicators crypto traders utilize. Combine indicators with other analysis to improve trading accuracy. Never rely on indicators alone.

trader applying technical analysis

Applying Technical Analysis in Your Cryptocurrency Trading

Now that you understand the key concepts and tools, here are some tips for applying technical analysis to crypto trading:

  • Start on longer time frames – Begin analysis on the daily or weekly charts to understand the overall trend and key levels. Then drill down to shorter timeframes.
  • Identify support/resistance – Spot potential support and resistance zones that have formed on multiple time frames. These often coincide with psychological price milestones ($10k, $20k for Bitcoin).
  • Draw trend lines – Connect swing highs and lows to spot uptrends and downtrends. Look for trend line breaks signaling potential reversals.
  • Utilize indicators – Apply indicators like moving averages, RSI, MACD etc to confirm trend direction and overbought/oversold extremes.
  • Watch volume – Volume indicates power behind trends and breakouts. Rallies on increasing volume have more conviction than low volume surges.
  • Trade the patterns – Keep developing your pattern recognition skills to trade chart pattern breakouts and breakdowns.
  • Set risk/reward – Use defined support/resistance levels to set stop losses and profit targets before entering trades. This defines your risk vs. reward.

Proper chart analysis helps traders objectively identify high probability setups. Combining technicals with fundamentals creates the optimal trading approach. Always remain flexible as the markets evolve over time.

Common Technical Analysis Software & Tools

Many excellent charting platforms and tools exist to conduct crypto technical analysis:

Charting & Trading Platforms

  • TradingView
  • Coinigy

On-Exchange

  • BingX
  • Coinbase Pro
  • Bybit
  • Bitget
  • cex.io

The best charting platforms offer robust tools for drawing trends/levels, overlaying indicators, and extensive backtesting capabilities. Always utilize quality charting software.

Considerations and Limitations

While technical analysis can help traders gain an edge, keep these considerations in mind:

  • Technical analysis relies on past price data – future conditions change over time
  • Certain signals work better in trending rather than ranging markets
  • No signal provides perfect entries/exits – consider risk/reward
  • Over-optimizing can lead to over-fitting – focus on high probability setups
  • Fundamentals ultimately drive long term prices – technicals just analyze price action
  • Cryptocurrency markets are still maturing – patterns can evolve

Technical trading takes screen time to master. View technical signals as high probability opportunities rather than absolutes. Combining chart analysis with market fundamentals creates a more robust approach.

Conclusion

Technical analysis provides helpful tools to analyze market conditions and identify high probability trading opportunities. Chart patterns, support/resistance, trend lines, volume, and indicators like moving averages, RSI and MACD all give clues into evolving market psychology and potential future moves.

Learn to spot patterns, momentum shifts, extremes in sentiment, and key breakouts/breakdowns. Apply proper risk management using defined support and resistance levels.

With practice, crypto traders can greatly improve their entries, exits and ability to objectively analyze the odds of any setup using the techniques of technical analysis. Just remember, no approach works perfectly. Stay flexible and go with the odds.

Gianluca Lombardi

Gianluca is the editor-in-chief of this site. A finance graduate, he is an active trader who has tested all trading platforms and knows all their secrets. Technology is his passion; he spends much of his free time in the metaverse. Gianluca loves learning new things, researching, discussing and writing about technology, especially when it comes to cryptocurrency and blockchain technology.