Charts and Technical Analysis
How to Use the Volume Indicator
This cryptopedia guide of Charts and Technical Analysis will teach you how the volume indicator shows you how an underlying asset is being traded. This indicator will be shown below the chart with green or red bars indicating the volume for a specific candle of the asset you are trading.
In the image below, you can see the volume indicator displayed in the chart.
Red bars mean traders are selling and green bars show buying momentum. The higher the bar, the larger the volume. You can also use the volume indicator to understand the strength of a price movement.
If the price of Bitcoin moves higher massively (several percentage points) with low volume or just a small increase in volume, it could show this is a weak bullish trend and it could eventually reverse.
Breakouts and False Breakouts Trading Strategy
Some traders tend to trade what we call breakouts. This is why it is certainly important to understand what breakouts are and how to spot them in the market. Breakouts make reference to price movements above or below key support and resistance levels.
The first thing you need to do is recognize resistance and support levels. If you are trading in the market, then you should also be able to recognize fake breakouts. A fake breakout will take place when the price of an asset moves above a resistance level or below a support level but the price retraces immediately after.
If you are trading breakouts, then you should always use other indicators that would confirm the breakout. You can select a percentage point above a resistance level or below a support level to set up your entry order.
For example, if you found a resistance level, you can create a limit order to enter the market at 1% above that resistance level. This would give you space to avoid fake breakouts and also the possibility to enter the market if a breakout is confirmed.
This is also one of the most used indicators in the cryptocurrency market. The MACD should be understood as the Moving Average Convergence Divergence. This shows momentum indicator and it follows the evolution of different Moving Averages.
The MACD indicator will have two main lines: the MACD and the MACD Signal. These two lines work together. The MACD Signal is a smoothed version of the MACD. You will also see a histogram as well that helps the trader understand the distance between the MACD and the MACD Signal.
Traders should pay close attention to the crosses between the MACD and the MACD Signal lines. When they cross, they will be indicating a change in the markets. However, the MACD is not good when the market is going sideways.
Sideways trading means the market is not moving in a clear direction. That means that the price of an asset is not falling or growing. It remains traded between two clear price levels without allowing traders to open long or short positions. Let’s suppose Bitcoin has been traded between $10,000 and $10,300 for three months. Then we could assume Bitcoin has been trading sideways for several months.
With this indicator, you will be able to find changes in the trend of the price of a cryptocurrency. Thus, it can be very useful if the market experiences higher volatility rather than trading sideways for several days, weeks or months.
Understanding Trading View
Trading View is one of the best platforms for traders to trade digital assets, stocks, currencies and also to perform technical analysis. This is an easy-to-use and intuitive platform that can be used by novice traders and experts to understand the markets, share your views and understand the trading ideas published by other users.
The platform will be providing real-time data from thousands of stocks, cryptocurrencies, currencies and commodities. Everything can be used on the official site of Trading View without any installation or even registration.
In addition to it, Trading View is also going to be adding technical tools to the charts. For example, you can start using the Fibonacci retracement, the MACD, the RSI and many other indicators.
Relative Strength Index (RSI)
The RSI (Relative Strength Index) is an analytical tool used in technical analysis that can be very helpful to understand momentum in the market. This tool can be added to any technical chart at the bottom of the graphic and it will provide valuable information about the asset you are trading.
There are two key levels for the RSI, the 70% and 30%. When the RSI is above 70%, then the market is in an overbought condition. If it falls below 30%, then the asset you are trading would be in an oversold condition.
For example, if you are trading Bitcoin, you can make profits with an RSI strategy. You can buy the asset when the RSI hits the 30% level (and the price of Bitcoin is moving higher). This will be your entry point. You will try to exit the market once the RSI hits 70%. This is going to be the exit point.
Mastering this strategy could be very profitable in the long term after having several profitable trades.
The Fibonacci retracement tool is one of the most useful tools to trade digital currencies. The Fibonacci retracement tool was created based on the Fibonacci sequence, which will unveil the golden ratio.
The Fibonacci retracement tool can help you find support and resistance levels. This can be very useful for traders to find entry and exit points in the market. The most useful Fibonacci retracement levels include the 23.6%, the 38.2%, the 50%, the 61.8% and the 78.6%. The most used Fibonacci levels include the 38.2%, the 50% and the 61.8%.
Let’s go to a basic example. If you are trading Bitcoin, you will have to find a time-frame in which Bitcoin made a local bottom and a local top. Once you find the local bottom, then you need to place your mouse on the lowest part of the chart, click, and click once again on the highest part of the chart.
This will show you the levels we have mentioned before. The price of Bitcoin could certainly retrace to 38.2% at a certain point in time.
If you consider that this is a bull market, then entering at the 38.2% could be a good move. Entering at 50% retracement would be a much stronger confirmation the market is expected to bounce at these levels. The 61.8% level would give heavy confirmation about a possible retracement level.
How to trade the “Head and Shoulders” Pattern?
The Head and Shoulders (H&S) pattern is one of the most popular patterns, not only in the cryptocurrency market, but also in stocks and other financial markets.
The H&S pattern consists of three different parts: a left shoulder, a head and a right shoulder. They also include a neckline that works as support and resistance levels. Shoulders refer to price movements. The left shoulder indicates a price increase/decrease that will test the neckline and will give place to the creation of the “head” of this pattern. The head refers to a higher high (or lower low) that will be the top (or bottom) of the pattern. Finally, there will be another shoulder that will give place to a breakout (in the case of an inverse head and shoulders) or a sell-off as you can see in the image below.
You can see an example of a head and shoulders pattern in the following image:
If you see an H&S pattern you have higher possibilities of a breakout or a sell-off but we cannot be 100% sure this will happen. Analyzing patterns is not an exact science. Thus, take this into consideration while trading.
Finding a Buying Opportunity in the Market
Finding a buying opportunity is not an easy thing to do. However, it is possible for day-traders to make money with price fluctuations in the cryptocurrency space.
One of the best things you can do to find a buying opportunity in crypto is to follow crypto trading signals such as the Nitros Bull indicator. These signals are provided by analysts and trading experts for investors that want to make profits trading digital assets. This could be a good way for newcomers and expert traders to have information about the best moments to enter and exit the market.
Another way to find a buying opportunity is to use the Fibonacci retracement tool. We can use this tool in different time-frames. As we explained in our previous guide, the Fibonacci retracement tool will give us valuable information about support and resistance levels.
Suppose you are now trading the 2019 bear market that started at the end of June 2019, you will see that BTC/USD is making new lower lows and lower highs. Thus, this confirms the price of the digital currency could continue falling.
This is the situation during the second half of 2019 for the BTC/USDT trading pair.
We can easily draw a Fibonacci retracement graphic on top of the Bitcoin price between the low in December 2018 and the high in June 2019. This will provide you with clear information about the possible levels at which BTC could retrace to from its highest point.
Some analysts believe it could be a good strategy to consider the range between the 0.618 and the 0.786. retracement levels a buying region. Although it is not possible to have information about when the market will reach these levels, we can have clear data about where to enter the market.
Remember to use other indicators to always confirm the entry point so you can be sure about the direction in which the market is going.
Trendlines are lines that investors use in order to understand where the market is moving. These are very simple lines that would provide valuable information about the trend in which the market is currently moving, whether it is going upwards or downwards.
Using trendlines is very easy. You can start drawing trendlines using Trading View in just a few seconds with the “Trend Line” tool that will be available in the left menu. A good strategy to start drawing trendlines is by searching a trend and placing one line that will support the price and another line that will be working as a resistance for the price of the asset.
In the image below you can see an example of trendlines:
The two blue lines you see are going to be working as trendlines. As you can see in this example, these trendlines are showing an upward channel. These trendlines are showing support and resistance levels you can use to trade. Combining trendlines with other indicators could be a great way to get valuable information about the market. This can be very helpful for you to open or exit trades.
As you can see in the example above, we use trendlines and also volume information. If you see that the trendline is broken and there is a spike in the volume (no matter which direction), then we could be experiencing a breakout (bullish) or a sell-off (bearish).
The Ichimoku Cloud is a technical analysis indicator that helps traders and investors identify the strength of a trend and momentum in the market. This tool can be very useful for users that follow breakout strategies. The Ichimoku Cloud is also helpful for traders to identify support and resistance levels.
When you will be using Trading View, you can set up the Ichimoku Cloud to trade. The red line in the bottom will be indicating support levels. When Bitcoin or a digital asset breaks support, then the market is showing a bearish signal. Furthermore, you will see that the “cloud” in the middle will have a red or green colour. Red colors indicate we are in a bear market and green colors show we are in a bull market. Thus, the Ichimoku Cloud will help us understand whether we are in a bull or bear trend. For example, if we are in a bear trend, the cloud will be above the price of the cryptocurrency and it will work as resistance. If we are in a bull trend, the cloud will be green and it will show a support region.
The Ichimoku Cloud has two more lines that is similar to Moving Averages. When the blue line goes above the red line, then this could be a signal that the market is changing its trend (if we were in a bear market). Instead, if the blue line falls below the red line, then it could signal that a bearish period is coming.
Exponential Moving Average (EMA)
This is one of the most popular trading tools used by traders in different markets, including cryptocurrencies, stocks and commodities. There are different types of Moving Averages (MAs) such as the simple moving average (SMA) or the exponential moving average (EMA).
The simple moving average is an indicator that calculates the average price of the asset during a certain period of time; for example, 50-days, a month or two weeks. The exponential moving average is very similar to the simple moving average. The only difference is that it gives higher importance to recent data, which can be more helpful to understand how the market is behaving.
The most popular EMAs include the 50, the 100 and the 200. Analysts believe that when the price of an asset is above the 50 EMA, then it is time to search for buying opportunities. Instead, when the price is below the 50 EMA we should check for selling opportunities. Of course, this is not going to work 100% of the time. These are only indicators that provide clarity on how to better trade digital currencies. It is always recommended to use a set of technical tools that would help you have higher chances of success.
How to Spot Support and Resistance Levels
Support and resistance levels show areas where the price of an asset tends to find a pause if it falls or if it grows. If the price of an asset falls and it finds support, then it is expected for this price to bounce up from the resistance level. If instead, the price of an asset grows and finds a resistance level, then we could imply the price of this asset will fall rather than continue growing.
For example, if you are trading Bitcoin and you see the virtual currency moving higher and touching $10,000 but without being able to cross it after many attempts, then we could consider $10,000 as a resistance level.
If instead, Bitcoin falls and reaches a region between $5,800 and $6,200 without being able to break through it and bouncing up every single time it tries to do so, then this would be a support level.
As you can see in the image below, Bitcoin found a great support level during the 2018 bear market. The $6,000 region was very important for the largest cryptocurrency. However, as you can see in the violet square, Bitcoin finally broke through it. We can confirm the resistance got broken when we see the volume massively surging in December 2018.
In the second image, you can see how Bitcoin found support at around $10,380 in the last year. It tried breaking that level many times until it was able to do so at the end of July 2020. As you see, once the resistance is broken, it later becomes a support for the price of the asset as pointed by the last arrow.
When a resistance level is broken, it later becomes support. The same happens with support levels. When they get broken they later become a resistance level.