The framework in which traders study price movements through data is known as Technical Analysis. In theory,you can look at historical price movements and determine the current trading conditions and potential price movement of an asset. The main evidence for using technical analysis is, theoretically, all current market information is reflected in price. Since price reflects all the information that is out there, then price action is all you really need to make a trade. With crypto, some news spreads like wildfire and can affect the price action of different cryptocurrencies. Traders mostly depend on chart patterns and trends to predict price action movements.
Technical analysis is all about studying price action history and looking for certain repeatable patterns. If a price level was held as a key support or resistance zone in the past, traders will keep an eye out for it and base their trades around that historical price level. Technical analysts look for similar patterns that have formed in the past and form trade ideas and systems with the belief that the price will act the same way it did before.
Traders use candlestick charts because they are the easiest way to visualize historical data. If you take a look at a candlestick, you will see a figure in the shape of a rectangular box. This is what is known as the body, which is the widest part of the candlestick. This is the first thing to observe when analyzing a chart. The body of a candlestick demonstrates the open and the close of the specific period. This implies, for example, that in a 1-hour chart every candlestick body will demonstrate the opening and closing price for that one-hour period.
In addition, the thin lines above and below the body are called “wicks” or “shadows.” The wicks at the bottom and at the top of the candlestick present the lowest and the highest prices reached during that candlestick’s period of time. Furthermore, the color of the body tells you whether the candlestick is bullish (meaning that it rises) or bearish (meaning that it falls). If the body is green, then the currency pair closed higher than it opened. If the body is red, it means the currency pair closed lower than it opened.
- Open Price: the open price depicts the first traded price during the formation of the new candle.
- High Price: the top of the upper wick. If there is no upper wick, then the high price is the open price of a bearish candle or the closing price of a bullish candle.
- Low Price: the bottom of the lower wick. If there is no lower wick, then the low price is the open price of a bullish candle or the closing price of a bearish candle.
- Close Price: the close price is the last price traded during the formation of the candle.
As a trader, you always have to pay close attention to price action. The trading price is king and it will tell you all you need to know. The wonderful thing that all markets have is a history. The market’s history will tell you where the “sweet spot” is on the chart. These sweet spots should be the foundation for everything you do as a trader.
A sweet spot on the chart is also referred to as a support or resistance zone. You may be familiar with the concept of support and resistance; however, support and resistance zones are different from what many traders characterize as support and resistance. A support zone is an area or range of prices that a currency pair struggles to go below. A resistance zone is an area or range of prices that a currency pair struggles to go above. The eight important characteristics of zones are as follows.
- Zones are an area, not a price point
- Zones are spots on the chart where price reverses repeatedly
- Zones may be extreme highs or lows on the chart
- Zones are where traders find trading opportunities
- The more a price has rebounded from a zone the more valid it is
- Support and resistance zones rarely need to be modified
- Line charts can help traders find zones
- Zones are often seen by many traders
You may want to take a closer look at each of these eight characteristics. It is incredibly important that you understand how to draw zones, why you should draw zones on your charts, and understand when these zones become critical for your trading.
When you have identified your major support and resistance, you can form another level in between your zones to find your entry options and accurately measure your gain/loss ratio. You can look at past data to help you spot trends and patterns which could help you find some great trading opportunities.
If you blindly buy any cryptocurrency pair and hope to make a profit, you will have approximately a 50/50 chance that you will profit or lose instead. Trading without a strategy and without analysis will not produce consistent results. As a trader your goal is to try to use technical analysis to increase your chances of being right. You don’t want to show up to work everyday and not get paid do you? The same should go for trading. You should consider trading as your part time job. You should try to get better at your job to get better pay.
To become a successful trader, you need to understand that trading is a game of probabilities, never certainties. Not a single person knows whether their next trade will be a winner or loser. There is no golden strategy that will allow you to predict the future with 100% certainty. Your goal as a trader is to develop a trading system where you have a statistical edge over the markets. This means that while you will never be able to predict the outcome of any one trade, you will know that in a broader survey of say one-hundred trades you will always win more trades than you will lose. As long as you’re able to develop a winning system, manage your risk properly, and stick to your rules without letting emotions get a hold of you, you will be able to make money with crypto for the rest of your life.
Written by: Edward Gonzales © Crypto University 2021