Be it stocks or cryptocurrency, technical analysis (TA) is one of the popular ways to estimate and predict the price of an asset in the near future. It aids in developing a perspective on market conditions that will impact an asset making it a critical tool for traders and/or investors. TA provides information about the price targets that one should adhere to for buying or selling the asset, the ideal holding period if you are a trader, the risk exposure and expected rewards.
Before we delve further, it is absolutely necessary to set the expectations of what TA can or cannot offer when applied to crypto assets. Foremost, TA is typically used to identify short-term trades (typically two weeks to one month). It is not used to identify long-term investment opportunities. However, one can use TA to identify entry and exit positions (prices at which you buy and sell) for any type of investment.
Second, there is always a risk associated with a trade. TA is a guidance tool and not set in stone. Strategies might backfire under some external influences. So it is always important to have a strategy in place to cut the losses and not wait for a recovery in asset price - if you are a regular trader. This applies to experienced traders as well.
Third, returns for a short-term trade are more likely to be moderate. Therefore, expecting huge returns in a short period of time might result in disappointment and even worse, a disastrous trade.To summarise, TA is best used to make decent returns on a short term basis.
TA, just like any other analytical framework, works based on a few assumptions. First, the markets discount everything. That means all the information that is available out there is already reflected in the latest price of a crypto asset. TA considers only the historical price data of an asset and what that data can tell us about its future price movement. Second, the price of an asset over time is likely to follow a trend over time. That is, if the prices of a crypto asset over a period of time (longer intervals) are recorded and analysed, a trend or pattern is likely to emerge.
Charts are the foundation of TA. There are different types of charts like line, bar, candlestick etc. Crypto markets are best represented using candlestick charts. Here’s an image that shows a typical chart and a single candlestick singled out from a chart.
Source: TradingView, Binance
Source: TradingView, Binance
First, let us understand what a candlestick means. A candlestick is usually represented by green (bullish) or red (bearish) color and contains three components namely the body, upper wick and lower wick. The body connects the open price and close price. Lower wick (Low price) is the line that extends in the bottom and vice versa for the upper wick (High price). Now, let's define open price, close price, high price and low price for a timeframe (can be minutes, hours or day).
Open Price (O) : The price at which opens at the start of time period
High price (H): The highest price it made during that time period
Low Price (L): The lowest price it made during that time period
Close Price (C): The price at which it closed on that time period
According to the green candlestick shown in the second image, the price of Bitcoin opened at $40,862, made an intraday low of $39,853, an intraday high of $43,392 and closed the day at $42,832. This is a bullish candle as price increased (C>O) during this time interval. Whereas if the candlestick is red, then it's a bearish candle as price would have decreased (C<O) during that particular interval. The charts can be plotted in different time frames like 5 minute, 30 minute or even by 4 hours depending on the trader's strategy.
With this, the basics of how to interpret a typical candlestick chart for a crypto asset like Bitcoin is complete. In the next edition, we will move on to the more exciting part where we will provide information about how to use indicators like support zone, resistance zone, volume etc to decide when to buy or sell.
Disclaimer: This article was authored by Giottus Cryptocurrency Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.