Crypto technical analysis involves using mathematical indicators based on previous price action data to try to predict future trends. The basic idea is that markets behave according to certain patterns and that once established, trends heading in a certain direction often continue along the same course for some time.
Broadly speaking, investors want to buy when markets are low so they can sell higher at some point in the future, and thus make a profit. Conducting technical analysis before entering a position is one way to try to identify price levels that might be considered low.
______________________
SPONSORED: Find a Qualified Financial Advisor
1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.
2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.
______________________
There’s no single, all-encompassing method for crypto technical analysis. Each trader will prefer to use different indicators and will likely interpret them slightly differently. It should also be noted that no technical analysis is anywhere near 100% predictive.
Related: What is a safe investment?
Crypto technical analysis: The basics
There’s a long list of different technical indicators and chart patterns that can be used to conduct crypto technical analysis. Entire books have been written and courses created on the subject. Here are just a few common technical indicators that traders can use when learning technical analysis.
Candlestick charts
Traders often prefer candlestick charts for their high level of detail. Rather than condensing data into one point for each time interval, candlesticks display four different price levels for each interval. These include (in order of top to bottom, visually):
- High price
- Opening price
- Closing price
- Low price
Candlesticks show this information in the form of a bar and two wicks. The peak of the top wick is the high price and the tip of the bottom wick is the low price.
The body of the candlestick can appear either green or red. Red indicates that prices ended the day lower than they opened; green indicates that prices ended the day higher.
On green candlesticks, the top indicates the closing price and the bottom the opening price. For red candlesticks, the top indicates the opening price and the bottom the closing price.
Each candlestick is read in the context of surrounding data points, and offers a detailed look at how investors are buying and selling crypto during a certain period of time.
Support and resistance levels
The terms support and resistance refer to levels where prices tend to bottom or peak, respectively. Traders might identify these levels and then use them to try and make informed trading decisions.
How are support and resistance determined? There are many possible ways. Sometimes it could be as simple as looking at a chart and pointing out where prices have repeatedly pulled back (in the case of resistance) or bottomed out (in the case of support).
Once identified, traders might use these price levels to inform their trading strategy. For example, stop-loss orders might be placed at support, while sell orders to take profits might be placed at or above resistance.
There are many different ways to use support and resistance, because these levels can either be used to try to predict price reversals or, if prices continue beyond them, indicate that a new trend has emerged. If prices keep rising above resistance, this might indicate sustained momentum to the upside. Likewise, if prices continue falling beneath support, they might continue falling even more.
Relative Strength Index (RSI)
The Relative Strength Index is a favorite among veteran and novice traders alike. This indicator presents itself as a simple line graph below a price chart.
The line oscillates between the values of 0 and 100, with 50 being neutral. A higher value is thought to indicate overbought conditions, while a lower value is thought to indicate oversold conditions.
Like many technical analysis tools, the RSI is best used in conjunction with other indicators. For example, if prices for a cryptocurrency were approaching a well-established support level at the same time that the RSI was giving a low reading of 20, then the odds of an upcoming price rally could be higher than usual.
Average Directional Index (ADX)
The average directional index is a short-term indicator used to help investors determine how strong a trend is. The higher the ADX, the more momentum there might be behind current trends.
ADX is simply the average of the values of directional movement lines over a particular period. These lines are calculated with current low and high prices. Similar to the RSI, ADX can have a value between 0 and 100.
But unlike many other indicators, the ADX rarely rises above 60. Chart analysts generally believe that an ADX of 25 and up indicates trend strength and a reading below 20 means there is no trend. Between 20 and 25 is considered neutral, or no trend.
When the ADX line is rising, it’s a sign that the current trend is growing stronger.
Moving Averages (MAs)
While the ADX helps investors determine the strength of a trend, moving averages can be used as a tool to help determine the direction of a trend. A moving average summarizes data points of a cryptocurrency over a set period and divides the total by the number of data points to create an average. The term “moving” average is used because the number is constantly updated using the latest price data.
Long-term moving averages are thought to be stronger indicators, as they contain more data. But MAs can also be tracked in the short term.
There are different types of moving averages, different time lengths for them, and different ways they can be used to provide clues to the direction of a trend.
One famous bullish setup based on MAs is referred to as the “golden cross.” This occurs when a short-term moving average moves above a long-term moving average, most commonly the 50-day MA above the 200-day MA.
Trend lines
Trends lines are just what they sound like — lines that illustrate potential trends. These can take many forms and sometimes multiple trend lines can be drawn on the same chart to show more complex patterns.
In their simplest form, trend lines are single lines connecting multiple high or low price points. The more points that connect on the same line, the stronger the trend might be. Trend lines can be drawn to show a variety of different crypto technical analysis setups.
Cup and handle pattern
The cup-and-handle pattern is a famous bullish set-up. It consists of a price chart over which a cup (the bottom half of a circle) and a handle (a downward-slanting line at about a 45-degree angle) can be drawn.
For this to happen, prices generally must fall, briefly trade sideways, rise for about the same length of time as they originally fell for, and then have a steep but brief drop. The final drop creates the handle, at which point the pattern is thought to be confirmed, and prices could rise.
The inverse of this pattern can also happen and is thought to be bearish. If an upside-down cup and handle happens, watch out, as prices could fall.
The takeaway
Crypto technical analysis is just one of many things investors might want to know before investing in crypto. That said, technical analysis of cryptocurrency can be highly subjective even though the indicators themselves are based on mathematics.
It should be noted that no technical indicator is correct 100% of the time. Even when multiple indicators converge on the same conclusion, prices could still react differently than expected. The best a trader can hope for is an increased chance of making a decision they feel good about, based on available information.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC. SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA, the SEC, and the CFPB, have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
More from MediaFeed:
12 benefits of cryptocurrency in 2021
Crypto is a relatively new asset class that began with the creation of the Bitcoin blockchain in 2009. The primary benefit of Bitcoin and most other cryptocurrencies based on blockchain technology is that they don’t have a central authority, payment processor or company owner.
Instead, crypto networks are peer-to-peer, meaning people can transact directly with one another. Many of the additional benefits of cryptocurrency stem from their decentralized and peer-to-peer nature. Let’s look at some positives of cryptocurrency in this crypto guide.
Related: How to invest in Bitcoin
tigerstrawberry / iStock
Crypto transactions can be made easily, at low cost, and in a manner more private than most other transactions. Using a simple smartphone app, hardware wallet or exchange wallet, anyone can send and receive a variety of cryptocurrencies.
Some types of cryptocurrencies, including Bitcoin, Litecoin and Ethereum, can be bought with cash at a Bitcoin ATM. A bank account isn’t always required to use crypto. Someone could buy bitcoin at an ATM using cash then send those coins to their phone. For people who lack access to the traditional financial system, this may be one of the biggest pros of cryptocurrency.
Phira Phonruewiangphing / iStock
Because they are based on cryptography and blockchain security, decentralized cryptocurrencies tend to make for secure forms of payment. This might be one of the most certain benefits of cryptocurrency. Crypto security is determined in large part by hash rate. The higher the hash rate, the more computing power it would take to compromise the network. Bitcoin is the most secure cryptocurrency, having the highest hash rate of any network by far.
Using a crypto exchange is only as secure as the exchange itself, however. Most incidents of crypto being hacked involve exchanges being hacked or individuals making mistakes.
phive2015 / iStock
While some people only want to invest in cryptocurrency for price appreciation, others might find benefit in the ability to use crypto as a medium of exchange.
Bitcoin and Ether transactions could cost anywhere from nickels and dimes to several dollars or more. Other cryptocurrencies like Litecoin, XRP and others can be sent for pennies or less. Payments for most cryptos settle in seconds or minutes. Wire transfers at banks can cost significantly more and often take three to five business days to settle.
Weedezign / istockphoto
The cryptocurrency industry has been one of the fastest-growing markets that most of us have seen in our lifetimes. Being involved now might reasonably be compared to being involved with companies on the leading edge of the internet back in the 1990s and early 2000s. The total market cap of the cryptocurrency market in 2013 was about $1.6 billion. By June 2021, it rose to over $1.4 trillion.
Marc Bruxelle / istockphoto
It’s no secret that Bitcoin has been the best-performing asset of the last 12 years. When it began in 2009, Bitcoin essentially had no value. In the following years it would rise to a fraction of a penny and then eventually to tens of thousands of dollars. This represents millions of percentage points’ worth of gains. By comparison, the S&P 500 index of stocks returns an average of about 8% per year.
Some altcoins have outperformed Bitcoin by wide margins at times, although many of those later saw their prices collapse. Gains like these might be among the most well-known cryptocurrency benefits. (The losses, on the other hand, may be among the most well-known drawbacks.) Volatility has characterized prices in the crypto space, which has been one of the key benefits of cryptocurrency for day traders and speculators.
whyframestudio / istockphoto
Privacy can be one of the benefits of cryptocurrency, but crypto isn’t as private as some people might think. Blockchains create a public ledger that records all transactions forever. While this ledger only shows wallet addresses, if an observer can connect a user’s identity to a specific wallet, then tracking transactions becomes possible.
While it’s worth noting that most crypto transactions are pseudonymous, there are ways to make more anonymous transactions. Coin mixing services group transactions together in a way that makes it hard to pick them apart from one another, confusing outside observers. Individuals who run a full node also make their transactions more opaque because observers can’t always tell if the transactions running through the node were sent by the person running the node or by someone else.
Methods like these are for more advanced users and could prove difficult for those new to crypto. So while absolute privacy is really not one of the main positives of cryptocurrency, transactions are still generally more private than using fiat currency with third-party payment processors.
SKapl / istockphoto
Cryptocurrency has become known as a non-correlated asset class. Crypto markets largely function independently of other markets, and their price action tends to be determined by factors other than those affecting stocks, bonds and commodities.
Any asset that has risen by millions of percentage points over just twelve years, as a number of crypto coins have, clearly is not correlated to anything else. But it’s worth noting that during the last few years, cryptos have begun to sometimes trade in tandem with stocks for short periods of time.
CasPhotography/istock
Mineable cryptocurrencies with a limited supply cap, like Bitcoin, Litecoin, and Monero, to name a few, are thought to be good hedges against inflation. Because monetary inflation can occur when central banks and governments print more money, increasing the supply, things that are more scarce tend to appreciate in value.
With more and more new dollars chasing fewer and fewer coins, the price of these fixed-supply coins as measured in dollars has a higher chance of going up. Additionally, the Bitcoin protocol, for example, is also designed to keep those coins scarce regardless of what happens with monetary policy.
Pe3check / iStock
Cryptocurrencies have no regard for national borders. An individual in one country can send coins to someone in a different country without any added difficulty. With traditional financial services, getting funds across international borders can take a long time and come with hefty fees. In some cases, doing so might not even be possible due to regulations, sanctions or tensions between specific countries.
Avosb / iStock
Some of the benefits of cryptocurrency extend to people who don’t have access to the traditional financial system. Due to its decentralized and permission-less nature, one of the benefits of cryptocurrency is that anyone can participate.
People don’t have to have permission from any financial authority or government to use the crypto ecosystem. (Though it’s worth noting that Bitcoin mining is banned in China.) They also don’t necessarily need to have a bank account.
There are billions of people today who are “unbanked,” meaning they have no access to the financial system, including bank accounts. With crypto, all these people need is a smartphone, and they can essentially become their own bank.
Andre Francois on Unsplash
One of the great benefits of crypto is that it can be used to exchange value between two parties. This can be done independently of any third-party, making the transaction freer and censorship-resistant.
Banks or other payment processors can choose to cut off services to anyone for any reason. This can make things difficult for some journalists, political dissidents or other individuals working in nations with oppressive government regimes. Because there is no central authority governing Bitcoin or most other cryptocurrencies, it’s very difficult to stop anyone from using them.
ipopba / istockphoto
Stock markets are only open on weekdays during the regular business hours of 9:30 am to 4:30 pm Eastern Time, in the case of the New York Stock Exchange (NYSE). During nights, weekends, and on holidays, most traditional financial markets are not open for business.
Crypto markets, on the other hand, trade 24 hours a day, seven days a week, without exception. Some of the only things that could interrupt a person’s ability to trade cryptocurrency would be a power outage, internet outage, or centralized exchange outage.
Phira Phonruewiangphing / iStock
The above are just a few of the most important advantages of cryptocurrency. Of course, there are potential flaws as well, its volatility being a major downside. As with anything, those interested in buying, selling and trading crypto would be wise to do their research before getting involved in the crypto market.
Learn more:
This article originally appeared on SoFi.comand was syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA /SIPC. SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB, have issued public advisories concerning digital asset risk.
Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
BackyardProduction / iStock
Featured Image Credit: Phira Phonruewiangphing / iStock.
