Using Technical Analysis to Trade Cryptocurrencies

Investing is about considering a myriad of factors at once, with access to data being at the center of importance – the more data you have, the easier it is to make intelligent decisions. Investing in cryptocurrency is slightly different, however, as there is very little (if any) fundamental data to discern. No earnings reports, no profits/sales to monitor, very few valuation metrics to analyze.

In the absence of fundamental analysis, it is technical analysis that becomes the primary source of data used for trading. Indeed, technical and chart analysis can help make sense of price trends and allow us to anticipate market shifts. Once patterns are identified, one can apply some simple math to make smarter decisions about how to buy and sell intelligently.

Once an investor considers the value of technical analysis and chart trading, the question then becomes: is reading charts good enough?

The answer, I believe, is no. One must have a method for testing results and obtaining statistics to measure the efficacy of their technical trading process. Without statistics, the strategy is little more than guesswork.  

Tickeron’s Artificial Intelligence is an example of technical analysis and chart-reading strategy that keeps statistics on predictions and also backtests patterns to see how effective they would have been. That includes but is not limited to the percentage of time the security reached its target price, the % gain or loss on the trade based on the AI’s advice, number of days the security remained in the pattern, and more. Having hard data can not only prove the efficacy of AI technology, but it can also help the trader decide whether they think the risk is worth taking.

Are you new to technical analysis and trading? Here are some basic terms and concepts to help you get started:

Channels

The space between the two parallel lines is called a channel. Within the channel, there can be ascending (highs are higher, lows are lower), descending (lower highs and lows), or horizontal (equal highs and lows) trends. To maximize your return, buy crypto when the price touches the support line and sell when it hits the resistance line. Breakouts are possible in bull and bear markets, but channels will generally be indicative of broader tendencies.

Triangles

If your resistance and support lines make a triangle shape, this usually means the market is somewhat unsettled. There are three different kinds of triangles: symmetrical (the market will likely continue whichever way it breaks the trendlines at the point of the triangle), ascending (prices will probably break the resistance line when it is horizontal), and descending (prices are expected to continue decreasing when they break a horizontal support line).

Other patterns

There are numerous patterns that can also help us recognize market evolutions. These include flags (typically occurring after periods of fast growth when prices rally sharply and then move to the downside. Sharp price rises preceding the flag shape are called flag poles; traders look for the price breaking out above the trendlines and enter a long trade), Eliott waves (used in tandem with a mathematical calculation called a Fibonacci retracement, Eliott waves can show us good buy markets), and candlestick patterns (a technique derived from 18th century Japanese rice traders that packs data from multiple time frames into single price bars, making it easier to predict price directions

Mathematical indicators

It is useful to familiarize yourself with some basic mathematical indicators that help us identify when to buy and sell a security. A couple of the most common is called a Simple Moving Average (SMA) and a Relative Strength Index (RSI).

SMAs are based on the average of multiple time periods – to calculate, add the closing price of the cryptocurrency over a number of time periods, then divide the total by the total number of time periods. When the SMA points up, the price is increasing and down signifies a decrease. Longer timeframes mean smoother moving averages.

RSIs can tell us whether cryptocurrency is being overbought or oversold, giving us a relative evaluation of recent performance. It is calculated through a formula that divides average growth by average decreases. An RSI of 70 or above indicates overvalue, and likely downward price correction. RSIs 30 or below often indicate the inverse.

These are just some of the patterns and indicators can make you a better cryptocurrency investor – the more you learn, the easier it is to make the right moves in dynamic markets.

Contributor

Sergey Savastiouk|Expert

Sergey Savastiouk, Ph.D. has a degree in Applied Mathematics from Moscow University and has extensive experience as an entrepreneur, investor, manager, and mathematician. His professional expertise is in applied mathematics, mathematical modeling, system and pattern analysis, and software and hardware system integration. He has served as the CEO of several hi-tech start-up companies and nonprofit organizations, which has given him proven capabilities in business strategy for high-tech start-up companies, market assessment, company formation, team building, product development, marketing, and sales. He has published numerous articles in journals and magazines on related fields. As a retail investor, he spent 15 years developing his proprietary trading and quantitative algorithms (now Tickeron’s A.I.), which brought him significant returns in trading the stock market. His current work and goal in founding Tickeron is to bring professional, sophisticated stock market analysis capabilities to retail investors via an easy-to-use interface.

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