Applying Technical Analysis on Bitcoin Charts – How to Find Crypto Trends

Before going into detail about the Technical Analysis (TA) of Bitcoin, we should note that there are two types of asset analyses – technical and fundamental. Both are used frequently and have been vastly improved over the years.

Some people believe that concerning the cryptocurrency market, both of these types of analyses are of little use in practice. With regard to TA, critics usually support their arguments by mentioning the high volatility of digital assets, the dissimilarity to other markets, susceptibility to news, etc. In particular, the dizzying growth of Bitcoin in 2017 (about 1,300%) makes it entirely inappropriate to dive into the concept of TA, but it’s not that simple.

Long-term investments can be combined with trading. The practice of trading on the cryptocurrency market can bring a lot of valuable experience, especially if the approach to it is complex, based on cold calculation, and without impulsive and unreasonable decisions.

What Is Cryptocurrency Technical Analysis?

Technical analysis is a set of tools for predicting likely cryptocurrency price changes based on patterns of price changes in the past in similar circumstances. The basis of TA is the analysis of price charts and the market depth. It employs a variety of charts to display prices over time. The analysis itself is partly based on mathematical and statistical calculations. TA does not consider the reasons why the price changes direction.

One of the basic tenets is that price movements in the market take into account all the essential information, the so-called Efficient Market Hypothesis. According to it, all information affecting the price of a product is already taken into account in the price and volume of trading.

Another TA postulate implies that price movements are subject to trends. In other words, the totality of changes in the supply and demand balance over a certain time can form trends (short, medium, and long term). When demand exceeds supply, an upward trend occurs. If supply exceeds demand, it causes a downward trend. When supply and demand balance each other, a sideways price movement (flat) occurs.

Among other things, TA techniques are based on the assumption that history repeats itself. In other words, market participants in similar circumstances behave the same way, forming similar price dynamics. Therefore, graphical models of price changes can be identified based on the analysis of historical data.

Dow Theory: The Six Basic Tenets

Understanding the psychology of the crowd means understanding the market and learning to anticipate its movements. It is the Dow theory that is the basis of modern TA. Forecasting based on TA uses data from past trades – the price of the previous time period and the volume of prior trades. It is these two indicators that are used by Dow theory as the main ones in forecasting. The main 6 points of Dow Theory are as follows.

Markets Discount Everything

All information that is freely available to all market participants is taken into account in the market movement. That is, any data that can affect the balance of supply and demand in a particular market – presidential elections, data on oil reserves, or a message about a hurricane – immediately triggers a price reaction.

History Repeats Itself

The characteristic patterns of price behaviour tend to repeat themselves over time. With a high degree of probability, after the future primary movement, the subsequent movement will be similar.

Prices Follow Trends

Prices do not move chaotically but have a prevailing direction of movement. This movement is called a price trend. Here are some clarifying points.

The main trends have three phases.

The first phase is transactions made by investors who can rightfully be called professionals. They have the largest amount of information (often from insiders) about the current state of the market and are the first to take action. The rest of the market participants do not possess the same information.

In the second phase, transactions of regular investors begin. The prospects for further movement become evident to them.

At the third stage, the wider public realizes the prospects for further movement and gains confidence in the further movement of the market. They begin to act, thereby spurring increased demand. But the same phase is also a reversal one – professional investors understand that the market has exhausted itself and begin to close their positions opened in the first phase.

Indices Must Confirm Each Other

This provision is of little use in the crypto market, but it must be cited to ensure the integrity of the theory. It is as follows – the industrial and transport indexes (Dow Jones) should confirm each other when the trend changes.

Volume Must Confirm the Trend

Despite debates about the predictive power of the volume indicator, its data can provide additional confirmation of the market’s growth or fall. The main rule is that the volume should grow both during periods of growth and during periods of market decline. If the volume indicator does not confirm the movement in any direction, then perhaps you are witnessing not a trend but a correction or just a chaotic movement.

A Trend Is Continuous Until a Reversal Is Confirmed

This is one of the essential rules that require a mandatory confirmation of a trend reversal before closing an old position and opening a new one in the opposite direction.

Technical Analysis Limitations on Crypto Markets

For most of October 2019, Bitcoin market analysts warned of the approaching the Death Cross – using TA. Death Cross occurs when the line that tracks the average asset price over the previous 50 days falls below the line of its 200-day moving average. It is considered the beginning of a bearish trend: the last time it happened in the Bitcoin market, in March 2008, prices fell by more than half over the following nine months.

It was considered an unusually bearish signal when in 2019, Death Cross finally appeared around October 25th. Bitcoin closed at $8,662 that day, and over the next few weeks, it fell by more than $2,000. Some analysts say the fall in prices was driven by the suppression of cryptocurrency activity in China. But TA supporters say it was all clear from the charts.

The concept that traders can reliably make money – or avoid losing it – from watching crossing lines seems ridiculous to many investors in traditional finance. But in the Bitcoin market, TA is ubiquitous. Binance, one of the world’s largest crypto exchanges, said in a research report on November 22nd (2019) that after high-frequency trading, TA has become the second most used investment strategy in digital asset markets.

In the short term, TA is less suitable. The only type of TA that would be appropriate is open trading, where you use support and resistance levels as the levels you want to enter and exit on an hourly or daily chart to see when the last highs and lows were. If you see certain candles always top at a specific price, say $8,000, and if you are in a long position, this may be an excellent time to trade. For day trading, TA is not an effective strategy.

Time Frames for Charts Explained

A timeframe represents the time interval of quotes on the chart of a cryptocurrency pair: what period the candlestick will include on the chart depends on the timeframe. To make it clearer, let’s look at an example of an ETH/BTC chart.

The screenshot below is a graph of the Ethereum-Bitcoin pair with a 1-day timeframe (D1). On such a chart, each candlestick displays the price dynamics for one day. If the candlestick is red, then the day closed with a price lower than the opening price. A green candle means that the ether rate in relation to bitcoin has grown during this day. On the daily chart, the period from January to March is immediately visible. That is, we can study the changes in the exchange rate at once for several months. Based on this, we can build our forecasts.

Now let’s look at the same ETH/BTC chart but with a timeframe of 3 minutes (M3).

When the M3 timeframe is selected, each candlestick will show the rate change over a time interval of 3 minutes. As you can see, in this case, small fluctuations during the day or even several hours are well traced, but the overview of the timeline is limited to this.

Depending on your trading strategy and the rhythm in which you work, you can trade on different timeframes. Trading on different timeframes has its characteristics, which we will talk about further.

But in any case, even if you are doing scalping or intraday trading on candles, for example, from M1 to M30, you will have to switch to larger timeframes to find out the general trend and see the whole picture. Long timeframes are also useful when trading using patterns. If you work on 1-minute timeframes, then the patterns will not be reliable, and it will be difficult to predict the price movement.

Usually, you can switch between standard timeframes on exchanges:

• Minutes: M1, M3, M5, M15, and M30 – respectively 1, 3, 5, 15, and 30 minutes;
• Hourly H1 and H4 – 1 and 4 hours;
• D1, W1, M1 – 1 day, 1 week and 1 month.

Japanese Candlestick Charts

This is perhaps the most popular type of chart in TA of both traditional financial assets and cryptocurrencies. Each candlestick on it reflects the price movement over a specific timeframe.

The main elements of the candle are the opening (Open, O) and closing (Close, C) prices of the candle, as well as the maximum (High, H) and minimum (Low, L). The last two are important components of the candle shadow. The upper candlestick shadow is a vertical line showing the difference between the high and close for a bullish (green) candle and the difference between the high and open for a bearish (red) candle.

What the Japanese candlestick charts can tell you:

• A large bullish candle will indicate the dominance of buyers, and a bearish candle will show the strength of the sellers. A candlestick with a small body (Doji) will indicate the uncertainty of market participants, as well as significant volatility.
• When candles with short bodies and long shadows prevail, this indicates high volatility and uncertainty of most market participants.
• Such charts can quickly help identify a trend, as well as determine the potential moments of the weakening of the trend and its reversal.
• Price gaps can indicate a significant change in the balance of power in the market. This serves as a signal for trend continuation or reversal confirmation.

Examples of Candlestick Charts

Next are some visual examples of a Hammer pattern, a Bearish Engulfing pattern, and a Morning and Evening star pattern.

Resistance & Support Levels

The backbone of TA is resistance and support levels. You can come across various graphical patterns of reversal and trend continuation (tendencies), such as: Pennants, Flags, Wedges, and others. But they are all just a combination of resistance and support lines. Now let’s look at how the resistance and support lines appear.

Support

Support levels connect important market lows. The support level forms a kind of barrier, but now for a further decline in prices and the probability of rebound from this “barrier” is much higher than the probability of its breakdown. If, after all, a breakdown of the support level occurs, then it becomes a resistance level.

Resistance

Resistance levels connect important market highs. Selling pressure surpasses pressure from buyers, and therefore the rise in prices stops and is replaced by a fall.

It is generally accepted that the resistance level forms a kind of barrier for further price growth. The probability of a breakthrough for this “barrier” is much less than the probability of a rebound from it. If, after all, a breakdown of the resistance level occurs, then it becomes a support level.

Trending Lines

As described earlier, trends can be very different, have different visuals and names. We already discussed the difference between bullish and bearish trends. Now we’ll give a short description of alternative names and descriptions. There are three types of trending lines:

Downward Trending Lines

Also called bearish. In this case, this beast presses on prices with its paws from top to bottom, and prices are constantly decreasing.

Upward Trending Lines

Or as traders call them bullish. The association with a bull arises for the reason that the bull pushes the price upward with its horns, and prices are constantly growing.

Sideways Trend

In other words, a flat. In this case, there is no pronounced price movement, and the chart seems to move in a corridor.

Reading Crypto Chart Patterns

In addition to trend levels, there are graphical figures (patterns), used to visualize the detected candlestick combinations with a characteristic movement within the pattern. What are the main patterns?

Bullish Patterns (Uptrend – Price Going Up)

A bullish pattern is a candlestick chart pattern that forms when a small candlestick is followed the next day by a large candlestick, the body of which completely overlaps or engulfs the body of the previous day’s candlestick.

Bearish Patterns (Downtrend – Price Going Down)

A bearish pattern signals lower prices: a downtrend. This pattern is important because it shows sellers have overtaken the buyers and are pushing the price down more than the buyers are able to push it up. The image above also illustrates it.

Reversal Patterns

Merely a change in the usual direction of a price trend. A reversal pattern can also occur at the end of a downtrend if the price begins to increase and produces higher levels.

Some Chart Examples

Difference between Limit Order and Stop Order:

Stop Loss

When you buy cryptocurrency, say BTC, you buy it at a specific price – $4,000, for instance. If the price goes up, you win, but if it goes down, you lose profit. The idea is to sell at a lower price than when you bought it, so you don’t lose too much money on the trade.

You can place your stop loss 5% lower than when you bought it in case the price suddenly drops. In the case of BTC, you can buy it for $4,000 and place a stop loss order at $3,800.

Trend Trading – Most Important Technical Indicators

Technical market indicators (also called TA indicators) are, strictly speaking, mathematical algorithms that predict the future behavior of the asset price based on statistical data for past periods. Judging by their behavior, traders make decisions about entering or exiting the market (opening and closing trading positions).

Moving Averages (MA)

MAs are used to determine the current trend. The most popular signals are Golden Cross and Death Cross. There is a lag, but each timeframe has its own MA period. For example, 50-100-200. The Average Directional Movement Index determines the strength and perspective of a current trend.

Relative Strength Index (RSI)

The Relative Strength Index allows you to assess the strength of a trend and find points of correction or reversal. RSI was created in 1978 and is easy to interpret. RSI shows the ratio of the absolute values of the rise and fall of the market over a certain time.

Bollinger Bands

Bollinger Bands is an indicator that shows volatility well. It hides how much the price changes and how much it “jumps” along the chart. At its core, this is a typical oscillator. The higher the volatility, the wider the Bollinger bands. Conversely, when the price creeps up or down (low volatility), the bands also narrow.

Stochastic Oscillator

Stochastic Oscillator reflects the percentage ratio between the current closing price and the high/low points of the cost for a certain period. It is based on the pattern where if the market rises, the closing price is the maximum for the period under consideration, and if it falls, the minimum. A close below the high or above the low indicates a weak trend.

Average Directional Indexes (ADX)

If the ADX curve rises on the chart, this indicates a strengthening trend, if it decreases, the trend dies down, and a range may form. The new growth of the indicator shows that the price is ready to exit the formed range and create a new trend. ADX indicates not only the strength of the trend but also its direction.

On-Balance Volume (OBV)

OBV is a TA indicator of momentum. It uses volume changes to make price estimates. OBV shows crowd sentiment that can predict a bullish or bearish result.

What Else Can Affect Prices?

The media are effective means of manipulating the public. This factor is relevant mainly for short-term forecasts. For example, in January 2018, there were scandals with Chinese and South Korean exchanges, which led to a collapse of the cryptocurrency market.

Opinion leaders often control the market through doubts, uncertainties, and fears of missed opportunities. The behavior of financial enthusiasts is a common reason for cryptocurrency price spikes and falls. Leaders shape crowd sentiment. It is imperative to think for yourself and not always follow the majority.

New technology growing investor interest, and the roll-out of innovative features have a positive impact on long-term rate growth. The cryptocurrency market growth is based on opposition to classical economic fundamentals. Decentralization, privacy, security, and speed all can affect prices.

Political news can warn about a short-term change in the exchange rate of a particular coin. But sometimes, such severe information appears that strongly destabilizes the cryptocurrency sector. For example, when South Korea’s cryptocurrency exchanges were announced to close, the market crashed.

How to Start: a Real-Life Example of Reading Bitcoin Chart

Let’s consider a real example of the technical analysis of the BTC/USD pair. We took a daily timeframe and applied two indicators: MACD and RSI. MACD formed bearish divergence, which signaled a downward movement. To confirm this signal, we could check alerts of the RSI indicator. As you can see, the line touched the 70 level but rebounded and moved down.

We could open a sell position on the second bearish candlesticks, formed after the divergence occurred (Aug. 19). The trade could be closed when MACD crossed the 0-line bottom-up (Sep. 15).

Learning Technical Analysis

Technical analysis is very versatile. These are charts and patterns, technical indicators, and oscillators, a combination of various techniques and methods. If the tools are right, anyone can learn it.

Cryptocurrency TA Software

• Best for Retirement Savers: E*TRADE
• Best for Day Traders: TD Ameritrade
• Best for Active Investors: Webull
• Best for Technical Analysis: TradingView
• Best for Trend Predictions: Tickeron
• Best Charting Tools: TrendSpider
• Best for Alternative Data: Yewno

Recommended Books

• The Candlestick Course by Steve Nison
• Getting Started in Technical Analysis by Jack D. Schwager
• The Encyclopedia of Technical Market Indicators by Robert W. Colby
• Encyclopedia of Chart Patterns by Thomas N. Bulkowski
• Technical Analysis Using Multiple Timeframes by Brian Shannon
• The Art and Science of Technical Analysis: Market Structure, Price Action, and Trading Strategies by Adam Grimes
• Technical Analysis Explained, Fifth Edition: The Successful Investor’s Guide to Spotting Investment Trends and Turning Points by Martin J. Pring
• Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David R. Aronson

Summary

In many ways, cryptocurrency exchanges work just like regular securities exchanges. An experienced trader will take little time to look at a BTC, ETH, or other asset price chart, while a beginner is at risk of losing money. In order to understand and learn how to decode technical data from price charts, you need to understand the essence of the Japanese candlestick charts, which we discussed in detail in this article.

All TA instruments provide information about the opening price of the corresponding period, the closing price, as well as the lowest and highest prices. Analysis of charts comes down to calculating the balance of supply and demand, expressed through price and volume.

By reading volume and price charts over time, you can see the change in the balance of buyers and sellers and take an advantageous position in advance before a price change. Check out the 3Commas Trading Bot – it will be useful for developing a more comprehensive understanding of the trading world.