How To Do Technical Analysis For Bitcoin Trading


After learning how to buy Bitcoin in Canada, there is another crucial step to consider. Now that we know the answer to how one will go about purchasing cryptocurrency, a trader is led to the question of when. More specifically, when is the smartest time to buy bitcoin? To determine the answer to this question, traders will conduct a bitcoin market analysis. A well-rounded bitcoin mrket analysis will include a technical, fundamental and sentiment analysis. For the purposes of this article, we will start by looking at the basis of a crypto technical analysis.

A technical analysis of crypto trading is based on the use of real-world data and trends to help predict the future of the market. Using historical performance data, traders can begin spotting trends and use this to base future trades on. Indicators include pricing and trading volume and commonly represented on what trader’s know as a candlestick chart.

This probably sounds really good to you. After all, what could be better than predicting the price of an asset with accuracy? To help improve (notice how we didn’t say perfect) your ability to time when to buy or sell your holdings as a beginner cryptocurrency trader, let’s start at the basics.

The Basis of Technical Analysis for Crypto Trading

For crypto technical analysis to be accurate, it assumes that a cryptocurrency price is an accurate representation of all the information available to the public. With this assumption, a technical analyst believes that focusing solely on the asset’s price’s statistical analysis is enough to predict the future. This concept was first created by a man named Charles Dow and a group of other researchers who developed the Dow theory.  

A writer from Investopedia explains the Dow theory best. Here it is defined as,

“a theory that says the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high and is accompanied or followed by a similar advance in the other average.”

1. History Repeats Itself

For trends to be valuable, bitcoin technical analysis relies on the assumption that history continues to repeat itself. Since prices repeat themselves, they aren’t ever random. Therefore, conducting a bitcoin trends analysis by looking at pricing charts can help you predict an asset’s future price.

2. Everything Is Priced In The Asset

While some experts suggest technical analysis for crypto trading isn’t practical since it only considers one factor, this strategy still works since all market factors are believed to be represented by the price of the cryptocurrency. Therefore, all aspects are considered in bitcoin market research by looking at the price.

3. The Averages of One Market Will Impact Another

When identifying how to do technical analysis for bitcoin trading, it is vital to bear in mind that you won’t necessarily just be looking at the bitcoin market. For example, imagine Company A was providing products or services to Company B. One day, Company B sees a massive spike in demand for its offering. They then look to Company A for additional support to fill this spike in demand. A smart investor would take notice of these correlations. In situations where an associated asset is trending upwards, bitcoin market research might suggest that correlated assets are soon to follow.

4. Trends Follow Newton’s Law of Motion

If you took one thing from grade school, we sure hope it was, “an object in motion stays in motion.” This object could very well be a cryptocurrency that, when set in an upward or downward trend, will likely continue for a specified period. Bitcoin trends analysis suggests a reversal trend usually is pretty rare.

Bitcoin Technical Analysis Indicators

A variety of technical indicators are used to identify the right time to buy. Some examples are:

  • Chart patterns (including the Japanese candlestick chart)
  • Support and resistance (sometimes identified using a stochastic oscillator)
  • Relative Strength Index (RSI)
  • Trend Lines
  • Trading volume and momentum
  • Moving averages
  • Volatility (sometimes identified using Bollinger bands)

While many of these might sound like foreign terms now, with a little bit of explanation, you’ll be using these indicators in no time!

Learning How To Read A Candlestick Chart

One of the most challenging skills you will need to master as a technical analyst is learning how to read crypto charts. This chart appears as a series of rectangular-shaped objects with a stick poking out of the top and bottom. As you might have guessed, the shapes close resemblance to a candle is where this chart gets its name. Each rectangle will be colored, either green or red. A green shape indicates the cryptocurrency closed at a price higher than it opened at. A red rectangle indicates the opposite.

To learn how to properly read crypto charts, it is essential to note that each rectangle’s top and bottom correlate to the opening and closing price of the asset, respectively. The tip of the candle (the little rectangle poking out) indicates the high and low for the cryptocurrency over a given period of time. You might hear these referred to as “shadows.”

Many traders are quick to see several of the same colored rectangles in a row and are quick to act on what they believe is a trend. Analyzing a candlestick chart requires a technical trader to consider the overall context of the situation to properly conduct a bitcoin market analysis.

Defining Support and Resistance

Another indicator that is important to keep in mind is support and resistance. Support and resistance are predetermined price levels of a cryptocurrency where the likelihood for a reversal exists. Multiple touches of a given price denote a support or resistance level. For example, the price continues to hit a low price at a support level without falling any lower. When a trader sees this pattern, they will typically opt to buy at the support price.

The reverse is also true. If a price continues to hit a high price without going any higher, this can be a good indicator the crypto asset is about to drop, and it is time to sell.

Assigning Meaning to the Relative Strength Index

The relative strength index (RSI) is a ratio that shows the average number of days the coin is up or down over a given period of time. The ratio will be a value between 0 and 100, which can be calculated using the formula:

RSI = 100 – (100/(1-RS))

Don’t worry about memorizing this formula; this value can be generated for you on several different dashboards. The only thing you need to remember is that with a weight of 30 or below, the asset is usually undervalued, suggesting it might be time to buy. On the other hand, an RSI value of above 70 indicates an overvalued asset, which means the asset is about to drop.

A stochastic oscillator also revolves around these values and can often be used to identify these same trends.

Identifying Trend Lines

As a cryptocurrency trader, you will also need to learn how to do a bitcoin trends analysis. You can quickly identify a trend line by locating a straight line of price points on a graph. At times, trend lines can help identify a line of support or resistance. There are three different trend lines you might come across. They are an upward-facing one, a downward-facing one and one that faces sideways.

Noticing a trendline is as simple as it sounds; however, some more advanced traders might use the terminology “Bearish” or “Bullish.” An easy way to remember this is a bearish trend is an upward-facing one. You can think of the horns on a bull that strike upwards, hence the action of pushing the price of a cryptocurrency higher. On the other hand, a bearish trend is one that slopes downward, similar to how a bear strikes downward with its paws.

Considering Trading Volume and Momentum

Another important indicator in a cryptocurrency analysis is the trading volume. The volume of an asset being traded can help to determine the strength of a trend. For example, when analyzing a candlestick chart, you might notice several long red candlesticks in a row. Learning how to read bitcoin charts, you would determine this indicates a bearish trend. It is important to consider volume because it legitimizes the notion that the cryptocurrency’s price is, in fact, following a trend-making your decision as a trader a lot easier.

In a situation where low volume is indicated, a technical trader will likely decide to sell the asset and take their profits. Getting out of the market at this point is often smart since no momentum in trading volume can indicate a trend reversal.

Calculating Moving Averages

If you guessed a moving average was the average price of a coin over a given period, you are correct. While averages can be calculated over any period of time (using a variety of different candlestick groupings), most experienced traders typically look at standards in groups of 10,20,50 or 100 periods. Depending on the type of trader they are, these periods might be in hours, days or weeks.

Moving averages can further be broken down into exponential and simple averages. The main difference between the two is that an exponential moving averages will give a more excellent value to more recent asset prices than those at the beginning of a period. A simple average is simply an average. To get the most value out of your market analysis, it is recommended that you consider both. A simple moving average can give a trader a broad view of a trend and can be contrasted with an exponential average that allows traders to quickly respond to the actions of the market.

Reading Bollinger Bands to Determine Volatility

Finally, the last indicator in this list for bitcoin technical analysis is volatility. Volatility can loosely be defined as the difference around the average price of an asset. An asset that is volatile can be seen as riskier since there are many possible outcomes for your investment to end at. In contrast, a nonvolatile asset typically does not deviate from the average and is, therefore, pretty predictable. Many might be hesitant to invest in a volatile asset; however, if you have many years to hold your investment or you are investing in a diverse basket of assets, this should not be a reason you avoid investing in a given asset.

Instead, you should consider volatility as an indicator to help you adjust your predetermined buying and selling prices to match the movement in price. The statistical chart most often associated with volatility is known as Bollinger Bands. These bands reflect the action of the cryptocurrency and will expand when the asset becomes more volatile and contrast when pricing becomes more predictable. These bands exist around a center line, which represents a 20-day exponential moving average. As more people purchase an asset, and the price begins touching the upper Bollinger Band, many traders will look to this as an indicator to sell. Conversely, a cryptocurrency asset that continually connects the lower band suggests an undervalued asset that is ready to buy.

Many bitcoin traders will agree that Bollinger Bands used in combination with other trading indicators are very influential in determining their trading strategies.

Incorporating Crypto Technical Analysis Into Your Trading Strategy

While a crypto technical analysis can be an excellent method to base your trading, this is only one method that should be used when determining the time to buy and sell. In addition, a smart trader should also consider public news, the mining rate, the action of whales (also known as traders who hold a lot of cryptocurrency assets) and other regulations around the use of crypto. Bitcoin market analysis blog posts can be a great way to keep on top of recent developments in blockchain, initial coin offerings that are about to hit the market.

Now that you know how to do technical analysis for bitcoin trading, you might be ready to get started. If so, you might be prepared to sign up for an account on a platform like Bitbuy and get started!

**DISCLAIMER** The following article is simply intended to be a guide to learn some fundamentals of technical analysis provided by a writer who is not an employee of Bitbuy. This should not be considered investment advice. Cryptocurrencies such as Bitcoin are volatile assets and can lose value extremely quickly despite technical indicators saying the opposite could take place. Please be extremely careful when trading cryptocurrencies.