There is often quite a lot of negativity on the concept of technical analysis (TA) and daytrading. However, there is a reason why there are professional traders whose jobs is to look at charts. This post aims to give a summary of basic concepts to new traders who would like to explore this field of cryptocurrencies.

Here we go!

What the hell is technical analysis (TA)?

its definition is as follows: " Technical analysis is the study of statistical trends, collected from historical price and volume data, to identify opportunities for trade. Technical analysts observe patterns of price movements, trading signal and other analytical tools to evaluate the strength and weakness of an asset. "

But why would it work?

A chart of prices and volume represents all the past decisions taken by market participants (buying and selling). This information will, in turn, affect future participant decisions in two ways:

1. Psychological: What you did in the past affects how you approach future situations. For example, many traders tend to focus on the price at which they bought an asset, and if it declines, they want to sell when it reaches break-even again.
2. Reflexive: Some traders identify trends and chart patterns which are common, and act accordingly (buying or selling). If a sufficient number of participants follow the same strategy, it is expected that these chart patterns will follow the expected outcome and that the trend will likely to be sustained by more and more participants joining the trend.

Chart-analysis basics

Trends

The following figure shows the 3 (main) possible scenarios:

Bullish / Crab / Bearish

1. Uptrend: In an uptrend, the asset is going up making, higher highs and higher lows. Also known as bullish.
2. Downtrend: In a downtrend, the asset is going down making, lower highs and lower lows. Also known as bearish.
3. Sideways trend: In a sideways trend the asset trades in a horizontal channel, also known as a crab cycle.

​

Resistance and support

The price basically never goes linearly up or down. It will face resistance or support:

• ‍Resistance: A level where an uptrend can be expected to pause or rebound that indicates a concentration of sellers.‍
• Support: A level where a downtrend can be expected to pause or rebound due to a concentration of buyers.

The following figure shows these terms:

Resistance and support zones

Importantly: When the resistance level is broken it usually becomes a support level and vice versa.

​

Chart-analysis advanced techniques

OHLC (Open-High-Low-Close) Charts:

These charts display bars that are known as ‘candlesticks’. A candlestick's shape varies based on the relationship between the day's high, low, opening and closing prices.

• Bullish candle (green): The close is above the opening.‍‍
• ‍Bearish candle (red): The close is below the opening.

The following figure shows an example:

OHLC Charts (left: bullish candle. right: bearish candle)

​

Bollinger bands:

Bollinger Bands display a graphical band (the envelope) with a simple moving average in the middle. The width of the envelope expresses the volatility. A higher volatility means that the asset can potentially fluctuate rapidly within a larger range of value.

The following figure shows these bollinger bands:

Bollinger bands. Upper, middle and lower bands

​

MACD (Moving Average Convergence Divergence):

Moving Average Convergence Divergence (or MACD) is a trend following indicator that looks at the combination of two moving averages:

• A short-term moving average
• A long-term moving average

These two moving averages are combined to identify what is the current trend and if there is a change in the momentum.

The MACD lines displayed below can be interpreted as follows:

• If the blue line (MACD line) is above the orange line (Signal line), the momentum is bullish.
• On the contrary, if the blue line is below the orange line, the momentum is bearish.
• When the lines diverge, it denotes a strengthening of the current trend while a convergence shows a trend reversal.
• When the lines cross, it is likely that the change in momentum is confirmed.

The following figure shows an example:

​

Moving Average Convergence Divergence (MACD) example

​

That's it for today.. there are countless other trading strategies and techniques but the post would be too long..

I hope that this teaches new traders some of the basics of technical analysis and daytrading!

(Credit to SwissBorg Educational Blog)

Have an amazing day and see you on the charts!