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Part 3 of 4: Technical Indicators

Feb 12, 2023
byNDAX Labs

Other Considerations for Technical Analysis

Though many traders basically use only candlestick patterns and a few key moving averages to perform 90% of their TA, technical analysis involves using other data to take candlestick analysis from educated guessing to something more certain. Maybe you could think of candlestick analysis as being a good blackjack player. But, if you know candlestick analysis, volume-price analysis, and support and resistance line usage, it is like being a blackjack player who knows how to count cards. You have a much better chance of beating the house in the long run.

Here are three of the most important considerations as you learn how technical analysis may be performed on cryptocurrency.

Trading Volume

Trading volume is the number of units, coins, or currency lots traded within a specific timeframe. This info gets visualized as a vertical bar on the bottom of the price chart (just above the x-axis).

Trading volume is important because it measures activity in the market. Traders may pay more attention to candlesticks made during periods of high trading volume, and they may be wary of ones that appear to show a reversal or trend formation but have low trading volume.

Moving Averages

Moving averages (MAs) measure the average change in price over a period of time. These cryptocurrency indicators can help measure the momentum of a trend. It is a line placed directly over the price chart.

The moving average can provide vital background information about the direction of the market. If the market moves in waves, the MA can offer visual insights into direction and speed with a smoother, cleaner line.

Traders can also use multiple MA lines on one chart. They may have one line made up of short-term averages from the last 10 periods and a long-term one made up of data from the last 50 to 200 periods.

When the short-term line passes over the longer one, it is a bullish sign to get into the market. When the slower-moving long-period MA crosses under the short-term one, traders can see it as a strong sell-signal.

Support and Resistance

The final vital concept in understanding cryptocurrency technical analysis is support and resistance. Support is a bottom market boundary and resistance is a top boundary. TA specialists believe that markets move in patterns, and support and resistance lines are vital to those patterns. They are areas on the price chart that the market price has a difficult time crossing.

If you zoom out on a chart, you may be able to see where these boundaries might be. The market will stall or reverse in certain areas. Charting software typically allows you to manually or automatically draw horizontal lines at these price points.

Of course, the market can cross support and resistance levels. This is known as a breakout. However, when you combine the support and resistance levels with candlesticks, volume data, and momentum from moving averages, you are able to evaluate whether the market will reverse from down to up at the support line or up to down at the resistance level.

Technical Analysis Tools and Indicators

There are many additional technical analysis tools and indicators. You may choose to use different types of market data analysis tools for different crypto assets to bring specific insights.

Most strategies involve using more than one crypto technical analysis tool. The idea is that the different indicators and patterns support each other so you can be more sure about your decisions.

It is easy to get carried away and end up with a chart with so many different indicators that you can’t even see the candlesticks. Most successful traders learn how to use a few key indicators and largely stick with these tools so they have a clean chart that is easier to read.

This level of indicator use is not necessary. For one thing, some indicators use similar data, so using both would be redundant. Secondly, many indicators won’t be effective for your chosen asset or timeframe.

The approach when choosing the best technical analysis indicators for cryptocurrency is to find the ones that fit your strategies, timeframe, and the currencies you want to trade. You can use a demo account or backtest to see which trading tools work the best for each situation.

Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.