Just like the foreign exchange market, the crypto market is actively traded by individuals who are looking to benefit from price movements, ecrypto market is heading, it can be hard to believe that technical analysis (TA) is useful to predict price action. Although scepticism is understandable in such circumstances, chart reading is undeniably a skill you want to master if you are attempting to trade virtual currencies. Here is why.
Is Technical Analysis Useful for Trading Digital Currencies?
On the one hand, news pieces and social media posts create a lot of noise and can cause poor decision making. On the other hand, charts provide objective data as they reflect how prices previously behaved and they prevent traders from reacting emotionally. For that reason, Crypto Technical Analysis Tools are used by many successful traders to build their strategies. CryptoCoinTrade reminds us that “technical analysis tools applicable to Forex and other markets can be used for digital coins. Additionally, the crypto market is quite a volatile one, even more so than mainstream industries.” Because volatility is a trader’s bread and butter, savvy speculators can expect to achieve success with crypto trading if they learn and practice the basic requirements of TA.
Nonetheless, technical analysis is more reliable in more stable and liquid markets, such as Forex. Also, while the size of the market makes it impossible for a single trader to drive the price of a national currency in a particular direction, some cryptocurrencies have a relatively small market capitalization. Therefore, they are more subject to influence by institutional investors, and this can affect the reliability of technical analysis. Although some virtual currencies are more vulnerable to “pump and dump” schemes, we do not believe that major coins such as Bitcoin (BTC) or Ethereum (ETH) can be easily manipulated, especially over longer time frames.
What Needs to be Learned Before Testing Your Strategy
Before risking any sizeable percentage of your capital, you need to get educated about elemental concepts of TA. First, you need to learn how to analyze the market’s geometry by tracing trend lines, identifying zones of support and resistance, and by recognizing chart-pattern formation. Then, it is highly recommended that you familiarize yourself with moving averages, indicators such as the Moving Average Convergence/Divergence (MACD), and the relative strength index (RSI). If market structure provides a signal that lets you know when there is an opportunity, indicators give you the best time for your entry. Finally, you can dive deeper and explore more advanced concepts such as Fibonacci, the Wyckoff Method, and the Elliott Wave Theory. These can be very helpful to gain an edge over the other market participants.
While the idea of trading on a five-minute chart might be appealing, it is strongly recommended that beginners start with larger time frames, such as four hour or even daily charts. Zooming out will give you more perspective and force you to wait longer before acting on a specific signal. In other words, your decisions should be well thought out. Unlike Forex, crypto markets do not close on weekends, which can lead you to over trade.
Bear in mind that trading in virtual currencies is different from trading in the foreign exchange market because the latter requires a trader to take into account many fundamental factors that are non-existent in the world of digital coins. For instance, national currencies are directly tied to their respective economies, whereas cryptocurrencies are not necessarily impacted by the general state of an organization or a collectivity. Hence, although you might have some experience with the foreign exchange market, we strongly recommend that you learn the basic fundamentals of crypto analysis to know what criteria are relevant for evaluating a digital coin.
For proponents of technical analysis, this discipline is the best tool available to forecast price direction. In other words, charts do not lie. Even though many investors have proven to be highly successful in trading traditional markets thanks to TA, many novices are still reluctant to believe that mastering this craft will augment their chances of accomplishing the same thing with cryptocurrencies. Nonetheless, most motivated individuals pursuing this dream should be able to achieve their goal with proper education and sufficient training. Finally, it is mandatory to learn risk and money management because protecting your capital is even more important than profitability if you aim to become a professional crypto trader.