Making Sense of Technical Analysis
Technical analysis is the presumption of the market trend and price movement by incorporating historical data, indicators, and patterns. Traders and investors use special mathematical tools to predict the market movement to seek trade opportunities.
The fundament approach is mainly used by long-term investors and for those entering relatively newer projects. We have already covered what techniques are used by these newer projects to scam people. Many indications can tell if a project is authentic or not. Fundamental Analysis mainly focuses on the followings:
- News announcements specific to the coins
- Economic and Financial Statistics of the coins
- Looking at Project-related data including Website Whitepaper, and MarketCap
Technical traders believe that the market movement is not random but follows patterns. So, if we spot what those patterns are, we can easily predict the market direction. Technical traders use technical analysis to forecast prices by processing statistical trends by analyzing historical data. The patterns are repeatable and identifiable which gives technical traders an upper edge to secure good gains.
Understanding the chart and tools: Technical Analysis
Understanding the price chart and its tools is the first step you take toward learning technical analysis. Most traders use the TradingView platform as it is equipped with advanced interactive tools to help traders draw their strategy best. Let’s first break the TradingView chart of the Bitcoin US dollar pair.
Candlesticks are being used since 1700 to show the price and its momentum. In a candlestick chart, each candle on the chart will show the price movement of the coin in a set timeframe. If the price increase during that time the candle will be green and if the price drops the candle formed will be red as shown in the image below.
The thicker area of a candle is called the body which shows the opening and closing price of the triangle. The bars of candles are called wicks which show the price minimum and maximum price movement during the set time period. For example, if an asset, like Bitcoin, is trading at $40,000 and a new candle starts forming at 12:00 PM. Now since the candle is of a 4-hour time frame, it should be closed at 4:00 PM. If the price before candle closing was about $40,000 then the candle should be green. And if the price dropped below the $40,000 mark the candle formed will be red. This decides the overall color of the candle.
Though candlesticks show the price movement yet technical traders believe that their shape can tell a lot to predict the market direction. Traders use one or three candles to identify the trend and trade accordingly.
1. Three Line Strike:
This is a trend reversal pattern with an accuracy of 83%. The line Strike can be bullish or bearish depending on the previous trend. As in the image above, the pattern shows a bullish reversal. The price is dropping making lower lows until they strike a huge bullish candle indicating the trend reversal.
2. Evening Star and Morning Star:
The market moves upwards when new buyers enter the market. Such candles appear at the peak of an uptrend further pulling the price up to a new high. Since new buyers don’t enter the trader this continuation of the bullish run stops. As the selling pressure rises, the existing traders exit the market making it dwindle by making lower lows. Evening Star appears at the bottom and has exactly opposite outcomes. This type of candle has an accuracy of 72% according to our Experts.
These are actually two types of candlesticks: Hammer and inverse Hammer.
A hammer is formed while in a downtrend with a short body and a long wick. During a bearish trend, although the price dropped this type of candle shows that there is buying pressure below this price level so a bullish reversal is expected.
On contrary to this, the inverse hammer is found in a bullish trend with a strong upper body and lower long wick. This kind of candle shows that though new traders are entering the market there’s a lot more selling pressure above this level so a downtrend is very likely to start.
4. Bullish Engulfing and Bearish:
This pattern is defined by two candles during a bearish market trend. There’s one small red candle being engulfed by a large green candle. This clearly sends a bullish signal to buyers to enter the trade and alter the trend. The bearish Engulfing pattern appears in a contrary position and can drag the market downwards causing a reversal.
These are some most important candlestick patterns traders should be looking for to execute profitable trades. These patterns play important role in driving market direction as retail traders or technical traders enter or exit a trade on these patterns.
Summary: Technical Analysis
The reliability of technical analysis is always questioned as no technical or fundamental analysis tool is perfect and this makes the trade even trickier. Market influencers and big players often fake these patterns to knock the retail traders out of the trade. These well-funded players have advanced algorithms with lightning-fast trade abilities. They alter the market to look so obvious to move in a direction to trap retail investors through fakeouts. It would be wise to first execute the fundamental analysis to spot if there are any influencers in the project and then use these technical factors to spot some reliable trade opportunities.