The use of technical analysis and signals in the cryptocurrency market, tips
When it comes to predicting cryptocurrency prices, opinions differ widely: someone says that Bitcoin will fall to $ 900, others are confident that it will rise to $ 100,000. In the article, we will look at the methods underlying technical analysis and cryptocurrency signals.
A signal is a message in which the analyst gives his estimate of the future price. And based on this information, investors can decide whether to open a specific position. This article tells you what types of signals exist, how to understand them, and how to use technical analysis.
How signals work in the cryptocurrency market
When the analyst is confident enough in his forecast for the future movement of quotes (as a rule, long positions are considered), he publishes his message. Community members can view various signals and select the most appropriate ones.
Signals are usually accompanied by additional information, such as :
- The range of levels that are attractive for purchase (usually expressed in Satoshi);
- Goals for sale, which, according to the analyst, are best suited (also in Satoshi). Sometimes several goals are given. The closest ones are considered low-risk, the rest are intended for investors who are willing to take higher risks in the hope of earning;
- Stop Loss. This is the level at which to close the position and limit losses if the forecast was not justified.
Usually, these data are sufficient for an investor to make a decision on participation in a transaction.
But the signals are as accurate as the analysis underlying them. Here are some obvious factors that can affect the cost of cryptocurrency:
- Important events and how they affect prices;
- News and analysis of their influence on investor sentiment;
- The overall composition of the community and the team, including the experience and reputation of the latter.
However, most cryptocurrency signals, especially short-term signals, are based primarily on technical analysis (TA).
What is technical analysis?
You may have heard of technical analysis or alternatives describing the same process (for example, risk / reward analysis or market psychology). Technical analysis is traditionally used by intraday traders in the stock market, hedge funds, brokers and investors.
Many people apply TA principles to study price trends and predict future movements. In fact, he looks at the current behavior of all sellers and buyers in a particular asset and tries to answer the question:
Where will prices go in the foreseeable future, based on recent behavior and historical patterns?
The effectiveness of technical analysis in cryptocurrency trading
TA is especially effective in cryptocurrency markets for a number of reasons. It is known that these markets are speculative, and the range of players varies from stock market veterans and experienced crypto traders to people who have no idea about stocks that first heard about Bitcoin a couple of hours ago and are already ready to invest their savings in it.
Due to the lack of a common understanding of cryptocurrency and their intrinsic value, prices often respond to news, hype and mood swings with sudden ups and downs.
In addition, the cumulative capitalization of cryptocurrency today is not up to $ 500 billion. Trading volumes in some less popular cryptocurrencies are so small that even a purchase of 10 thousand dollars can lead to a significant price shift. As a result, the market situation favors various manipulations and fraudulent schemes (such as pumping and dumping). Thus, the cryptocurrency market is particularly sensitive to the behavior of buyers and sellers.
Another important factor is robots. Trading algorithms are widespread in the cryptocurrency world, and many of them use technical analysis.
The combination of low volumes (subjecting some cryptocurrencies to excessive volatility), robots (acting on the basis of technical analysis and indirectly affecting the equilibrium price) and the reaction of buyers and sellers to price changes in the highly speculative market hints that TA can reliably predict further movement prices.
Cons technical analysis
Despite all the advantages, technical analysis has many drawbacks. He not only does not guarantee the investor success, but does not take into account news or events. That is why when trading on technical analysis it is necessary to set stop-loss.
Bad news can seriously affect the cost of cryptocurrency. The situation is aggravated by the fact that with a sharp increase in volumes, the work of currency exchange exchanges may slow down, and trading – to stop. As a result, it is not always possible to liquidate a position during a crisis.
The lack of a stop-loss can lead to the fact that by the time when you can sell your coins, their price will drop significantly. Many traders faced similar problems.
According to Investopedia, technical analysis is based on two assumptions:
“The prices reflect all available information. In other words, quotes reflect everything that is known about a security at a given point in time and, therefore, represent its true value. This assumption is based on the idea that the market price always reflects the general knowledge of all market participants. ”
Thus, even the best technical analysis can only assume what the price behavior will be based on factors affecting the current situation.
"The second fundamental assumption of technical analysis is that price fluctuations are not random – market trends can be found and earn them."
Price movements are not random and reflect the collective attitude of investors to the asset. There is a good reason behind every deal. Although the modern cryptocurrency market seems overly emotional, its price dynamics should not be considered random – behind every purchase and sale there are people with their own convictions.
Technical analysis does not take into account intrinsic value, the prospects for cryptocurrency or the experience of its developers. This means that TA does not make much difference when choosing cryptocurrencies for a long-term portfolio.
Application of technical analysis in the cryptocurrency market
Technical analyst Zander publishes his analysis in the cryptocurrency trading group Cosmic Trading. In total, he made eight accurate predictions and two erroneous, when the intended pattern did not materialize and the price reached the stop loss level. All his signals can be viewed here .
When formulating his signals, Zander uses various elements of technical analysis – support / resistance lines, MACD, etc. At the same time, Zander gives investors three important tips for following his signals:
- Always put stop losses. Let's face it – when it comes to profit, we often become overly greedy. The tool reaches the set goals, the voice inside starts to wonder if it will go further? As a result, instead of closing the position, we continue to wait. Then the trend suddenly reverses and the price collapses. To limit losses, put stop-loss – they will automatically close the position if the signal turns out to be wrong.
- Adhere to the established time frame. Sometimes cryptocurrency takes some time to get to the goal. The path to it can be quite stressful both financially and psychologically. Keep calm and do not close the position too early, especially if it has not yet reached the stop loss. Even short-term signals may take several days to form or break through the resistance line.
- Never put all the money on a single signal. The cryptocurrency market is highly volatile, and this practice only exacerbates the risks.
Is it possible to invest all the money in signals
This article should in no way be taken as investment advice. You should be engaged in distribution of assets only independently.
So the answer to the question above is no. And just not. Signals are weighted assumptions. Cryptocurrency markets are highly volatile, so diversification is necessary. It is not necessary to invest all funds in the trade on the signals. Distribute and minimize risks.
You can divide the money in the portfolio into three parts :
- long-term investments (55%),
- medium term (30%),
- short term (15%).
Portfolio №1. Long-term investments
This portfolio includes cryptocurrencies that you buy for the future. Their selection is carried out on the basis of fundamental factors, such as the experience and reputation of the development team, prospects, community activity, market promotion, investor attitudes.
Portfolio №2. Medium term investments
This part includes cryptocurrencies, which, in your opinion, have high growth potential. In other words, they are promising rather not from a fundamental, but from a technical point of view (they can be considerably more expensive). It can be coins, around which the hype is heated in every way, as was the case with RaiBlocks / Nano (some bought this cryptocurrency when it was traded only on small exchanges and dropped when it entered Binance – this moment corresponds to the peak of prices on the charts).
Portfolio number 3. Intraday Trading
This portfolio is more focused on the amount of money, rather than on specific cryptocurrencies, since its composition will change daily or weekly. For short-term trading, you can use free or paid signals. A good signal can make a significant profit (several tens of percent) in a couple of days or even hours. Profit from this portfolio can be distributed between the first two.
Due to the subjective interpretation of the figures in the charts, technical analysis is more art than science, despite the numerical methodology.
Signals from groups of traders take into account news / events / technical analysis to increase their reliability, but this is only a tool that uses information available at a particular moment. Therefore, always diversify your portfolio to reduce risks and do not invest all the money in a single signal.
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