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Technical Analysis for Crypto Trading

I recently attended a beginner’s trading course presented live by the Denver Crypto Group in Englewood, Colorado. Thanks Mike, Matt and Pete!

This was my first taste of technical analysis and analyzing price charts,Denver Crypto Group offers education and resources for bitcoin and cryptocurrency trading and it was eye opening.

Technical analysis is a well-known technique that can be used for many assets and investment types. It can help you make better investing decisions whether you day trade, buy-and-hold, or use some other fundamental strategy.

Before I attended the course, I viewed day trading as an extremely high-risk activity that was too reckless for my taste. However, as you’ll find out below, I discovered that one of the benefits of being a disciplined trader is that you can strictly limit your losses.

The following is partly information I learned from the course, along with previous investing knowledge, research and personal opinion. The actual course provided over two hours of “how to” advice and demonstrations that students can use immediately to begin practicing their new skills.

If there are any factual or technical errors written here, those are my own and not attributable to Denver Crypto Group!

What Is Technical Analysis Used For?

Technical analysis is a widely used method for making investment decisions for certain publicly traded assets. The particular asset under consideration isn’t that important, so long as the asset and related markets (i.e., the place(s) where the asset is traded) meet a few important criteria.

First, the market should be transparent and have a large number of participants. Think about stock exchanges. Almost anyone with a minimal amount of funds can buy stock assets. Prices are continually updated in close to real time, along with the number of shares and amount of money traded every day.

Amazon currently has 485 million shares of stock outstanding, and over 3 million shares are traded on a typical day. We know this due to regulations that require corporations and stock exchanges to report certain types of data and make them publicly available.

Aeon cryptocurrencyOn the other hand, if we examine a cryptocurrency like Aeon (figures courtesy of CoinMarketCap.com on June 21, 2018), we see that the entire circulating supply is only worth ~$21 million, and during the previous 24 hours of trading only $19,000 worth changed hands.

That means there are relatively few Aeon coins in existence, not many people are trading them and the trading volume (the dollar amount traded in one 24-hour cycle) is very low.

So, if you own 100,000 Aeon coins and the price begins dropping rapidly, it’s very unlikely that you’ll be able to unload those coins to other buyers before the price bottoms out. This particular asset is a poor candidate for technical analysis, in my opinion.

That’s because one of the biggest dangers of using technical analysis for cryptocurrency is that you need to have some confidence that the coin or token is widely distributed (not concentrated under the ownership of a few entities or accounts) and has a healthy, consistent trading volume. These factors increase the odds that you will be able to sell your asset when the time is right.

To put it more simply, lack of liquidity will lead to catastrophe, even if you make the “right” analysis!

Another essential requirement for technical analysis is the existence of enough historical data to validate market behavior patterns. The price trends of a one-week-old cryptocurrency coin are not going to give you actionable data for any number of reasons.

The ideal assets for technical analysis exhibit high volatility (large movements in price over short periods of time), high volume and large spreads between daily highs and lows. When prices are stable, it’s difficult to make money from short-term price appreciation or depreciation. When prices rise and fall rapidly with large amplitudes of variation, these are the perfect conditions for profiting from technical analysis.

Due to the volatile nature of many cryptocurrency assets, many people believe them to be a lucrative target for technical analysis. The more changes of direction you see in a price trend line, the more opportunities there are to profit from the price changes.

The Market Doesn’t Matter

It shouldn’t matter if we’re talking about the price of gold, stocks or barrels of crude, strictly speaking. All technical analysis cares about is the velocity and range of price changes over a certain period of time.

Of course, if someone magically invented a new process to cheaply create gold from lead, the gold market would be disrupted temporarily and old patterns may not recur for some time, if ever. Investors should remain aware of these macro influences on whatever market they target with technical analysis.

In the crypto world, macro influences can include government regulatory announcements, bad news about an exchange hacking scandal, or the entrance of institutional investors into the markets.

As I mentioned earlier, investors who perform technical analysis use historical price charts of some form, the most popular the “candlestick” chart (see example at the top of this post). Each candlestick represents a period of time, and shows you the start price, end price, and high and low price reached during that time period. This time period can be 15 minutes, 4 hours, one day, a week or any other interval you choose.

Chart example with technical analysis indicators

“Indicators” tell you when to trade

The time period you choose to observe is partly dependent on your chosen trading strategy. In general, the shorter time you plan to be invested in an asset, the shorter time period you’ll want your candlesticks to represent.

Whether you eventually predict the price to go up or down is irrelevant. In many markets you can profit by predicting either direction (“shorting” a stock lets you profit when the price goes down).

I won’t attempt to describe the actual indicators and patterns you might look for. There are countless websites, books and videos that describe and explain typical market price activity and different methods of analysis.

Technical Analysis Trading Strategy in a Nutshell

The basic strategy that was presented by the Denver Crypto Group is simple, once you overcome the complexity of choosing and analyzing indicators.

First, you review price movements and–using your chosen indicators–make a prediction about whether an asset is about to increase or decrease in value.

Let’s assume you predict the price of the Ripple cryptocurrency will increase over the next 24-48 hours (shorting cryptocurrencies may not be an option for many investors, for a variety of reasons).

Next, you buy a small amount of Ripple on a crypto exchange. Then you will use the exchange to create automated sell orders that will execute when the Ripple price reaches a predefined higher price (i.e., you made a profit) or a lower price (loss).

So, for example, if you bought $20 worth of Ripple at $0.50 per coin, you might set your automated trades at $0.46 and $0.56. Assuming the asset is liquid enough to sell and you are on a high-volume exchange, you’ll never lose more than 8% of your starting capital. Of course, you can’t gain more than 12% from this particular trade, either.

While you may limit potential gains by selling at a predetermined profit percentage, this is also how you manage risk by locking in profits before the market turns down again. In the case of the lower price target, the goal is to minimize loss if your Ripple analysis proves incorrect.

One of the most important features of a system like this is your ability to determine your “Risk:Reward” ratio in advance. You decide how much risk you’ll assume both when taking a profit and when absorbing a loss. Managing this ratio properly may be as important to your long-term results as accurately predicting the price direction.

Why Does Technical Analysis Work?

You might think that, with a huge population of investors essentially using the same methodology, that there is no way for this to work. Everyone can see, for the most part, the same data and the same signals and indicators. If everyone buys and sells at the same time, you gain no advantage, or edge, on other market participants, right?

The thing is, there are many technical indicators, and everyone has a slightly different slant on interpreting them. People also have different tolerances for risk, which means investors will set their automated selling prices at different levels.

I truly believe that the concept of technical analysis is a valid and possibly profitable technique for making crypto investing decisions. It’s certainly not a way for most people to get rich quick, although certain Internet marketers might like you to think so. Success is going to take some time and effort.

If you decide to apply the principles of technical analysis to your cryptocurrency trades, make sure you study and learn from several different sources. There are common elements and unique twists to every “system” I’ve run across, and it will be up to you to create a system that makes sense for you.