Key Takeaways
- Ues technical analysis to spot trends (bullish, bearish, or consolidation) and look for trading opportunities.
- Use significant price levels (support and resistance) to determine where to trade.
- There are many useful indicators that we can use to find entry and exit points for trades.
- Technical analysis is extremely useful for helping traders make better decisions.
Identifying Trends
In the last lesson, we learnt how to spot candlestick patterns and chart patterns. These are short term patterns to look out for, and they can be hard to spot, as they are few and far between. If you want a more commonly found tool to predict prices, it is useful to look at chart trends. If you can find a trend, you can ride the trend to make a profit.
There are three types of chart trends, which are very easy to identify. These are bullish, bearish, and consolidation.
Bullish Trend
A bullish trend, also known as an uptrend, is when you see the prices getting higher over time. Charts are never a straight line, so it will not continually rise at a regular rate, but you can see the increase by looking at the peaks and troughs. In a bullish trend, you will see higher highs (peaks) and higher lows (troughs). In the screenshot below, you can see that each peak (circled in green) is higher than the previous one. Moreover, each trough (circled in red) is also higher than the previous one.
Bearish Trend
The opposite of the bullish trend is the bearish trend, or downtrend. It is noticeable due to the lower highs (circled in green) and the lower lows (circled in red). There are more sellers who are willing to sell for lower prices, and fewer buyers to push the price back up. There is a clear downward trend happening, which could continue. As a beginner, the idea is to trade with the trend, in the hopes that it will continue. It is not recommended to trade against the trend, hoping that it will turn around.
Consolidation
When the chart is not in an upward or downward trend, it is referred to as consolidation, which is a sideway trend. As you can see enclosed in the blue rectangle below, this section of the chart does not have much price movement at all. There are some increases and decreases in price, but it is mostly trading within a small price range.
Traders look for consolidation areas to enter trades, because it usually precedes a breakout, which is an opportunity to make a profit. In the chart below, you can see that after the consolidation ends, there is a bearish breakout, and if you are a trader who enters a short position, you will profit from the falling prices.
Support and Resistance
When studying charts, traders look at significant price levels which are referred to as support and resistance. Support is a price level where a downtrend is expected to stop, because a lot of buyers are willing to enter at that price. Conversely, resistance is a price level where an uptrend is expected to stop, due to large numbers of sellers happy to sell at that price. It is important to note that the support and resistance are never an exact price, but rather a zone around a particular price.
Support and resistance levels occur because of the underlying psychology of traders. When the price of a cryptocurrency increases to a certain level, some traders may decide to sell (if the price is at resistance) or buy (if the price is at support) based on their expectations for the coin's price. These traders may believe that the price will not rise above (or fall below) a certain level, and their actions can create a self-fulfilling cycle in which the price is indeed resisted (or supported) at that level.
In the graph below, you can see that the resistance has been tested three times (red circles). If the resistance is breached (at the blue arrow). then there is usually a breakout, and as you can see the price has gone on an uptrend. When levels of resistance or support are broken, we need to look at the graph for new levels. In an uptrend, like in the graph below, the previous resistance level can become the new support level, (see right of the graph, circled in green).
Indicators
Indicators are statistical tools used to analyze and interpret cryptocurrency charts, and are useful in technical analysis to help make more informed decisions when trading. They are mathematical models that aim to give context to price action (how a cryptocurrency is trading now versus how it traded previously), and help traders to spot changing trends.
Just like trends and patterns, indicators are based on historical data, and are only a guide to future price patterns; they cannot be relied upon as a definitive source of truth. We will discuss some of the common indicators such as moving averages, relative strength index, and average true range.
Moving Averages
Moving averages are a way of smoothing out the price data for a cryptocurrency chart. It does this by taking the average of the price over a certain number of periods.
SMA (Simple Moving Average)
The most common type of moving average is the Simple Moving Average (SMA), which is just the average of the price over the given time period. In MEXC Global, it is easy to show the SMA, click the indices button (blue arrow in screenshot below), and select MA. You can also choose the time periods you wish to view the SMA for (click the button shown by green arrow). If you want to expand the chart, click the button denoted by the pink arrow, to view the chart in detail.
In the chart below, we can see 5-day, 10-day, 30-day, and 200-day SMA, denoted by the orange, purple, blue, and pink lines respectively. If we look at the pink line (the 200-day SMA), you can see that the current price is below this indicator. This tells us that in the short term, the price has become bearish compared to the last 200 days.
EMA (Exponential Moving Average)
The other popular type of moving average is the Exponential Moving Average (EMA). Instead of simply averaging the price over the time period, the data for this indicator is calculated using a formula that gives more weight and importance to more recent cryptocurrency prices. To access EMA in MEXC Global, click on the index button (blue arrow), and then select EMA.
In the chart below, the 6-day, 12-day, and 20-day EMA are denoted by orange, purple, and blue lines respectively. You can see that the EMA follows the price much more closely than the SMA.
RSI (Relative Strength Index)
The RSI shows the relative strength of the price compared to previous prices. To view this index on MEXC, click on the index button (see blue arrow below), and then click RSI under the Sub index field. This will show the RSI at the bottom of the graph, which you can see more clearly by expanding the graph (pink arrow).
At the bottom of the graph below, you can see 3 different RSIs: 6-day, 12-day, and 24-day RSIs, shown by orange, purple, and blue lines respectively. The RSI is an indicator of momentum, and is a number from 0 to 100. If the RSI is below 30, it is generally considered to be oversold (possible good time to buy), whereas if it is above 70, the cryptocurrency is seen to be overbought, and expensive.
However, this is not a hard rule, and for shorter-time period RSIs, for example 6-day RSI, it may need to be below 20 to be oversold, and above 80 to be overbought. Traders can also look at a combination of the three different RSIs to make decisions. If RSI6, RSI12, and RSI24, are all in the high bands, then it is a more compelling argument to sell, rather than if RSI6 is high, but RSI12 and RSI24 are low.
Average True Range
Another useful technical analysis tool for traders is the Average True Range (ATR), which measures the volatility of a cryptocurrency. It is an average of the true range (how much the price fluctuates) over a set number of time periods, and this gives an indication of the largest probable price move in the given time period.
To access the ATR in MEXC, you need to switch from the 'Original' chart view to 'TradingView', by clicking the TradingView button (see blue circle below). Then click on the indicator button (green arrow), type in ATR in the search field, then click 'Average True Range'. You will now see the ATR displayed as a red line at the bottom of the chart. To expand the chart for easier viewing, click the maximize button (see pink arrow).
The ATR is important for identifying potential entry and exit points in the market, and setting stop-losses. If the ATR is high, you don't want to set a stop-loss that is too close to the current price, but instead allow some breathing room for normal volatility in the market.
For example, in the chart below, if we look at the very start of the chart, you can see the ATR is over 2,400. This means that the price is likely to fluctuate up to $2,400 in one day. In this case, you would not set your stop-loss less than $2,400 below the current price, otherwise it will probably trigger, and you end up selling your crypto even though the price is going up over the next couple of weeks.
By knowing what the ATR is, you can also determine if you expect the price to go any higher in a certain time period, and whether you should take profit now, or if there is still room for the price to increase. When you become comfortable with using ATR, you will be in a much better position to enter and exit trades.
Now that you understand technical analysis, it's time for the fun part, where we put together what we have learnt throughout the course. In the final lesson, I will show you examples of how to trade crypto so you can get the hang of it before you try it for yourself.