There are two kinds of people in the world. Those who believe in Technical Analysis & have many lines, Indicators, patterns, moving averages on their charts & those who think Technical Analysis is completely bogus. In this article, you’ll find out a summary of Technical Analysis & how the thing works exactly.
Before I start, let me put up a disclaimer that price prediction is not based solely upon Technical Analysis but also includes fundamental analysis & market sentiment research in general. To get your head out as a day trader, everyone needs to find a sweet spot that lies in between these three elements.
To sum up, what is written further down in this article, we will be having our conversation on what is technical analysis, how you can spot market trends, how it can be useful & some common patterns that you can use for making money in a trade. The short & simple sum-up of technical analysis is to buy low & sell high.
What is Technical Analysis?
Technical Analysis is one of the things that is overused by people who know what it is & undervalued by those who have never used it. When it comes to investing, not just to cryptocurrency. The main step as I mentioned above is to have profited by buying something at the cheapest price possible & then selling it at the most expensive price.
That’s much easier said than done. Recently, Nithin Kamath, CEO of Zerodha said that less than 1% of active traders beat the annual returns of an FD. That’s what it is. So unless you are very sure about outperforming the market by trading you probably should be in for the long haul.
That being said, Technical analysis is a great tool to understand the general momentum of the market. It is not a holy grail that will be correct 100% of the time & make you wealthy overnight, take it as another data point to consider before putting in your money.
Some people I know as day traders may only trade once a month but they beat other day traders by huge numbers. A general perception of the momentum of the market can surely help you get an extra edge over 99% of the traders. You may wonder why am I explaining this a lot and emphasizing a specific point?
That’s because, I am sure many of the readers will just go down, look at the patterns and try to implement them in real-world trading with real money. That being said, you can compare yourself with Casinos after doing technical analysis because you have an extra edge over the rest of the market. Then can be as small as 1% but over a long-term horizon added with large enough volume, it can compound really fast.
The following are some of the possible 1000s of Indicators that can give you an extra 1% edge over other traders. Beating the market is hard but if some want that extra competitive advantage, it is worth learning.
Who Controls the Market?
This question may not seem important but you need to ask yourself this every day. Who is actually controlling the market? Your most obvious thought can be whales or institutions or maybe even big market movers.
All these can be obvious things but the real reason for fluctuation in the markets are retail investors like you & me including millions of other people who are anticipating the market on a daily basis.
People by nature are unpredictable & hence the markets are unpredictable as well. There can be unforeseen events which no one can predict & that can cause the liquidity to move out of the markets. We witnessed a similar scenario in 2020 when every market took a massive correction.
Maybe today, I need to liquidate 100 Ethereum which you may plan on holding for a long-term period. This will instantly take out the liquidity of Tether or USDC off the market & you cannot predict these things but they make insane amounts of money in & out of the markets.
Many people think that if they can find the right tool & technique for making technical analysis, then they might be able to predict the future & make millions. But the truth is nobody knows the future. Our only goal with technical analysis is to find a plan that works for us and never let emotions take over our plan.
Technical analysis is simply a tool to help us. Now that we have gotten most of the theory. Let’s look at some of the common candlesticks.
Candlesticks are a way to look at price action within a specific timeframe. A candle can be very confusing if you don’t know what you’re looking at.
Candlesticks turn four points of data into a single image. You have the Opening Price of the candle, Closing Price of the Candle, Difference Between Two Prices, & more. The thing to note is, for a Green Candle, the opening price is at the bottom of the base & the closing price is at the top whereas for a Red Candle the reverse is true.
So the color of the candle tells you whether the price went up or went down on a specific time range. The body of the candle tells you about the gap/difference between closing & opening price along with the time frame. The time frame for a Candlestick could be 1 min, 10 min, 1 hour, 4 hours, 1 day, 1 week, so on.
The thin lines on the top & bottom of a candlestick are called ‘Wicks’. These are evidence of where the price went & then recovered. It all starts to make sense when you read the candlestick data a couple of times. It is really simple.
Now there are candlesticks that can give you insights into the market. Observe the last candle in the Green Candlestick collection. This one shows that the price went way up & then came back went down which means the buyers were exhausted. In other terms, there were more sellers than buyers which might indicate that there were more sellers than buyers for the asset and soon it may go through a collection.
This image above tells you what mostly you need to observe in a single candle. My preferred time is the 4-hour candlestick but you may choose daily or weekly candles based on your trading horizon.
The next thing to look for is trends. Remember trend is your friend in the markets. An uptrend is formed when the candles keep forming higher highs and higher lows. This can be a strong indication of an upcoming uptrend. Now I know this can be a bit confusing to understand from an article but these are very basics.
When the trend line starts to form lower highs & lower lows, it means a downtrend is underway. To make money in a downtrend, you might open a short position on the asset with 3x or 5x leverage but this can be risky as well.
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