In the world of finance, technical analysis is easy to dismiss as a pseudoscience. It's 'charting magic', simply a bunch of lines drawn on a historical stock/crypto price chart in an attempt to predict the future. It will always take the backseat to legitimate research and analysis though technical analysis is not without its merit.
There are a couple points to consider:
1. There is measureable, historical momentum evident in the stock market and investing in stocks/crypto with a "hot hand" results in striking and robust outperformance. As such, investing in companies and coins going through a phase of momentum growth is key to short term trading.
2. Considering that the market for stock and coin investing is built up of millions of individual traders, it is peramount to have a small understanding of the psychology and sociology of the attitudes and biases of these investors. Given that every price is simply the equilibrium of numbers of buyers buying and sellers selling, it is key to guage where people are buying and selling (where their stop losses, stop buys, anchor points of references, etc. are). It's also important to have an idea of other investors and your own cognitive biases. These biases include our tendency to herd (and not accept conflicting opinions), loss aversion (our outsized pain experienced by losses relative to our joy of gains), the anchoring effect ("I won't sell under it reaches my initial purchasing point), etc. Technical Analysis helps uncover this supply/demand balance as measured by prices and volume and also uncovers the biases we all are subject to.
3. Technical analysis and patterns on charts also helps uncovering the key support/resistance levels that underpin the ability for a stock to move upwards and downwards. For example, Bombardier is trading in a range of $0.85 to $1 and is having tremendous difficulty breaking out of $1, a key 'psychological resistance level'. Much like if Dogecoin ever comes close to one dollar, it will face tremendous difficulty breaking above - as this is likely the point where many people will be selling and likewise, if it breaks above on heavy volume, will create its new support level.
The choice of investing in any stock or coin long-term must depend on your research and strong investment thesis for said coin but applying some technical analysis can be very helpful towards finding good entry and exit points. Let's review.
Patterns
There are many patterns that can demonstrate either continued trends upwards or downwards or a reversal pattern. Some common ones include the following:
Continuation Patterns - imply that the stock price movement will continue uninterrupted. Common patterns include triangles and others.
Reversal Patterns - imply that the stock price movement will shift direction. Common patterns include double/triple tops and head and shoulder patterns.
Indicators
There are a number of indicators important for measuring when to find an entrance and exit point for your stock or coin purchsae and some of my favourites include the following:
Relative Strength Index - this is a momentum indicator used to find overbought/oversold conditions and has a reading from 0 to 100. Anything below 30 is considered oversold and above 70 is overbought.
Moving Average Convergence Divergence Indicator - Is a trend-following indicator that shows the relationship between two moving averages (calculated by subtracting the 26-period exponential moving average from the 12-period EMA. A 9-period EMA is then treated as the 'signal line' and plotted along the other to function as buy and sell signals - buying when it crosses from below to above.
Bollinger Bands - These are envelopes plotted at a standard deviation level above/below a simple moving average of the price.
Moving Averages - Moving Averages can help guage momentum of a coin/stock. When above the moving average (and the exponential moving average for even greater accuracy), a stock is trading with momentum. When it crosses from above to below its moving average, this is a 'sell signal'. When crossing above, it is a buy signal.
Time Frame
The timeframe for your patterns/indicators depends on your goal accomplishment. If you are looking to purchase something long-term, I would look at the weekly chart for an idea of the momentum and sentiment for long term investment decisions. Beyond this, you can complement your weekly timeframe with a daily and hourly timeframe to find the perfect moment on a short-term basis for when you want to place your purchase/sale. Once you have found the perfect long-term investment, you can dial it down to as short a timeframe as you would like to find the perfect price to purchase at. The shorter the timeframe, the better is it for short-term trading. (For example, if you want to daytrade, you might want to find a volatile stock/coin and continuously buy at support (say $0.65) and sell at resistance (say $0.70). If your trading costs are low and volume is high, this might become a very profitable trading strategy for you.
How to Use Technical Analysis
By favourite website to apply technical analysis is using tradingview.com. It is a free website where you can search any number of listed stocks and cryptocurrencies and can apply different timeframes,
How to use? Search a stock/coin and click Full-Featured Chart. On this screen, you can add three indicators/strategies, apply different types of charts (candlesticks/bar graphs/ etc) and you can draw lines and so on. This website is free and easy to use.
Above is Dogecoin on the Hourly Timeframe. Note the following: It is bullish in some sense (below the signal line of the MACD), bearish in others (near the lower end of the bollinger band) and also quite choppy, non-directional (volume is low, RSI is 44).
Definitions:
Price - This is the historical price reference of a coin/stock and shows the equilibrium level where the number of sellers and buyers have paired.
Volume - This level shows the total number of trades between buyers and sellers. A buy signal paired with high volume is very bullish. Similarly, a buy signal with low volume is not quite as bullish at all. Always consider volume complemented with price when making investment decisions.
To conclude, technical analysis can be a very important tool to use towards finding good entry and exit positions for developing your investment strategies though it must be paired well with fundamental analysis and effective research of the coin whitepaper, use case, supply and demand and for stocks, its financial statements, business strategy, management direction and so forth.
