What Trading Crypto with Technical Analysis actually means

Technical Analysis is a tool used by many traders, in the crypto market as well as in other markets, to try to predict price movements based on historical performance. The foundation of Technical Analysis relies on 3 key principles:  

• Principle 1:

All the information (economic, political, financial, etc.) is already incorporated in the price. In other words, if you want to use Technical Analysis, you won't need to look at anything else, because the price already reflects everything that makes it move.

• principle 2:

The price moves in trends. Once you identify a trend, the price will continue moving in the same direction for a while.  

• Principle 3:

If you give it enough time, the price of crypto-assets will start repeating patterns that it had manifested before. It could do that tomorrow or in ten years. Eventually, history repeats itself.

When you discover these 3 principles for the first, you would be tempted to go and apply them directly to your trading. You would say that it should be easy now. First, I wouldn't have to look at anything but the price charts, since everything I need is there.   Second, I will wait for a historical pattern to start repeating itself. Third, I will search for a trend in that historical pattern and trade with that trend, since the price is going to continue moving in that direction for a while. Simple! Right?

If it was that simple, everybody would have been rich by now. No, it's not that simple. Even if the 3 principles are absolutely true, you wouldn't know when to enter a trade, when to exit that trade, how much you should trade and for how long the price is going to trend! So, take some time to just let this sink in. Be wise about your decisions in trading. Don't be hasty. Wait to learn and experiment some more. There's much to be said and done.

A trader, who wants to be consistently profitable dealing with cryptocurrencies, needs to come up with a system that stands the test of time. This system should allow for fixing some crucial parameters that will work for every trade. These parameters are entry, exit and trade management. If you really think about this you will come to the conclusion that, if you want to apply these principles to the price movements, trading must transform and be considered as a game of probabilities rather than a deterministic one. No matter what you're trading, you need tools to assist you in your trading decisions. These technical tools can be used either independently, or in combination with other tools.  

1. Support and Resistance Lines:

Fundamentally, support and resistance are just psychological lines. They are used by traders to try and determine levels that the price may react to, in one way or another. The price can test a support or resistance line, it can bounce back from it or go past it.

• Support levels:

Support lines are formed while the price is going down.

• Resistance levels:

Resistance lines are formed while the price is going up.

2. Trend Lines:

Trend lines are a very popular technical tool among traders. They are used to identify trends. their use is similar to support & resistance. The only difference is that they are drawn diagonally! They are drawn on the price chart by connecting the highs of the price movements with a straight line, and doing the same for the lows. Trend lines help identify two types of movements.

• Bullish price trend:

It's identified by finding higher highs and higher lows in the price movement.

• Bearish price trend:

It's identified by finding lower highs and lower lows in the price movement.

3. Indicators:

Technical indicators are tools that use mathematical calculations, based on historic data, to display an easy to read signal. There are more than 10,000 indicators that traders all over the world use. The biggest encyclopedia of technical analysis I know of is the MQL5 CodeBase.   There are 3 main types of indicators based on how they display signals.  

• Zero-Cross:

Zero-cross indicators give you a signal to go up or down by crossing the zero line. If it crosses to the negative side, that's a signal to sell. If it crosses to the positive side, it tells you to buy. The Chaiken Oscillator is a perfect example for zero-cross indicators.

• Two-Line Cross:

As their name indicates, two-line cross indicators are composed of 2 lines. Depending on the indicator itself, their crossing may indicate the perfect moment to enter either a short or a long position. For example, we can take the case of the Relative Vigor Index (RVO). It's composed of 2 lines. When the red line crosses over the green one, it's a signal to sell. When the green line crosses over the red line, it's a signal to buy.

• On-Chart:

On-chart indicators are implemented directly on the chart. You can read them in many ways. They also contain one liners, two line crosses, cloud based and many more. Don't worry, it's not that hard to read them. All indicators are relatively easy to decipher and there is no shortage in resources that can help with that. The Moving Average (MA) is a popular tool that fits right into this category. It is a popular indicator too and it's super easy to use. You put the Moving Average indicator on the chart. When the candle crosses over the line and closes, it's a signal to buy. Moreover, when the candle crosses and closes under the line of the MA, it's a signal to sell.

4. Price Action:

Price action is all about searching for specific patterns on charts, without using indicators. It also calls for the use of support and resistance levels and trend lines. But it doesn't stop there. You can use it to identify chart patterns that may appear due to the repetitive nature of the market's cycles. There are so many chart patterns and rules to apply in this area. We won't be able to cover all of that in one article. So, if you are interested in learning more, I've got your back. Here's a book I read when I first started my journey as a trader. It's called Technical analysis : the complete resource for financial market technicians, by Charles D. Kirkpatrick and Julie R. Dahlquist.

It contains a good number of chart patterns and the methods you can apply to identify them. On top of that you'll find a lot of valuable gems there. I strongly recommend giving it a read.

Finally, I can say that Technical Analysis is truly about price movements. Whether by using indicators, price action, support & resistance or trend lines, it's still limited, in my opinion. This doesn't mean that it's not a good tool to use while trading. On the contrary, it's a terrific add-on to your trading algorithm. I use it myself in all of my trading. I'm saying that it's not enough. You need to incorporate it with other tools that will help you see the big picture. This is why I think these articles would be a perfect place for you to start from:

How to live on Crypto trading: where to start?

Risk Management in trading: It’s about time!

The valuation of cryptocurrencies to maximize profit

Trading psychology: It’s tricky

So, just keep reading, discovering, backtesting, forward testing, demo trading and interpreting. Do everything you need to do to minimize your risk, maximize your profit and stay in the game for as long as you can.

Moreover, I want to highlight the fact that this should not be taken as financial advice. This guide is to help you do your own research before taking any trading decision. Be careful and trade safely.