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Technical analysis (TA) is a significant component of modern trading. The term refers to a body of analysis methods and indicators used to forecast future market movements based on past price and volume data.
In the stock market, TA indicators like support and resistance levels, Bollinger Bands, chart patterns and moving averages have been used successfully for decades. Many crypto traders apply the same TA methods to predict the prices of cryptocurrencies. However, due to the inherent differences between stocks and crypto, applying these methods to crypto trade directly may not be as straightforward as it seems.
In this article, we’ll explore which common TA indicators might work for crypto, at least with certain adjustments, and which might mislead you when applied in the unique world of cryptocurrency.
Key Takeaways:
Certain TA indicators have a higher similarity within the contexts of the stock and crypto markets. These include support and resistance levels, Bollinger Bands and volume-based techniques like volume-weighted average price (VWAP) and volume profiles.
Chart patterns, moving averages and the relative strength index (RSI) might require more significant adjustments to fit the realities of crypto trading.
Support and resistance levels are among the key concepts in TA. A support level is a price point at which a downtrend is widely expected to halt, while a resistance level is a price point at which an asset’s uptrend is expected to fizzle out. Traders expend considerable effort to identify likely support and resistance levels for a stock or cryptocurrency, considering factors like the asset’s overbought and oversold indicators, orders clustered around a certain price level, previous highs and lows, institutional buying behavior and more.
In both the equities and crypto markets, support and resistance levels can provide valuable insights. These levels are often more predictable in the stock market thanks to its more established nature, higher liquidity and strong institutional participation. On the other hand, the crypto market’s higher volatility, whale activity, lower liquidity and susceptibility to news and online hype can make estimated support and resistance levels less certain. This is particularly the case with lower-cap altcoins, whereas support and resistance levels are more clear-cut for the top assets, such as Bitcoin (BTC) and Ethereum (ETH).
Despite the lower certainty of support and resistance in crypto trade, both markets conform to the general rules of estimating these levels since they are driven by basic human psychology.
For instance, the round-number bias is a significant determinant of support and resistance. It manifests itself in clear support and resistance points around round numbers, e.g., $70,000 for BTC. Since many investors, particularly less experienced retail players, often think in terms of round numbers — e.g., I’ll buy this asset when it hits $70,000 — there tends to be clear order clustering around these points. The flurry of orders at or very near round numbers tends to provide support or resistance to the price.
Although support and resistance levels apply to both stocks and crypto, use them more cautiously in crypto as they are less certain. Treat these levels for cryptocurrency TA more like support and resistance zones than precise point estimates.
Bollinger Bands is a major TA indicator represented by a trio of bands plotted on the price chart. The middle band shows the asset’s 20-period moving average (MA), while the upper and lower bands represent two standard deviations above and below the MA, respectively.
In both the stock and crypto markets, Bollinger Bands can inform the trader of several things. For instance, band squeezes may indicate periods of reduced volatility. According to the indicator’s inventor, John Bollinger, these periods are often followed by increased volatility, so a squeeze may signal an upcoming increase in market turbulence. This use of Bollinger Bands is highly applicable in both the stock and crypto markets, as they both have volatility cycles.
Another common use of the bands in both markets is estimating the likelihood of trend continuation. When the price breaks out of the upper or lower band, it signals that the uptrend or downtrend, respectively, will continue. However, the crypto market is more prone to false breakouts, particularly during periods of low volatility and significant whale trading activity.
Large players — institutional investors in equities and whales in crypto — often employ volume-based strategies. These can be analyzed using TA tools like volume-weighted average price (VWAP) and various volume profile indicators.
VWAP shows the average price ratio to the asset’s total trading volume. Volume profiles are a family of TA indicators that typically show trading volume distributions across price levels.
Large-cap cryptocurrencies and stocks often demonstrate similarities when analyzed using volume-based indicators. For example, a crypto like Bitcoin and a stock like Apple (AAPL) might consolidate near their VWAP. Also, a breakout above VWAP and an increasing volume of trade may signal bullish whale or institutional activity and the continuation of the uptrend.
TA patterns are visual formations in price charts that reflect trader psychology and help predict potential future price movements based on historical behavior. Many patterns are used to indicate trend reversals or continuation, as are bilateral patterns, which suggest price movements in either direction. Below are the popular or common patterns:
Reversal patterns: Head and shoulders, wedges, double tops and double bottoms
Bilateral patterns: Symmetrical triangles and rectangles
Bear in mind that the same pattern may be interpreted as either a reversal/continuation or a bilateral signal depending on contextual factors like volume activity and volatility.
High and well-structured institutional activity in the stock market makes patterns more likely to be completed. In contrast, patterns may often fail in the crypto market due to the effects of news and online hype, whale manipulation, lower liquidity, trading bots exploiting patterns early and the lack of defined institutional activity. Therefore, crypto traders are advised to wait for patterns to be confirmed in the expected direction and use supporting signals like volume data and other TA indicators.
A moving average is a TA indicator that shows the average price over a set number of past periods. Its most basic form, the simple moving average (SMA), is based on unweighted averaging of the past periods.
Traders use several more advanced averages — the exponential moving average (EMA) is probably the most common. EMA is based on a weighting procedure that gives more weight to more recent data periods.
In the stock market, the 50-day and 200-day MAs are reasonably reliable trend indicators. Institutional and retail investors respect these indicators, using them to estimate trends and plan their moves. However, the MAs in crypto are often much less reliable due to factors like higher volatility, lower liquidity, more emotion- and hype-driven retail traders, lower institutional activity and the prevalence of short-term high-risk strategy followers. As a result, prices in crypto might move violently well outside of MAs, sometimes multiple times in a single day.
MAs may still provide sound signals to crypto traders, but they must be used with specific adjustments. Treating MAs in crypto as general support and resistance zones is advisable, as is employing higher time frames (e.g., daily or weekly) for better accuracy.
Relative strength index (RSI) is a primary TA indicator used to assess whether an asset is overbought or oversold.
The RSI value oscillates between 0 and 100 — below 30 indicates an oversold asset and above 70 signals excessive buyer activity.
RSI works reasonably well in the stock market, particularly for large-cap, high-volume stocks, but the applicability of this indicator in the crypto market is less certain.
It’s not unusual for a cryptocurrency RSI to stay in an overbought or oversold territory for extended periods. For instance, a hype-driven altcoin may remain above 70 RSI for a long time, getting pumped and promoted continuously, attracting more and more gigaprofit-chasing individual traders.
Therefore, if you plan to use RSI for crypto trading, be sure to verify its signals using other indicators and consider the broader context.
Using established TA methods may significantly enhance your crypto trading. However, not all methods are highly applicable to the cryptocurrency market.
While you may be able to use support and resistance levels, Bollinger Bands, and volume-based indicators successfully in crypto with certain adaptations, chart patterns, MAs and RSI require more substantial adjustments. You might even omit them from your active analysis toolbox. In any case, combining multiple indicators and using other contextual data to inform your trading moves is always advisable.
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