Crypto Trading 101: Technical Analysis

INTRODUCTION

Technical analysis tries to predict future price movements based on historical price movements. This is generally done by looking for repeatable patterns in price data.

This article will explain some of the specifics around using technical analysis in crypto, and explore the debate around its effectiveness across different markets. Two case studies will be presented at the end, with examples of how you can use technical analysis yourself.

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SUMMARY

• Technical analysis (TA) is a methodology used by some traders to forecast future price movements based on historical price data.
• It does not tell you the direction of future price changes with certainty and its overall effectiveness is debated
• It can be used to suggest entry and exit points for trades
• Technical analysis can be used across different time frames to forecast short or long term trends

WHAT IS TECHNICAL ANALYSIS?

Technical analysis evaluates price data over a certain timeframe in order to predict potential future price movements. Traders use technical analysis to help determine when to buy or sell assets.

This method of analysis involves  the use of key price chart data points called indicators, such as candlestick patterns, open/high/low/close prices, and price trends, to create a picture of existing price movements. For example, - prior all time high price, or periods of choppy price action, can both act as useful context for a trader’s research. These indicators are used to determine “support” and “resistance” levels, where the price is expected to stabilize or reverse its trend.

A huge variety of technical analysis tools and indicators have developed over the years, with many traders developing their own unique style based upon their preferred indicators or tools. Certain technical analysts will swear by basic indicators such as Trendlines and Moving Averages, others will insist upon using more complicated strategies involving tools such as Ichimoku Clouds or Bollinger Bands. Traders often develop their own individualized methods involving a unique combination of these & others.

APPLYING TECHNICAL ANALYSIS TO CRYPTO TRADING

Traditionally, technical analysis has been performed in commodity & equity markets. However, the same basic principles apply to crypto trading.

Defenders of technical analysis in crypto emphasize the insufficiency of alternative analysis methods. Whereas in traditional markets, financial models and revenue calculators exist to determine the fundamental value of a stock, security or financial instrument, in crypto these models often do not exist or are inaccurate. Most crypto tokens do not produce a cashflow, either for technical or legal reasons - and therefore it is difficult to assess their underlying fundamental value. Also, crypto tokens are often afforded an extremely high growth multiple by the market & are highly volatile - often skewing the effectiveness and accuracy of traditional financial models. This means that traders must look at alternative methods to forecast future price movements, and frequently turn to technical analysis.

Technical analysis may provide traders with a ‘schelling point’ - that is, an idea that separate individuals may collectively resort to in the absence of external information. In this case, the lack of ‘external information’ is the insufficiency of traditional fundamental analysis. The idea is that, a large number of traders who are looking at the same chart, and attempting to identify certain patterns and support/resistance levels, will mostly come to similar conclusions - and their actions will follow accordingly, making technical analysis self-fulfilling.

This effect is what makes technical analysts swear by this method. Since a large number of traders have similar ideas about what indicators mean for future price movements and trade in accordance with them, they collectively move markets towards their predictions.

THE BEST TECHNICAL ANALYSIS CHARTS & INDICATORS FOR BEGINNER CRYPTO TRADERS

Beginner crypto traders often attempt to look for a ‘one size fits all’ indicator to use for every trade, but charting assets is highly circumstance dependent. Consequently, more advanced traders tend to use a combination of strategies, combined with alternative methods of analysis. That being said, here are some of the most commonly used indicators for beginners:

Horizontal Support/Resistances: These are horizontal lines drawn to indicate a line of price support or resistance. These are drawn at levels where bullish or bearish momentum has frequently stalled or reversed in the past. A price hitting a “support” line is considered a bullish indicator, where price is expected to stop falling and rebound upwards. In the opposite direction, hitting a “resistance” line is considered a bearish indicator, where upwards momentum has frequently stalled out and reversed. If price action is enclosed within The price action between lines of support and resistance is caled a range.

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Breakouts/Breakdowns: Price action breaking through support or resistance lines is known as a ‘break-out’ (bullish) or ‘break-down’ (bearish). Traders will often use the breaking of support or resistance lines as triggers to enter a trade, as these frequently indicate significant bullish or bearish momentum.

Retests: Retests of support or resistance often occur after a breakout or breakdown. Frequently, when support or resistance lines are flipped, price will come back to the support or resistance to “retest” and give traders a chance to position themselves now that price has broken through a significant boundary. Traders will often wait for a retest after a breakout or breakdown in order to get the best entry when they are trading support or resistance lines.

DOES TECHNICAL ANALYSIS ACTUALLY WORK IN CRYPTO?

Technical analysis is frequently criticized as ineffective and based on false assumptions. Non-TA traders say it provides inconsistent signals, particularly in larger markets and on longer timeframes, because technical signals are broadcast to a large number of market participants, and can then be taken advantage of by larger/savvier market players. For example, many traders believed in November 2021 that a new Bitcoin all time high (ATH) was a bullish breakout. Previous ATHs are considered to be strong resistance levels, so surpassing them is seen as a major breakout.

However, after Bitcoin’s ATH of ~$65K was broken, BTC’s price did not follow the expected path upwards. This may have been partly due to larger players deliberately trading against the TA-driven crowd by selling into them, dampening the bullish momentum that the TA traders were expecting. When large and liquid markets have a large amount of retail interest, technical analysis indicators are often exploitable by larger market participants because they know that more inexperienced traders will anchor heavily on these indicators. This allows them to take advantage of circumstances where they believe inexperienced TA traders may be bidding or selling - and trade against them.

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Of course, technical analysis cannot predict developments in fundamental aspects such as coin listings, earnings data or user growth. A coin that is about to get listed may experience positive flows from insiders and individuals with privileged information. TA traders may be able to see these flows expressed in a positive chart trend. However, they will not be able to know the source, or reason for the flows until after the fact or until they’ve done other research

Arkham and other on-chain data tools are leading to the rise of another kind of analysis - transaction analysis. Transaction analysis  takes advantage of the public nature of blockchain transactions to directly analyze asset flows in order to forecast price changes. Whereas technical analysts must rely upon anonymised price data from different exchanges, transaction analysts can look at the specific transactions underlying an assets price movement and aggregate data on these fund flows You can read Arkham’s complete guide to on-chain analysis here, to learn more about transaction analysis.

TOP CHARTING TOOLS FOR TECHNICAL ANALYSIS

The most popular charting tool used by technical analysts is TradingView, which provides users with the ability to add their own technical indicators and chart notation to a variety of crypto-asset price charts. TradingView’s charts are often integrated into other analysis software such as Arkham, Dexscreener and Dextools, - you can find TradingView charts for each asset directly on Arkham token pages.

TradingView charts allow users to add their own notation like chart lines to establish support/resistance levels and moving averages. These can be used to identify momentum and suggest points at which traders may believe reversal is about to occur. Other indicators, such as MACD (Moving Average Convergence-Divergence) use the distance between different moving averages as a way to determine whether momentum is increasing or decreasing in velocity. TradingView provides many other indicators, as well as custom indicators shared from their trading community, on their platform.

Different analysis software can also be used depending on the data source that a trader is investigating. For instance, individuals trading futures instruments may find it useful to investigate tools such as Coinalyze or Velo Data, both of which provide a level of additional data on futures. These platforms both also provide their own price charting tools for technical analysts to identify chart patterns and trendlines.

On-chain traders, on the other hand, may find it more useful to use platforms such as Dexscreener, Dextools, or Defined.fi. These platforms provide data pulled from decentralized exchanges where users can trade assets directly on-chain. These three platforms actually all use TradingView charts, but, on-chain traders will often not find these charts on the main TradingView site because they are based on decentralized exchange data.

These tools can allow on-chain assets to be charted and tracked using certain indicators and notation tools such as fibonacci extensions, long/short position indicators, and also contain all of the basic information that you would otherwise be able to view on TradingView.

BITCOIN TECHNICAL ANALYSIS: A CASE STUDY

Bitcoin is the most valuable, liquid, and widely-traded crypto-asset in the world. This may lead traders to believe that technical analysis of BTCwill not be effective due to the presence of sophisticated players trading against TA traders. However, in late 2020 and through the 2021 bull market, traditional TA support and resistance levels proved to be useful indicators.

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A significant point that BTC passed moving upwards in late 2020 was the past cycle high at around $19,400 - Bitcoin’s previous ATH that it made in late 2017. This was a notable point of prior resistance, with it marking the peak of Bitcoin hype in the 2017 market cycle. There were, of course, a number of other peak prices that Bitcoin needed to pass first - for instance, the peak price in mid-2019 and some intra-year ranges - but as these indicated only mid-points of Bitcoin’s price range up until 2020, they were not necessarily as significant as the 2017 cycle high break that happened in November 2020.

As you can see, in late 2020, there are first a number of ‘rejections’ from the previous ATH of ~$19,400 - a major resistance level, followed by ‘retests’ of that resistance. After 2 rejections and retests, the price violently breaks upwards. TA would conventionally consider this a very bullish breakout, and indeed Bitcoin soared upwards without any major setback until reaching double its 2017 cycle high.

These kinds of sharp breakouts and momentum based price movements might have been predicted by technical traders who were watching the ~$19,400 price level, with the numerous rejections and retests giving TA traders ample time to prepare and take their positions once the line of resistance had been broken.

One other important price level was the yearly open in 2021, occurring at $29,000. This price continued to perform as an important level of support throughout the 2021 market cycle - and provided technical traders with an entry point in June-July 2021 as Bitcoin’s price collapsed, but did not break through the line of support. It was not until June 2022 that the market lost the 2021 yearly open support line. This was after the crypto lending contagion of early 2022 had wiped out multiple institutional market participants, including the infamous hedge fund Three Arrows Capital.

The 2017 cycle high continued to play a role well into late 2022, acting as a last line of support that was broken only by the collapse of the second-largest crypto exchange in the world - FTX. Technical traders who were watching important price levels may have chosen to interpret this in different ways - while some viewed this as a marker of bearish momentum, and awaited Bitcoin’s collapse to $12,000 (which never came), others interpreted a collapse under previous cycle highs as Bitcoin entering a “value zone”, and looked for long-term entry points, which as of late 2023 has proven successful. 

SOLANA BREAKOUT TECHNICAL ANALYSIS: A CASE STUDY

Solana was one of the most heavily-shorted tokens in late 2022, with a negative narrative surrounding it: it had been heavily backed by the FTX/Alameda complex, with a large amount of the tokens held by FTX users - becoming part of the estate that would be sold off to pay legal fees and estate recovery costs - and another large chunk owned by Alameda itself, a portion of which was still supposed to be “locked” but the actual status of which was then uncertain.

Developer support and chain onboarding had been heavily reliant on the FTX ecosystem, and with the infamous collapse of its largest backer, the chain’s image was in jeopardy. Combined with a very pessimistic market outlook for crypto, Solana reached a bottom of around $8 in the final week of 2022. There was a commonly-held belief, particularly among BTC and ETH maximalists, that the token’s price would continue to underperform without the significant backing the chain had received from FTX.

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Solana’s price before the FTX crash appears to have provided a rather important line of resistance. The FTX Estate’s selloff, Solana’s decimated community, and the large exodus of developer talent from the ecosystem may have caused a psychological barrier to be built up around Solana’s “pre-crash” price.

When this line of resistance was broken in late 2023, TA traders could have taken away that the market had broken a strong subconscious barrier that led to increased momentum from thereon out. The token subsequently doubled in the following 3 weeks.

HOW TO LEARN TECHNICAL ANALYSIS IN CRYPTO TRADING

Certain individuals and educators such as CryptoCred produce free trading courses which are available on YouTube. Arkham’s 101 trading series, available on our blog, also aims to provide new traders with the resources they need to understand core trading concepts.

CONCLUSION

Technical Analysis is a complex and controversial trading method, with many different styles, techniques, adherents, and critics. New traders should remember that its methodology isn’t “one size fits all”, and often successful traders will have wildly different ways of working and will make use of technical analysis alongside other methods, like on-chain research.