If you want to have a better understanding of how to make bitcoin investment decisions, then technical analysis can help you comprehend how price trends are affected by market sentiment. Technical analysis offers patterns and trends that help you determine price movements in the future.
Cryptocurrencies, like other trading investments, have historical trading data and technical analysis is the study of these statistical trends. Patterns are observed to determine price movements and volume data, and these can be used to identify trade opportunities.
How does technical analysis affect future decisions?
Past decisions by Bitcoin participants are represented by a chart of prices and volumes and there are two ways these affect future decisions:
The first is the psychological effect where past decisions affect how you approach buying or selling in the future. If you bought the bitcoin at a certain price, you would want to sell before it reaches the break-even price if it starts to decline.
The second is a reflexive effect where you buy or sell the bitcoin according to common trends and chart patterns. These chart patterns follow the expected outcome and the trends continue to be sustained as more participants continue to follow the strategy of the trends.
As with stocks and other commodities, Bitcoin has three possible trends.
During an uptrend, Bitcoin prices are going upwards, and its highs are higher and the lows are higher.
With a downtrend, Bitcoin prices are dropping with lower highs and lower lows being prominent.
Here you will see a horizontal line and the trend is sideways without fluctuations in the trade of the Bitcoin.
An upward trend can also be referred to as “Bullish” because bulls strike upwards with their horns. A downward trend is referred to as “Bearish” because a bear always strikes downward with its paw.
Looking at resistance and support levels
When prices go upward or downward, they can face resistance and support. Resistance zones are lines where the uptrend is expected to pause or rebound, indicating a concentration of sellers.
Support zones are due to a concentration of buyers that can cause a downtrend to pause or rebound.
A resistance level can become a support level when it is broken, and a support level can become a resistance level. In a strong trend, the price of the Bitcoin can surpass support or resistance without stopping.
Support is often used as an entry point and resistance as an exit point in technical analysis.
With just one glance, candlestick charts give you all the information from one day’s trading. They reflect the opening prices, daily high and low, and the closing price. You can choose the trading intervals you want the charts to show.
Candlestick charts were first developed in Japan for keeping track of the price of rice and have become very popular in cryptocurrency charting to help determine the market trend.
If the candlestick is green, then Bitcoin closed higher than it opened. A red candle indicates losses. On a green candle, the opening price is at the bottom, and on a red candle, the opening price is at the top. The candles are always aligned at the top or bottom, to represent the closing or opening of the following trading day.
The shadows are the sticks at the bottom and the top of the candlesticks and they indicate the highs and lows of the day. There are a whole lot of candlestick patterns that can help you understand the trends if you study them.
Moving averages simplify trend recognition
Bitcoin trends can also be seen through moving averages. There are two moving averages, one is short term and the other long term. When the two are combined, they identify what the current trend is and any change of momentum, and the combination is known as the Moving Average Convergence Divergence (MACD).
As the two lines move across the chart, they can indicate a bullish or bearish momentum. When they separate there is a strengthening of the current trend, whereas when they meet, the current trend is weakening. When the lines cross, there is confirmation of the momentum.
Identifying trends from trading volumes
You can identify trends from the trading volume of Bitcoin. With weak trends, there are usually low trading volumes and high volumes accompany significant trends. Long-term healthy growth is usually accompanied by trading volume increases or a low volume of declines. If you notice a decrease in volume during an upward trend, the trend may be about to reverse. The opposite will apply with a downward trend.
What can affect bitcoin prices?
There is no doubt that Bitcoin prices are affected by global events. We have seen spikes in Bitcoin when eBay and Dell were considering accepting the cryptocurrency. There was also a sharp decline of 6% in 2017 when initial coin offerings (ICO) were termed illegal in China.
Therefore, technical analysis is not the only thing that you should rely on when you decide to invest in Bitcoin. Look out for cryptocurrency regulation news, mining hash, ETF certificates, and anything related to these currencies. Make wise investment decisions by combining the two.
Jacob Maslow is a native New Yorker with five children. He left his payroll manager position after finding that his true passion was in writing, and has never looked back.