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For friends who are just starting to get into cryptocurrency investment, the most noticeable aspect is that cryptocurrencies do not have opening and closing times and are traded 24/7. Therefore, the price fluctuations of cryptocurrencies can be more dramatic than those of stocks, leading to various legends of overnight wealth and bankruptcy in the crypto space. Hence, how to make informed investment decisions—the more accurate question is how to assess market conditions and anticipate upcoming trends to seize opportunities—becomes very important for investors.

So how do we assess market conditions? If we take stocks as an example, analysis can occur on two levels: one is fundamental analysis—studying the current status of the company issuing the stock and relevant industry news, focusing on the 'value' of the company and the stock itself and its future development; the other is technical analysis—using charts and data to tell a story, obtaining information to interpret 'market consensus.'

Cryptocurrencies, as a form of financial investment, are certainly applicable to both of these analytical methods. Next, we will systematically understand these two analytical methods and focus on learning what 'technical analysis' is. What knowledge and basic indicators do we need to understand? Here, I boldly predict that after reading this article, you will have at least a 60% understanding of technical analysis!

What are Fundamental Analysis and Technical Analysis?

As mentioned earlier using stocks as an example to distinguish between fundamental analysis and technical analysis, when applied to cryptocurrencies, fundamental analysis shifts from focusing on fixed companies or industries to studying project teams or the technical characteristics of cryptocurrencies, focusing on the project's 'intrinsic value.'

Taking Ethereum ($ETH) as an example, one would focus on studying the current applications of Ethereum (Ethereum) or the new impacts of blockchain upgrades (like the recent Cancun upgrade), or the recently approved Ethereum ETFs, all of which could signal potential price increases.

Want to know more about Ethereum? We recommend reading:

What are the future prices of Ether? How much will ETH rise? Price predictions for Ether from 2025 to 2050.

What is Ethereum? Is Ethereum (ETH) worth investing in? Where to buy Ethereum? How to buy?

Technical analysis is another way to judge the market—from the market's perspective. It should first be noted that, like stocks, cryptocurrencies have buyers and sellers. When there are more sellers (supply increases while demand remains the same), prices will fall; conversely, when there are more buyers, prices will rise. This back-and-forth buying and selling process causes the price line chart to fluctuate. Based on this premise, it can be seen that prices reflect all market news, and technical analysis uses price charts as the basis for predicting future trends.

In terms of cryptocurrencies, it involves using the observed price trend line charts to interpret various data to determine the potential direction of the market (upward or downward). Unlike fundamental analysis, technical analysis does not concern itself with the technical value or team background of cryptocurrencies and projects, but rather focuses on price trends and market sentiment.

It can be said that technical analysis is an investment method of 'learning from the past to predict the future.' Here are several core components of technical analysis:

Price reflects everything: all factors that may affect the market (news, policies, economic data, etc.) have already been reflected in price trends. History tends to repeat itself: the behavioral patterns of market investors will repeat, thus past price movements can help predict future trends.

Price Trend: Prices typically move in a certain direction, whether upward, downward, or within a stable range. By observing these price movement trends, investors can make buy or sell decisions to find the best investment timing.

Basic Concepts of Technical Analysis

So what data should we look at for technical analysis? What tools should we use to help analyze charts? Technical analysis can be further divided into many schools of thought. The most commonly used is the 'candlestick theory' originating from rice merchants in Japan's Edo period. It was originally used to record daily rice market conditions and price changes, and due to its detailed record-keeping capabilities, it has evolved into the candlestick charts we commonly see in stock and cryptocurrency markets today.

In addition to understanding candlesticks, there are two other concepts in technical analysis that need to be mastered in advance: 'trend' and 'support and resistance levels.' Before using technical indicators as tools, please make sure to familiarize yourself with these two concepts!

Trends

In technical analysis, the trend is one of the most important concepts, referring to the long-term direction in which prices move. Understanding the trend can help investors decide whether to trade in the direction of the current market or to wait and avoid getting caught in market volatility. Trends can be categorized into three types:

Uptrend: Prices are consistently reaching new highs, and each subsequent low after a pullback is higher than the previous low. Downtrend: Prices are consistently reaching new lows, and each subsequent high after a rebound is lower than the previous high. Sideways Trend: Prices fluctuate up and down within a stable range without significant increases or decreases.

Support and Resistance Levels

Support Line is where the price may stop falling and rebound when it drops to a certain area because many buyers are willing to buy here to support the price. Conversely, Resistance Line is where prices may struggle to continue rising when they reach a certain point due to an increase in sellers.

Support and resistance levels can help us identify appropriate buying or selling opportunities. For example, when prices approach support levels and show signs of rebounding, this may be a good buying opportunity; when prices approach resistance levels, one may consider selling to avoid price retracement.

The eight most useful technical indicators in the cryptocurrency space are interpreted through familiarization with various volatility trading indicators, which can help traders better grasp market trends and make quick decisions in a rapidly changing market. These indicators provide different angles of market information, including trends, volume, momentum, etc., allowing for a more intuitive and comprehensive projection of short-term price movements, helping traders determine entry and exit points, while also assisting in identifying market sentiment and potential turning points, thereby controlling risk through setting profit-taking and stop-loss points. Volatility trading indicators can typically be divided into the following categories:

. Trend Indicators

Trend indicators are used to identify the primary trend direction of the market, helping traders assess the trend of price increases or decreases. Common indicators include: Moving Average (MA), MACD.

. Momentum Indicators

Momentum indicators are used to measure the speed and strength of price changes, helping traders assess market overbought or oversold conditions and potential reversal points. Common indicators include: Relative Strength Index (RSI), Williams %R (WR), and Stochastic Oscillator.

. Volume Indicator

Volume indicators are used to analyze changes in market trading volume, helping to confirm the strength of trends or the possibility of reversals. Traders can assess the validity of price fluctuations. Common indicators include: Volume, On-Balance Volume (OBV).

. Volatility Indicators

Volatility indicators are used to measure market price volatility, helping traders identify whether the market is calm or active. Common indicators include: Bollinger Bands, Average True Range (ATR).

. Mixed Indicators

Mixed indicators combine various types of analytical methods to provide multidimensional market analysis. For example, the Parabolic SAR combines trend-following and momentum analysis to provide market reversal signals.

Below are the eight best volatility trading indicators.

1. Relative Strength Index (RSI)

RSI is typically used to measure an asset's overbought or oversold condition, with a value range from 0 to 100.

·RSI > 70 is usually viewed as an overbought state, possibly indicating an upcoming pullback.

·RSI<30 is typically viewed as an oversold condition, possibly signaling an upcoming rebound.

It should be noted that RSI is not an absolute indicator. In a strong trend, RSI may remain at high or low levels for a long time.

As shown in the figure above, during the period from the end of January to mid-March this year, BTC began a strong upward trend. Although the daily RSI for BTC reached 80, there were few pullbacks during the rise, indicating strong upward momentum. Until mid-March, after the daily RSI maintained a high level close to 90, a trend reversal was finally completed, leading to a volatile decline.

2. Moving Average (MA)

MA smooths price data by calculating the average price over a certain period, helping traders identify and confirm market trends. The main types are:

Simple Moving Average (SMA): A simple arithmetic average of all prices over a specified period.

Exponential Moving Average (EMA): Gives more weight to recent prices, responding more quickly to market changes.

Weighted Moving Average (WMA): Average calculated based on custom weights.

When the price is above the MA, it is usually seen as an upward trend.

When the price is below the MA, it is usually seen as a downward trend.

·When multiple MA lines converge, it may signal an impending significant fluctuation.

MA is often viewed as a dynamic support or resistance level. When a crossover signal occurs, e.g., when a short-term MA crosses above a long-term MA, it may indicate a trend change.

As shown in the figure below, after the 9-day EMA on the BTC 4-hour chart crosses above the 26-day EMA, BTC enters a short-term uptrend. This crossover point is known as a 'Golden Cross' and is usually seen as a buy signal. Conversely, a crossover point below is called a 'Death Cross' and is typically viewed as a sell signal.

However, it is important to note that MA works well in trending markets, while in a sideways market, MA may produce many false signals. Therefore, traders should not rely solely on MA but should combine it with other technical indicators such as trading volume for a comprehensive analysis.

3. Bollinger Bands

Bollinger Bands were created by John Bollinger in the 1980s to measure market volatility and potential price ranges.

Components of Bollinger Bands:

Mid-Band: Typically the 20-period Simple Moving Average (SMA).

Upper Band: Mid-Band plus two standard deviations.

Lower Band: Mid-Band minus two standard deviations.

Bollinger Bands are a volatility indicator where expanding bandwidth indicates increased volatility and contracting bandwidth indicates decreased volatility. When the Bollinger Bands narrow drastically, it usually signals an impending significant fluctuation.

In volatile markets, Bollinger Bands can be seen as 'overbought or oversold' signals:

Price nearing or breaking above the upper band may indicate overbuying.

Price nearing or breaking below the lower band may indicate overselling.

It should be noted that Bollinger Bands behave differently in trending and sideways markets. In trending markets, asset prices may remain above or below the Bollinger Bands for extended periods, so they should not simply be viewed as 'sell or buy' signals. As shown in the figure below, the BTC 4-hour chart shows its price fluctuating between the lower and upper bands.

4. Moving Average Convergence Divergence (MACD)

MACD consists of two lines: the MACD line (fast line) and the signal line (slow line). Their crossover and relationship with the zero line can provide trading signals.

. MACD line crosses above the signal line: may be a buy signal.

. MACD line crosses below the signal line: may be a sell signal.

·MACD histogram turning from negative to positive: may indicate strengthening upward momentum.

MACD divergence with price may signal a trend reversal.

For example, as shown in the red box in the figure below, the MACD line on the BTC daily chart crosses above the signal line, while the MACD histogram turns positive. At this point, BTC's upward momentum strengthens, leading to a sustained increase.

Volume

Although volume is not a complex technical indicator, it is extremely important as it can validate the strength of price trends.

Price increase accompanied by increased volume: usually seen as a strong upward trend.

Price drop accompanied by increased volume: may indicate strong selling pressure.

Price movement with low volume: may indicate a lack of trend continuity.

. Sudden surge in trading volume: may indicate important market turning points.

Looking at the BTC daily chart, significant increases in trading volume have often preceded sharp fluctuations in BTC's price.

6. Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator that includes the %K line and %D line, used to determine the price's position over a certain cycle. Its operation is similar to the RSI indicator but with different calculations.

%K line crosses above %D line: possible buy signal

%K line crosses below %D line: possible sell signal

Indicator value above 80: may indicate overbuying.

Indicator value below 20: may indicate overselling.

As shown in the figure above, in the BTC daily chart, when the Stochastic Oscillator falls below 20 multiple times, BTC also corresponds to a phase of bottoming out, indicating that the market is oversold and has rebound demand. However, it is important to note that while the Stochastic Oscillator is a useful tool, it is not foolproof. Traders should use it in conjunction with other technical analysis indicators and fundamentals to improve the accuracy of their assessments.

7. Fibonacci Retracement

Fibonacci retracement is based on the Fibonacci sequence and is used to identify potential support and resistance levels. Common retracement levels include 23.6%, 38.2%, 50%, and 61.

8%.

In an uptrend, these levels may become support during pullbacks, and in a downtrend, they may become resistance during rebounds. For example, in BTC's most recent sharp decline, the price dropped from $70,018 to $49,116. According to commonly used Fibonacci levels, during BTC's subsequent rebound, support was repeatedly found at the 38.2% level, while the 61.8% level became a resistance point.

Average True Range (ATR)

ATR is a volatility indicator developed by Welles Wilder. It measures the average price movement of an asset over a specific period without considering direction, helping traders set stop-loss and target price levels.

High ATR value: Indicates high volatility, possibly signaling important market turning points or breakthroughs.

Low ATR value: Indicates low volatility, possibly signaling consolidation or the imminent end of a trend.

Used to set stop-loss: For example, a stop-loss can be set outside the entry price by 2 times the ATR.

For example, if the current price of BTC is $58,500 and the daily ATR is $2,470, this means BTC's average daily price fluctuation is about $2,470. Therefore, the stop-loss point can be set at the entry price minus 2 times the ATR, approximately $53,560 (58,500 - 2,470 * 2).

The Importance of Volume

After understanding technical indicators, there is another important area to note: 'Volume.' As mentioned earlier, technical indicators are calculated based on price and volume data, reflecting the total number of buying and selling activities in the market. Therefore, high trading volume typically indicates higher reliability in decision-making using technical analysis methods, while low trading volume may suggest a lack of support for price movements.

Volume can also help us validate price trends. For example, if trading volume significantly increases during a price rise, this typically indicates that the trend may continue; if trading volume decreases, it may indicate that the trend is about to reverse.

You can view the trading volume of various cryptocurrencies on CoinMarketCap.

Pros and Cons of Technical Analysis in Cryptocurrency

Neither technical analysis nor fundamental analysis is absolutely foolproof. Since technical analysis focuses on the market, it does have some shortcomings. Below is a table summarizing the advantages and disadvantages of technical analysis for novice investors.

Summary

Technical analysis is not a tool for predicting future prices, but rather a method to assist in decision-making. It can enhance the likelihood of investors making correct trade decisions, but it also needs to be combined with market sentiment and fundamental analysis, as well as managing risk and setting stop-loss points.

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