bitcoin-investment-trading-technical-analysis

Bitcoin investors and traders have an extremely broad spectrum of tools and methodologies at their disposal that can optimize efficiency and profitability. Developing a firm grasp of these tools is essential to achieving success in the crypto trading and investing world and deliver a powerful competitive edge. Of the tools that are available to traders, technical analysis is arguably the most practical and easiest to comprehend.

Using technical analysis, Bitcoin traders are able to identify and isolate key trends in the Bitcoin market and leverage these insights to gain a deeper understanding of market sentiment. The practice of technical analysis typically involves the assessment of Bitcoin market activity, as well as volume data, price movement, and several other factors.

The detailed information that technical analysis provides allows chartists, technicians, and technical analysts to make more efficient, informed trades. Bitcoin technical analysts are able to obtain a greater predictive understanding of the future actions of a security by assessing market history and utilizing powerful analytical tools.

Bitcoin Investment Trading Technical Analysis Guide

In this guide, we’ll cover the basics of fundamental analysis versus technical analysis and break down the core axioms of the technique. We’ll also proceed to explain moving averages and support and resistance levels to help you gain a greater understanding of this powerful and effective Bitcoin trading tool set.

Fundamental Analysis vs. Technical Analysis

In order to gain a deeper understanding of Bitcoin Investment Trading Technical Analysis, it’s worth taking a look at our breakdown of fundamental analysis, which is the other most commonly used analytic technique in securities trading. Fundamental analysis, as opposed to technical analysis, is primarily concerned with examining the key price drivers of Bitcoin to determine worth.

Technical analysis, on the other hand, is focused on assessing the volume trends and price history of digital currency. To present the difference in simple terms, technical analysts are primarily concerned with the observable fluctuations in Bitcoin prices and their drivers. technical analysts considered these drivers to be the result of supply and demand.

What Is Technical Analysis?

Bitcoin investors often attempt to identify the key factors that motivate the price movements of any given asset as well as leveraging the insights delivered by both technical analysis and fundamental analysis. Identifying the exact causa prima of the fluctuations in the price of an asset, however, can be an extremely difficult task that is open to a great deal of creative interpretation.

Thus, technical analysis is concerned not with the reason behind price movements, but the observable, measurable factors that can be used to identify key trends. Technical analysis is a widely used and highly valuable tool, but not all Bitcoin traders consider it effective or worthwhile.

The ongoing debate both for and against technical analysis in the trading community can appear at first glance theoretical and speculative in nature. Both sides of the argument are often obfuscated in rhetoric and complex jargon, so in order to provide a clearer explanation of both points of view we’ll proceed to outline the core axioms of technical analysis and how it is used in Bitcoin trading.

The Core Axioms Of Technical Analysis

Technical analysis is, at its core, a pragmatic approach to trading, and is built upon several basic assumptions that serve as the foundation of the analytic technique. The core axioms of technical analysis are founded on empirical, academic observations of global asset markets, and thus can be presented in a linear and logical manner.

Markets Are Extremely Efficient

One of the most important assumptions of the technical analysis method is that the prices of any given asset reflect the sum of all information available regarding it. The practice of technical analysis takes into account historical, present and even future demand to develop a highly accurate predictive model. This assumption is uniquely suited to Bitcoin, as the total amount of Bitcoins that will ever exist is capped at around 21 million, making predicting future demand and the rate of new supply relatively simple.

Understanding Is Not Essential

Many investors expend a significant amount of time and energy attempting to explain and understand the reasons behind fluctuations in security prices. Attempting to uncover the root causes of price changes presents a Zeno’s paradox, as unfolding events provide an exponentially increasing amount of information to interpret. Ultimately, this large amount of information presents too many variables to account for in an accurate assessment of the underlying factors that drive price movements. Technical analysis focuses on the temporal trends of asset prices instead of assessing causes.

Price Patterns Frequently Repeat Themselves

Like any complex system, the security market exhibits observable and measurable patterns that repeat themselves. Long term analysis of market trends has demonstrated that pricing patterns are inherently repetitive, which many leading industry experts attribute to market psychology. By assessing emotional drivers such as fear and greed and comparing them to chart patterns, technical analysts are able to obtain a great deal of insight into current trends.

Prediction Can Become Prophecy

The Bitcoin market can be heavily influenced by the direct actions of investors. If a sufficient number of investors all draw the same conclusion from observable patterns, they often take action as a group that results in a prediction actually taking place. If enough investors saw Bitcoin as a whole as the future of currency in general, for example, and expected Bitcoin to reach $10,000 per coin, it’s likely that the market zeitgeist would drive the price up to this level.

Identifying Trends

One of the most important elements of technical analysis is the practice of identifying key trends. In the context of technical analysis, trends refer to the current direction of a price, and are able to provide technical analysts with a greater understanding of the future actions of a given security. Trends can occur in downward, upwards, or sideways patterns, and can be observed over short, medium, or long-term time frames.

Identifying Bitcoin pricing trends can be an extremely valuable technique, but the volatility of the currency can make identifying long term trends difficult. Bitcoin typically experiences several highs and lows over short periods, but there are a number of different techniques that technical analysts can use to cut through the noise that obfuscates accurate trend assessment.

Some of these techniques are extremely simple. For example, if a trader observes that the price of Bitcoin is experiencing progressively lower highs and lower lows, it’s safe to make the assumption that Bitcoin is in a downtrend. The inverse is also true- if Bitcoin displays ongoing higher highs and higher lows, it’s safe to assume that the currency is in an uptrend.

Leveraging Moving Averages

Another powerful tool used by technical analysis to assess trends in the Bitcoin market is moving averages. By smoothing out price volatility over the short term, moving averages allow technical analysts to obtain a higher resolution image of the pricing trend for any given security.

The simplest and most basic moving average is referred to as such- a simple moving average, or SMA. A simple moving average gathers together the prices of a security over a specific period, then averages them out. A good example of this is Bitcoin price fluctuations– if the price of Bitcoin fluctuates between $600 and $700 over a period of 20 days, a technical analyst is able to determine the simple moving average of the currency by taking the price of the currency after every session and averaging the final values.

An exponential moving average is similar technique that is performed in a virtually identical manner, but instead places an emphasis on the more recent price values gathered in a particular time period. The insights delivered by moving average calculation can be expressed in the following example:

If a Bitcoin trader calculates the simple moving average of Bitcoin over two different periods- fourteen days and twenty one days respectively, they may find that the fourteen day simple moving average is higher than the twenty one day simple moving average. This result would indicate that Bitcoin is experiencing a short term upward trend.

If the inverse were true, however, and the twenty one day average was higher than the fourteen day average, it would indicate that Bitcoin was likely in a short term downward trend. It’s also possible to use moving averages over a longer period of time.

Calculating the 50-day simple moving average or the 200-day simple moving average for Bitcoin can help traders gain a greater understanding of the long-term trends of the currency and identify any downward or upward patterns. The same technique used in short term calculations can be used to identify the long term trends of the currency- if the 50-day average exceeded the 200-day average it would indicate an upward trend, while the inverse would indicate a downward trend.

Support And Resistance Assessment

The final technical analysis technique we’ll take a look at in this article is the identification of support and resistance levels. By identifying the support and resistance levels of a currency, traders are able to gain a great deal of insight in the current levels of supply and demand.

The core concept behind support levels is that they function as “price floors” that occur when demand from traders is powerful enough to mitigate any potential further losses. If Bitcoin prices from support at a price of $1,000 for example, investors will determine that any potential fallback to this level will make Bitcoin a positive buy.

Calculating these price floors provides a highly accurate representation of the current levels of demand for Bitcoin. If the price of a currency drops to this support level, many traders will choose to invest in it, which ensures the price will not drop below the given support level. Remaining aware of this support level price is an extremely powerful asset for technical analysis, as it can help traders to determine the price point at which most investors and Bitcoin traders will consider Bitcoin to be oversold.

Resistance levels are the functional opposite of support levels, and are price points at which most investors will decide to sell their currency. If the resistance level of Bitcoin is $1,200, for example, most traders will decide to sell, which makes it difficult for Bitcoin prices to rise further in price beyond this level.

If a digital currency develops resistance at a level such as in the above example, traders will begin to sell as the price approaches $1,200. Resistance can be interpreted as an accurate indication of supply, determined by the actions of sellers. Resistance levels can also be used to obtain an insight into points traders may consider a currency to be overbought.

Technical Analysis Final Thoughts

Technical analysis is one of the most important tools for any Bitcoin trader, and makes the process of identifying trends and assessing market sentiment far simpler. By leveraging the information provided by technical analysis, it’s possible to make highly informed decisions regarding Bitcoin investment.

If you’re considering employing technical analysis in your trading strategy, however, there are a number of critical factors to keep in mind.

Firstly, technical analysis is a hotly-debated topic that frequently spawns arguments regarding its efficacy, accuracy, and relevance. Many opponents of technical analysis posit that as the market already incorporates all available data into asset prices, technical analysis is rendered defunct, as the price history and other information it assesses has already been analyzed and taken into consideration.

Other opponents of technical analysis prefer fundamental analysis, holding the opinion that the dynamic and volatile nature of Bitcoin is better assessed with fundamental analysis rather than the interpretation of charts. For more information on fundamental analysis, take a look at our Understanding Bitcoin Fundamental Analysis article.

A balanced approach to analysis that incorporates both fundamental and technical techniques, however, is arguably the most effective approach to Bitcoin trading. Fundamental analysis can help traders identify whether the price of Bitcoin makes it overvalued or undervalued, which provides a powerful leverage point that technical analysis can be used to exploit.

Technical analysis can also be used to identify the most profitable time to sell, which can then be confirmed using fundamental analysis techniques such as the ongoing scaling dilemma.

Additional Technical Analysis Resources

If you’re looking for further information on Bitcoin technical analysis, there are several additional sources available at the following links:

  • Economies.com frequently publishes in-depth reports on technical analysis
  • NewsBTC.com offers infrequent reports on technical analysis
  • TradingView.com provides crowdsourced technical charts alongside user comments
  • TheChartguys deliver a daily video update on detailed Bitcoin technical analysis

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