Technical Analysis is the trading discipline used to evaluate investments and identify trends/price movement and with the goal to find trading opportunities and predict future price action.
When using TA, you are looking at the past to estimate what the future might bring. A lot of skeptical people or new traders think TA is a god’s tool and with the right indicators and lines you will buy the very bottom and sell the very top!
Please forget that NOW! TA is useful to predict the market but it’s never spot on. If you want 100% success ratio in the crypto market, buy yourself a crystal ball and a mist machine.
So, why use it?
Because it helps you make an “educated guess”. Yes, if you are good at TA and understand human psyche, you will be able to predict where the price will go. But what TA really gives you, is your setup.
In the image above, you can see that after a price drop the asset has kept to a range; being bought up when it gets to the bottom, getting sold down when it nears the top. In a bull market you could expect the resistance (upper level where the price doesn’t get above) to break at some point and let the asset reach higher prices. The opposite is true for a bear market, where you can see the support (lower level here price doesn’t go under) weakens. It is true that a trend line or support/resistance is considered strong if it has failed multiple times. However you must know the bigger trend too. If it’s bull you can expect the bears to wear out and give in to the price rise. And the opposite is also true and would weaken the support and give in to sell pressure.
It all depends on a lot of factors; Macro-trend, market sentiment and emotion, volume/reaction of bears/bulls. In this example you could go short/sell the asset with a clean candle close under the support, with a stop loss close to or inside the range (as per your risk appetite. We’ll get an article on that soon!). Price did bounce in this example so you would be stopped out.
In this next example, we saw the price rise and look for a support. It bounced around a bit. By the way it bounced and the way it it behaved, with volume and market sentiment, we can see that this is a H&S pattern. (we’ll cover patterns later in full) This type mostly signals a breakdown of the price where the height between the “neck” and tip of the head indicates how low you’d probably go. When you see a clear break (under the lowest low of the “left shoulder” and “head”), you’d go short and collect profit at the end of the possible fall depth (indicated by the red line).
These examples won’t teach you that much because I went over them too quickly, but should illustrate that TA doesn’t do magic, it gives you the possibility to look for a setup to take or leave a trade.
I’ll post more in depth about patterns, resistance, support, market sentiment and how to “read” a market in the coming weeks.