The Basics of Chart Analysis and Technical Indicators in Cryptocurrency

A Guide to Chart Analysis, Technical Analysis, Chart Patterns, Technical Indicators and More

If you are trading cryptocurrency or investing in it, it can be helpful to have a basic grasp of chart analysis and a few standard chart patterns and technical indicators. We present a simple to understand guide for beginners.

The focus of this page will be on offering up some very basic insight into Chart Analysis, Technical Analysis, Trend Analysis, and using Technical Indicators. All the aforementioned being terms related to analyzing price and volume trends on charts.

TIP: Make sure to set up a free profile on Trading View and save a chart template to use. My favorite indicators are 1. “guppy MMA,” 2. “Daily lines”, and 3. “Bollinger bands.” Yours might be different.

What is Technical Analysis? In simple terms, technical analysis is analyzing price and volume trends (generally in an effort to predict future price and volume action). In more complex terms, it generally also includes analyzing things like short interest. It is not an analysis of the fundamentals of an asset, but instead it is the analysis of trends in key bits of data like the market price of the stock of a company.

What is Chart Analysis? Chart analysis is just a general term for the study of chart patterns. It is a major aspect of Technical Analysis, since Technical Analysis generally boils down to studying trends on charts. One could probably argue if chart analysis or technical analysis is the primary category, but since you can analyze price and volume data without looking at a chart, I would argue Technical analysis is the main category. See Chart Analysis for different types of ways to analyze chart patterns.

What are Chart Patterns? Chart patterns are things like bull flags, bear flags, head and shoulders, cup and handles, etc. They are different patterns that occur often in price and volume trends that generally have bullish or bearish implications. See Chart Patterns.

What is a Technical Indicator? In simple terms, technical indicators are the lines people draw on charts. More specifically, they are visual representations of the outputs of mathematical functions that analyze data related to an asset such as price and volume data. These indicators are used in Technical Analysis (TA) by investors and traders who want to better analyze and predict price and volume trends (to preform Trend Analysis; i.e. analyzing trends in data such as price and volume data). Indicators (like moving averages) are slightly different from chart patterns (like flags); indicators are based on equations, chart patterns are a thing of pattern recognition. See Technical Indicators for a look at indicators used in technical chart analysis.

Why is this important? Chart analysis is useful for helping to determine entry and exit points for any asset. However, it is particularly useful in cryptocurrency due to the lack of agreed on fundamental value a given crypto has (there are ways to calculate value, but there isn’t really an agreed on way to fall back on; instead prices are found through speculation). Combine that truism with the algorithms that trade based on technical indicators, and they end up being fairly important in cryptocurrency trading specifically (and useful for cryptocurrency investing as well).

Probabilities: Analyzing charts help analysts better determine the odds of something happening based on the idea that in human behavior tend to be predictable and thus patterns form on charts as an advent of this. Nothing is for certain in markets, so any pattern or indicator can fail on any time frame. Analyzing charts is useful, but it is only one of many useful things one can do (and sometimes all useful things in general end up being not useful at all in certain cases). In short, we are dealing with odds, not certainties.

Candlesticks and Lines: On price charts one can represent price data in different ways. Commonly data is represented as lines or “candles.” Candles are green and red bars that show price action on different time frames. Most indicators are best paired with candlesticks, and then chart patterns can be seen in the patterns candlesticks make… thus, it is worth understanding the basics of candlesticks if you want to analyze charts. See Introduction to Candlesticks.

Important Chart Patterns: There are a number of chart patterns that can help one spot the continuation or reversal of a trend. These are often easier to spot and easier to work with than the indicators we will offer up below (although confirming each pattern by understanding specific rules and how volume relates can get tricky). Important chart patterns include: simple trend lines, double tops, double bottoms, head and shoulders top, head and shoulder bottom, bull flags, bear flags, and more. Instead of linking to each one of those, see a list of chart patterns.

Important Technical Indicators: Important indicators include Moving Averages and RSI. See descriptions of a few of these below.

Moving Averages (MA): Moving averages are lines that show the average price of an asset on a given timeframe. They can be useful for understanding and predicting price trends. If the price is sitting on top of key moving averages or if the price is closing in on them, then the trend is up for that time frame. If it is below them or the price is moving down and away from them, the trend is down. Prices often bounce off of key moving averages like the 12, 26, 50, 100, and 200 day averages as traders respond to them. There are a few different ways to calculate moving averages, with Exponential Moving Averages (EMA) and Simple Moving Averages (SMA) being the most common. Moving averages are one of most useful indicators for analyzing crypto, and they one of the simplest to understand.

Relative Strength Index (RSI): Relative Strength Index measures the speed and change of price movements. Importantly, it can tell you if an asset is overbought or oversold on a specific timeframe. Unless crypto is crashing or on an epic run, you can expect that it won’t stay oversold or overbought for long. The more timeframes it is oversold on or overbought on, the higher the chances of a reversal are. See Relative Strength Index (RSI).

Bollinger Bands: Bollinger Bands are bands placed above and below a moving average that represent volatility. Although they are a little complex to look at, they are rather useful for detecting patterns and learning more about Technical Analysis. They come with their own system for detecting trends that is well explained in the following link. In simple terms however, the widening and narrowing of the bands, the pattern the price is forming within the bands, and the position of the price relative to the top band, bottom band, and moving average in the middle can help one spot potential breakouts, breakdowns, and more. See Bollinger Bands.

Other Indicators: There are a number of other indicators and overlays that are commonly used and rather useful. They include StochRSI (a type of RSI that shows what an asset’s price is doing relative to past movements), MACD (where two moving averages are compared and the convergence and divergence of them helps detect trends), Ichimoku Cloud (an overly that helps show a complex array of useful data), and Fibonacci Retracements (an overlay that helps show support and resistance levels).

WARNING: Watch out for over analyzing the crypto market. It is rather volatile. Sometimes chart patterns won’t materialize as expected and indicators will fail. Sometimes the best analysts make the worst predictions due to all the data they have, meanwhile amateurs who buy and HODL can outperform them in the short term. In other words, knowing how to analyze charts is really helpful, but relying too much on analysis (especially if you aren’t very skilled at it) can be a slippery slope. Analysis can help inform your choices, and that is likely to be increasingly true as you level up your skills and gain experience, but there is a lot more to crypto trading and investing than that.

Author: Thomas DeMichele

Thomas DeMichele has been working in the cryptocurrency information space since 2015 when was created. He has contributed to MakerDAO, Alpha Bot (the number one crypto bot on Discord),...