There are two kinds of people in the world, those that believe in technical analysis and have over 50 lines on their charts and those that think technical analysis is completely bogus. In this article. We are going to be explaining what technical analysis is, how it can be useful, and even some common patterns that you’ll be able to identify yourself by the end of this article. Also, about two months ago, I stumbled upon a fantastic crypto creator who wasn’t reaching many eyeballs, even though his technical analysis content was the best that I’d ever seen.
1) Technical Analysis
Let’s dig into technical analysis is one of the things that is overused by people who know what it is and undervalued by those who have never used It when it comes to investing not just in cryptocurrency the main step to make a profit is to buy something at the cheapest price possible and then to sell it at the most expensive price. Now, while that’s much easier said than done, technical analysis is a great tool to help make that possible. It’s worth noting that technical analysis is not a holy grail and will not make you wealthy overnight. It’s not designed to do that. Some traders will even only make trades once a month, but it will give you a small edge in the markets.
2) The One Percent
Even a one percent edge in something can be much greater or more useful than you think. For example, casinos make millions of dollars every single day around the world because they have a simple edge over the people that are playing against. Sometimes that edge is less than one percent, but over a long enough period with a large enough volume.
That is all you need, gold medal athletes in the Olympics, win by less than one percent all the time now before we get off-topic and go down the rabbit hole.
3) Who Controls the Market?
I want to help you understand some of the most important concepts when it comes to technical analysis and how you can use it to give you an edge when it comes to investing in cryptocurrency, the first topic I want to cover is something that doesn’t even have to do with charts or covering technical analysis. Instead, this concept is probably the most important one to remember when you’re investing the most important question to ask yourself is: who controls the markets? Now your first thought may be whales or institutions, or maybe even big market movers, and while those are all great guesses. The real answer is that the markets depend on you and me and the millions of other people who are participating in the market daily.
4) Humans are Unpredictable
All of these people control the markets. So, what I’m trying to get at is that people by nature are unpredictable. So, therefore, the markets are unpredictable, some guy has a car accident and he gets sued and because of that lawsuit, he has to liquidate all of his Ethereum.
Maybe there’s some woman out there who just realized, she’s pregnant, and so she sells half of her chain link. So, she can have some cushion money or maybe there’s an xrp whale that woke up one morning and they start dollar-cost averaging out of their xrp bags because they had a dream that the whole thing was a scam. Now, these things might sound funny.
5) Cons of Using Technical Analysis
But these things happen every day every week every year you cannot predict the lawsuit, the pregnancy, or the dream, but they lead to tons of money being moved in and out of the markets. There’s a common misconception about technical analysis and many believe that if you can just find the right tool or the right trading plan, then you can predict the future and make millions. But the truth is nobody knows the future.
Your only goal with technical analysis is to find a plan that works for you, define your edge in the market, and never let your emotions get the best of you. Technical analysis is simply a tool to help you now that we’ve gotten the theory work out of the way, let’s actually dig into reading a candlestick now candlesticks are a way to look at price action within a specific time frame.
7) Reading a Candlestick
A candle is very confusing. If you have no idea what you’re looking at, but I’m about to teach you everything you need to know about, candlestick candlesticks turn four points of data into a single image. First, you have the price that the candle started at now. This is depending on whether the candle is green or red.
8) Green Candlestick
These points will be different, for example, on a green candlestick. The opening price is the bottom of the base or the body of the candle. The other end of the body is where it is closed.
9) Red Candlestick
On the other hand, for a red candlestick, the opposite is true, the opening is the top of the body and the closing is the bottom of the body, so the color tells you which one of these is the opening and which one is the closing, but the Two points of the body tell you where the crypto opened and closed within that specific time frame. Now this time frame could be one minute. It could be 10 minutes an hour or even a whole month, they’re technically fractal, but we’ll talk about that later.
On so now that we’ve gotten the big body parts of the candlestick out of the way, let’s move on to the thin parts of the candle, and these are called wicks now these are evidence of where the price went but then recovered. So, let’s take a look at a green candlestick. This candlestick tells us that the crypto opened here went all the way down here at one point and then came back up to here at some point and then ended at this part of the body.
That’s how you read a candle. It’s that easy. I will say you may need to read that a couple of times, but all candles work this way and once you know how to read them, it all starts to make sense.
Now some candles give your insight into the market, for example, a candlestick that looks like this means. The price went way up, then came back way down, and that usually means that the buyers were exhausted or in other terms, there were more sellers than buyers and that the price of whatever this asset is might drop in the future. Alternatively, a candle like this is where the price went way down and then came up, and that usually means the sellers were exhausted and that the price may go up in the future. These are not always true, but they give us good ideas about what’s happening in the market now.
12) The Three Phases
Breaking down the three phases of the market first, we have an uptrend, a downtrend, and consolidation, which is a sideways movement. An easy way to think of it is that an uptrend is a series of higher highs which are these and higher lows, as you follow the arrows, it looks like the market is going higher and we know the market can’t go only up.
There need to be retracements in it. A downtrend is the same thing but in the opposite direction. So, you have a series of lower lows and lower highs, lower lows and lower highs, and that is what determines the downtrend in its simplest form and consolidation is when the price gets stuck in between two price points and just continues to consolidate now.
14) Bitcoin Example
To show you this, in a real data structure or real technical analysis chart, we have bitcoin on the four-hour chart, starting from the beginning of January, and ending around July 20th. So, you could do this in any time frame because everything is fractal which we’ll talk about later so I’ll draw this out for you to make it even more simple. So, we have the market coming up, coming down a series of higher highs and higher lows, and this is an uptrend until we start to make lower lows and lower highs in the market, and then finally, right in this area, the market consolidates, in between the price points at 36, 000 and around 29 000 and the market just starts to go sideways and then, as we go on even farther to the right side, we could see that the market starts to give us another uptrend until it starts to give us a downtrend.
15) Price Action
So, the market goes through these three phases over and over and over again and as you scale down to lower time frames, they start to happen more frequently and if you get to higher time frames, it is a lot slower, but the price movements are a lot Larger, so I’m hoping that this exemplifies how simple market structure can be and how easy trading can be, sometimes because really, there are only three directions. The market goes up down and sideways. Now that we have a common understanding about what candlesticks are and when you put them all together, they kind of tell us a story of what’s happening within a certain asset that you’re looking at so, for example, we’re looking at bitcoin US dollar and on here we are currently on the weekly, so each one of these candlesticks represents one week’s worth of price action telling us where price has been over that week.
16) Trend Lines
Now, trends or trend lines help us understand where we are in the market and where we might be trending whether that’s a higher price or lower price. Now, there are a couple of really important things to know about trend lines, and while they’re very helpful and they’re very simple, there are a couple of key things. You need to understand them.
The first thing is that they’re very subjective. When I see a trend, you may not, and when you see a trend, it may not be very obvious or evident to other people, so trend lines are very subjective, just like many other things when it comes to technical analysis, so always keep that in the back. In your head, the second thing that we need to understand is that a trend line needs to have two touches. For example, I have this trend line on the weekly that you can see. The first touches back around here. The second touch connects to right here and the third one is typically where people are anticipating price to get to now, not to put too much weight or time into trend lines.
17) Macro Trend
The last thing I want to go over is that there are three main trend lines that I like to look into the first one is the macro trend when I’m talking about macro, I’m talking about where the price is going for a very long-time scale. So, for example, when we’re looking at the weekly, the monthly, or the daily, as you can see the time frame of this starting from back here, this is a lot of price action. This is currently around 658 days' worth of data that we’re looking into so you can almost consider this as the macro trend right.
18) Minor Trends
What is the large scale of the market? But if we come down to shorter time frames like the four-hour one-hour or anything below that, that’s when we’re looking at minor trends – and this is something that’s happening right now. So, we’re starting this trend back from November 10th and it’s going to price action to where we are on December 30th. So, as you can see, we are currently in a minor downtrend on bitcoin, but if we were to take a look back at the weekly, you can tell that we are somewhat in a pretty bullish state.
So, it is always good to consider what time frame you’re on and what trend you’re in on that time frame now. The last thing I want to get into is a counter-trend, and this might be kind of confusing, but I’m going to make it very simple. Now, while we’re talking about a counter-trend, the first thing we have to identify is what is our main trend.
So, if we’re looking at bitcoin right here, we’re looking at the price action from the end of January, going all the way to around the middle of April. Now you could pretty easily tell that bitcoin was in an uptrend just by looking at the price and plotting this trend line right here. But a counter-trend is the opposite trend against the bigger overall picture, so currently we’re in an uptrend, and the counter-trend would be any time.
20) Main Trend
Price is going down against the main trend and, as you can see, this only happens for a little bit, and then we break out and continue with the main trend. We go down for a little bit and break out with the main trend, go down and break out now, an indication that this might be over or that our main trend is getting broken is when it breaks below our main trend line. As you can see by this white line, that is indicating that now we might be switching our trend line to the opposite direction, now that you know what market structure is and in what directions the market moves, and in what phases.
21) Fractal Pattern
It is also important to understand that the markets are fractal. A fractal is simply a never-ending pattern. It’s a mathematical phenomenon and it’s just a self-similar pattern across different scales.
So, let’s hop into the charts and I’ll show you exactly what I mean so, as you can see right here, we have a pattern of a large triangle that is made up of smaller triangles and the deeper we look into the actual triangles, as you can see, right here it seems like it’s a never-ending pattern of bigger and smaller triangles, and it just continues to zoom in and then and you can look this up on google and get a better understanding of it. But basically, I have two Ethereum USD charts pulled up for you. The first one is the four-hour chart and it dates from September 16th to around October 6th.
The next chart is the 15-minute chart and this one dates from December 12th to around December 16th, and you could verify that by the scale down here and the numbers up here. So, the first one we have is the four-hour chart. The first thing that happens is that the market drops and then we have three touches on a floor or support, and then we have a big bullish move off of that level.
22) Compare the Charts
If we jump over to the 15-minute time frame completely different time completely different scale of candlesticks, we have a move down. We have three touches into this support or this floor, and then we have a large reaction to the upside. Now you can see that they’re not perfect, but the whole point of this is that you can go even down to the one minute or the weekly chart and you can compare these together and the market moves in similar ways.
And we all know that the market is not predictable, but it is not random either. So now that you know what fractals are and that they’re in the market, it’s your turn to go hop on the chart and go find a couple. So, if you’ve made it this far, I just want to thank you for bearing with me and my examples and thank you for not thinking that I’m too boring, maybe you have but you’ve made it this far. So, congratulations, but the last thing I want to share with you is reversal zones and patterns. There’s a saying that goes to understanding the future. We need to look at the past first.
23) Rise of Bitcoin
The markets may be unpredictable, but they are not random and with this knowledge, we can use it to our advantage to understand what price might do next so right here, I have the entire 2021 bitcoin chart almost summarized for a lot of its massive uprises and downfalls, but as you can see back here in February, this massive uprise came from a lot of institutional support. Companies like Tesla, MicroStrategy, and MasterCard were all publicly supporting bitcoin which made it rise. Then we had the summer fud dating back in May, even starting back in April, and then at the bottom of it.
Grayscale announced that they bought 1.5 billion dollars of bitcoin, which made it rise, and then China again banned cryptocurrency once again around the middle-end of September, which made it drop, and then bitcoin ETF hype, pumped it up again, and then right here. Our most recent rally was our Santa Claus rally which takes effect the last week of December now, while all of these events are unique, these are massive price points or movements in the markets.
24) Price Reversal
As you can see, the market comes up and comes down violently. Usually, the market kind of flows up and down it has an ebb and flow to it. But when these massive fundamental or news events hit the public, we could see massive changes in the market and what we can do is we can map this out.
Across and we can use these as levels of future price reversal zones – and you can see if we map these out. It’s no coincidence that over and over and over again when we see support or resistance right here, we can see it over here. As well and over here, even though this is a one-time event this summer, you could see that a lot of traders and investors look at these levels because this is where prices moved on a very large scale.
And if we continue to take out all of these, you could see that it’s no coincidence that these levels continue to reach into the future. So, while something big might happen once – and it might not recreate itself in the future, those levels will be remembered by the traders and investors in the future. So, these are important things to remember and even if no big event happened, we hit an all-time high or a local low.
Those are important things to remember for the future because it’s an indication that something similar might happen again in the charts. So that’s the last thing I want to leave you with and just for fun. Go ahead, go on a chart, find some really important price reversal zones go ahead and see what happened in the past and then what happened in the future as well.
So, I hope you guys enjoyed reading this article.