Technical analysis is mainly quantitative and metrics-based, but it also provides a space for qualitative techniques to assess an investment opportunity. As technical analysis has mathematical and statistical modeling to comprehend the market and price behavior, it also has wide applications in buying and selling cryptocurrencies, including bitcoin. While applying technical analysis, the technical analysts can find three primary tenets; history tends to repeat itself, the market discounts everything, and prices movement in trends.
With such beliefs in mind, the analysts can understand the market from various influences such as traditional and behavioral economic principles. This helps make predictions about market movements. After blockchain developments boomed, the first crypto asset, bitcoin, emerged. So let’s draw on some essential tools to perform technical bitcoin analysis.
Relative Strength Index (RSI)
RSI is helpful for novice and veterans, which appears like a simple line graph below a price chart. This line swings between 0 and 100, with the 50 as a neutral value. If you find the higher value, it indicates the overbought conditions, whereas a lower value shows oversold conditions. Besides, RSI can be used best in conjunction with other indicators. For example, suppose, if the prices for bitcoin approach a well-established support level while showing a low reading of 20 in the RSI, traders need to believe that an upcoming price is likely to be higher than usual.
Average Directional Index (ADX)
ADX is a short-term indicator that helps traders decide how strong a trend is. The more elevated the ADX, the more vigorous the momentum behind current trends. ADX indicates the average of the values of directional movement lines over a specific period. So, these lines include current low and high prices to calculate. Like the RSI, ADX also contains a value scale between 0 and 100.
Moving Averages (MAs)
A moving average is a tool to determine the direction of a trend. MAs help summarize data points of bitcoin or other cryptocurrencies over a set period and divide the totals by the total number of data points to get an average. Experts believe that long-term moving averages tend to be strong indicators because they contain sufficient data. However, MAs can also be applied in the short term.
You can find many types of moving averages, different time lengths, and various ways that help offer clues to the direction of a trend. For example, one popular bullish setup based on MAs is the “golden cross,” which occurs when a short-term MA moves above a long-term MA.
Candlestick Charts
Technical analysts use candlestick charts for comprehensive details about the growth of the asset and market. These candlesticks show four different price levels for each interval: high price, opening price, closing price, and low price. They display this information in a bar and two wicks where the peak of the top wick indicates the high price whereas the tip of the bottom wick shows the low price.
Thus, the candlesticks are either red or green. If there is a red candlestick, the prices end the day lower than they have opened, whereas the green candlestick shows that prices end the day higher.
Support and Resistance Levels
Support and resistance levels indicate the movement of prices that tend to peak and bottom, respectively. Identifying these levels help traders to make informed trading decisions. There are many ways to determine support and resistance levels. For example, if the chart shows that prices have pulled back, it is resistance level, but if the price is bottomed out, you can determine it is a support level.
After identifying these levels, trailers can make informed training strategies. Besides, there are other ways to use support and resistance as these levels either help predict price reversals or indicate a new trend if prices continue beyond them.
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