I’ve been interested about the subject of cryptocurrencies for a while, and by dint of seeing graphs, seeing indicators, hearing about RSI, MM200 or others, I wanted to know more about the subject. cryptocurrency trading.
This article is part of the file “Cryptocurrencies, the big folder”
This is not the first time that I have mentioned the subject of cryptocurrencies on this blog. After a first very brief article on bitcoin in 2013 , another a little more extensive in 2018 on bitcoin, altcoins and how to buy, store and transfer them , I wanted to know more about trading and analysis technical.
The idea is not to turn myself into an intraday trader (I’m more into a long-term perspective on cryptocurrencies). But I especially wanted to know a little more about technical analysis to perfect my general knowledge on the subject, and to draw a little more information by looking at a course graph. So I started to take an interest in the subject of cryptocurrency trading, and here I am giving you the first elements that I could remember. My vocation is not to transform you into a trader, but simply to bring you, like me, to a better understanding of the whole. Note that I am talking about cryptocurrency trading, this is the subject that interests me. But these indicators can of course also be used in all-course trading.
Choose a cryptocurrency trading tool
The first point is to choose a tool that will allow you to view the graphs, and to place indicators there. For once, I was not original, and I created an account on TradingView . For the fairly basic use I have of it, a free account is more than enough. You will be limited among other things in the number of simultaneous indicators that you will be able to display, but this should not be blocking at first.
Once you are connected, you will be able to ask the tool to display graphs for you. You can choose for example as a first simple example the BTC/USD pair. You should end up with the following (here in night mode and Japanese candlesticks):
On the screen, you will find:
- a menu at the top, with a number of items, including indicators (we’ll come back to this), and the pair used on the left (here BTCUSD). You can simply change the pair by clicking here which will allow you to search for the one you are interested in.
- a menu on the left with the drawing tools (we will also come back to this).
- a panel on the right with a number of additional items to display (alerts, news, calendar, etc.). I let you discover the latter we will not talk about it here.
In terms of the basic manipulations possible, you can zoom in on the graph with the wheel. You can also play on the abscissas and ordinates by clicking and moving from left to right, or from top to bottom. This will flatten or extend the axes.
The representation in Japanese candlesticks (or candles)
For the rest of this article, I will be using Japanese candlesticks (or candles) on the charts. This is the most used figure, because it gives several important indications depending on your chosen time scale.
On the interface, you will be able to choose your time scale (next to the pair). This allows you to define the scale on which the openings and closings of your candlesticks are made. It can be a scale of one hour, one day, one week, one month… It all depends on your strategy and what you want to see. To start, the ideal is probably to start on a “daily” time scale.
You will then have a series of candlesticks as in the image:
The color of the candlestick tells you whether on the time scale it is up (green) or down (red).
Your candlestick then breaks down into two parts:
- the body (thick part)
- the wicks (thin parts at the top and bottom)
The body indicates the opening and closing price. For cryptos, the closing is fictitious in daily because it is a market that does not close. This closing takes place at midnight GMT (either 1am or 2am in France depending on summer or winter time). The wicks indicate the highest point and the lowest point reached.
Basic indicators for cryptocurrency trading
Now that you have a tool and a first graph, we will see what indicators we can add to it to draw information and lessons.
Volumes are used to measure market activity. They indicate on the time scale the volume of traded assets. To add them to TradingView, you can click on “indicators”, and search for “volume”:
By clicking on the indicator, you will see the volumes appear at the bottom of the screen:
You can see that the volumes can be very disparate depending on the day here.
Isolated increases can correspond to market upheavals such as FOMO (Fear Of Missing Out, buying for fear of missing the boat), or FUD (Fear, uncertainty and doubt, or panic selling).
The volume can give several keys. Already, a large volume is reassuring in the sense that the price is less easily manipulated. It can also help identify trends. An increasing volume will tend to confirm a trend (up or down), while a decrease in volume may indicate a reversal or consolidation.
Support and resistance
It is both a basic element, and a determining element in cryptocurrency trading. Supports and resistances are often the basis of strategies. In any case, they make it possible to define price levels to monitor and which may give indications of trend changes.
To put it simply, a support is a price on which the price tends to rebound to start rising again in the event of a decline. A resistance is a price on which the price tends to rebound to start falling again in the event of an increase. These are thresholds that have been set by the price history.
When a support is broken (known as a breakout), especially with high volumes, this can indicate a strong bearish movement, usually until the next support. Conversely, if a resistance is broken, it can indicate a strong bullish movement.
Once a support is crossed on the downside, it will become a resistance that must be crossed. Conversely, a resistance crossed on the rise will become a support.
On TradingView, to draw your supports and resistances, you will take the “horizontal line” tool:
Then, you will need to locate points on the chart on which the price has bounced up or down, for example:
We see that here the green line that we have just drawn served as resistance 5 times (red circles), before breaking upwards and becoming a support (green circle).
Note that the more support or resistance is touched, the more the order book empties on this price and therefore the more it weakens.
On the other hand, the more support or resistance has been hit, the stronger it will be after the trend reversal. Here the green line has been touched as resistance 5 times. This will make it strong support going forward now that it has been broken as resistance. To go further, I recommend Captain Trading’s video on the subject:
RSI (Relative Strength Index)
The RSI is an indicator of trends and oscillations. It helps highlight overbought or oversold areas. By default, the RSI works with 14 periods, but you can change this setting. Here is what the addition of the RSI on TradingView gives (purple zone under the price curve, you can add it via the indicators, “RSI”):
We see that by default there are three zones in the RSI:
- above 70: overbought
- below 30: oversold
- between the two, with the median at 50 (the RSI gives a number between 0 and 100)
A crossing of 70 on the downside may suggest that the upside is running out of steam and a trend reversal (which can be seen on the significant crossing of 70 on the downside on the right of the graph). Conversely, a crossing of 30 on the rise to indicate renewed purchases and a price that can rise. But as you can see from the picture, this is not always the case.
Moving averages provide average prices over a defined period. It is possible to have short-term moving averages (over 10 periods for example), medium-term (50) or long-term (200). This allows to have indications of supports and resistances of the course compared to these moving averages.
Crossovers between MM50 and MM200 are also used to find trends. When the medium-term average crosses above the long-term average, it can be a sign of an uptrend. Conversely, if it crosses downwards it can mean a bearish movement.
Here is an example of adding a 50-day (dark blue) and 200-day moving average on the BTCUSD pair (you can add it via the indicators, “Moving Average”)
We see for example on the rise that the MM50 acted as support throughout the rise.
Bollinger bands are used to indicate market volatility. The further apart the bands, the more volatile the market. The tighter they are, the more the market consolidates.
Several indications can be drawn from Bollinger bands in cryptocurrency trading. Even if, as with all indicators, it does not always work 100%:
- In general, a violent movement occurs after a phase of tightening of the bands
- Bands act as supports and resistances
- In general, when prices break out of the bands quite clearly, it confirms the trend and continues it.
Here is the illustration on the BTCUSD pair
We see that after a tightening in orange, a large uptrend followed, with three clear overflows in green, all followed by a continuation of the trend. The low band also served as support between the last two green circles.
The Chopiness Index will indicate whether the price is on a consolidation phase or whether it will go into a bullish or bearish trend. Like the RSI, it is on a basis of 0 to 100. And like the RSI it is broken down into three areas:
- beyond 61: the consolidation ends and a trend (bullish or bearish) will undoubtedly be expressed
- below 38: the trend is running out of steam, a reversal is coming
- an intermediate zone between the two
An illustration here:
The index arrived in the phase of change in the first orange circle after a large phase of range, an uptrend followed. There was then a long phase of breathlessness in the second circle which ended in a trend reversal.
Fibonacci retracements is a widely used indicator. Again, the idea is to find potential support and resistance areas.
On TradingView, you will find the tool in the left menu bar:
You will then need to find a completed trend with a high point and a low point. To find the high point and the low point, you will need to find the moment when the market turns. For the low point it will be a hollow, namely a low point surrounded by two higher points. And vice versa for the high point. For an uptrend you connect the low point to the high point. For a downtrend it will be from the high point to the low point. This should give you something like:
You see different levels appear. As part of an uptrend like here this can give you support points. We see here that the 0.5 Fibonacci served in the decline as a support, even if it was slightly exceeded. If it had been pushed in, the next support would have been 0.618.
To go a little further, you can go to the Cryptoast site to see the article on the subject.
And a video tutorial on the subject, still at Captain Trading:
Ichimoku is a very complete indicator, because it is made up of 5 straight lines. These are plotted from the average weights. It is an indicator that allows you to have a lot of indications on the market, and possible reversals. The information given is strong, but there will be a certain lag effect compared to other indicators. Like many others, it will make it possible to determine supports and resistances.
In detail, here are the 5 lines that make up Ichimoku:
- Tenkan (or conversion line). It is calculated over 9 periods. We take the high point and the low point, and we divide by two over the 9 periods.
- Kinjun (or baseline). It is calculated over 26 periods. We take the high point and the low point, and we divide by two over the 26 periods. It is therefore the same calculation as the Tenkan, but over more periods.
These two lines are the baselines. They will make it possible to identify in particular possible trend reversals in the event of breakouts. There are also three other lines:
- Chikou (or lagging Span, or turnaround time). It validates the price movement. It is made up of closing prices 26 periods back and is projected into the future. You will thus see on your graph the lagging span continuing after the current period.
- Senkou A (or leading Span A, or end A of the cloud, or SSA). It is the average weight between the Tenkan and the Kinjun. It gives the thickness of the cloud with the B. It is calculated over 26 periods and is projected into the future (like the Chikou)
- Senkou B (or leading Span B, or end B of the cloud, or SSB). It is calculated over 52 periods and projected 26 periods into the future.
The cloud (or Kumo) is therefore located between the SSA and the SSB, in one direction or the other. It will also serve as a resistance zone (if the price is below) or support (if the price is above).
To go further on Ichimoku, I recommend this article by Karen Peloille on Ichimoku and bitcoin. Or even better to follow this very complete video on the subject, always with Karen Peloille and Cryptoast:
I hope that I have given you some clues to better understand the graphs. Of course, no indicator can define 100% what will happen. It is the intersection of several indicators that will make it possible to identify a trend. Note also that technical analysis is not everything. The price is also subject to other elements (current events, influence of other economic elements, etc.).
Useful links to learn more about cryptocurrency trading
Here are some links to broadly deepen the concepts and indicators that we have just seen:
- Captain Trading for YouTube tutorials to broadly deepen each of the indicators seen above (and many others). It’s very well done, very well explained, I can only encourage you to go see his training videos.
- Crypto Matrix for daily Youtube points and analytics.
- Maxime Prigent for regular analyzes on Twitter combining technical analysis and much broader context. A must to take a step back, and realize that the course is not everything.