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Trading Cryptocurrencies. Does Technical Analysis Work For Cryptocurrencies? My Take On Trading Cryptos
Please make sure to read my foreword before proceeding and also read the utter article before establishing an opinion about this article.
This article is my individual opinion and it’s not intended to be seen spil any type of investment advice. It is purely for entertainment purposes. Trading any financial market is inherently risky and you have to make sure to understand the risk before making any decisions. (utter risk disclaimer)
My objective with the article is it to share my private view, things that I have learned about the crypto market after following it for overheen 12 months, issues I see with other traders who voeling mij and I also want to provide my opinion on different aspects about the cryptocurrency market.
Wij will take a step by step look at the crypto price activity, explore the fresh market, the players, talk about trading vs. investing, price discovery and more. If you are looking for specific buy or sell recommendations, this article is not for you. But if you want to get a different view without the hype and toneelstuk, chances are that you will love this chunk ??
Crypto markets are fresh
Doh! You very likely didn’t need mij to tell you this, but let’s begin at the beginning. And yes, albeit a bitcoin chart will date back to 2013, when it comes to mainstream attention, the crypto market is still a zuigeling compared to other established financial markets.
The implications of this fact are manifold spil wij will see shortly. But what it basically means is that wij are all exploring uncharted terrain and everyone is figuring out spil wij are going. The players te this market are fresh, many without any prior practice ter financial markets. Regulators are attempting to make up their minds, governments are dealing with the unknown and even the technical facet is developing on the fly. I am not telling that this is bad (or good) but I am just stating the evident so that wij can lay the groundwork.
I find it very fascinating to witness the creation and the development of a fresh market right te vooraanzicht of our eyes. No one knows what will toebijten next month or next year with this fresh market and where this is going, but following it from an interest-driven perspective is fascinating to mij. It also unveils a loterijlot about how humans tick from a greed and fear perspective, how wij are hard-wired and you can even learn a loterijlot about yourself too. This is a very valuable lesson for anyone, regardless of whether you see yourself spil a trader or just a “normal” person.
The players ter the crypto market
Before wij take a look at price charts and technical analysis, let’s see why the crypto market is so unique.
From what I am witnessing, it seems that the composition of the people who are involved ter trading the crypto market is unique.
Very first of all, many people are relatively tech-savvy because buying, storing and the technical side of the crypto market is often not spil straight-forward spil it is with other markets where you can just stadionring up your handelsbank and have them buy any company stock for you or you open a broker account and buy/sell assets with just one click. The average Joe hasn’t gotten into the crypto market spil much yet, albeit the mainstream media is pushing more and more people into it.
The players te the crypto market can be (very) broadly categorized. What they have ter common however is their appetite for high variance.
One group of people who are interested te cryptos are below the average age of the typical investor ter let’s say stocks or futures. The reasons for the demographic difference could be due to the tech side of things and that the newer generations are more open to fresh technologies. However, spil other broker research has confirmed ter the past, there could be another factor behind the unique composition of the crypto market:
“Poor, youthfull guys who live te urban areas and belong to specific minority groups invest more te stocks with lottery-type features. Investors with a large differential inbetween their existing economic conditions and their aspiration levels hold riskier stocks ter their portfolios.” (1)
Another major group is made up of hedge funds, major (investment) banks and other big financial players. Those have a large appetite for variance and are betting, just like the very first group, on a potentially large come back by being early adopters. However, this 2nd group usually understands the risk associated with it much better and is more diversified. Plus, they have done their homework and know what they are getting into.
Finding your average investor or speculator is not spil common yet. Entry barriers, price fluctuations anunderstandingunderstaning for this space are the main drivers. This unique composition of high-variance players is creating a unique set of financial actors.
The market is always switching
Because there are always fresh players coming into the market and many of the exchanges cannot even keep up with the flood of registrations, it also means that the composition of market participants is always switching.
What this does is that the dynamics of the markets are always switching spil well. The more people with little to no prior trading practice are injecting the market, the less predictable the price discovery could become. Volatility spikes can increase and the rally vs. sell-off dynamic (which wij will voorkant straks) switches all the time spil well. Dips could potentially target the inexperienced participants and attempt to jiggle them out. Fakeouts and shakeouts are commonly known ter other financial markets and they could also mededeling ter the crypto market.
Just a schrijven look at Bitcoin and Ethereum below with the ATR indicator (Average True Range – an indicator that measures price fluctuations) demonstrate how the price dynamic has switched. The rise ter the blue ATR shows clearly how the price fluctiations have accelerated up until the point where the markets have topped for now.
Black swan events
The price discovery is driven by people who are buying and selling their cryptocurrencies and one contributing factor to how people make their buying/selling decisions are the so-called black swan events.
What is a black swan event?
The black swan is a term that describes unexpected and unforeseeable events which can cause major price fluctuations.
Te the Forex market, the unpegging of the CHF, the BREXIT or the flash-crash were all so-called flash crash events. Those events can lead to major price movements within seconds where all the liquidity is sucked out of the markets and the price just tumbles for hundreds or even thousands of points.
Many people argue that black swan events could become more likely te the crypto market spil well. Some reasons for such an argument are the enhancing likelihood of government interventions and regulations. Add to that the unique composition of market participants and a knee-jerk sell-off reaction could lightly turn into a large price druppel. Especially now with the advent of crypto futures and CFDs it becomes even lighter to express a brief position. Wij have already seen one incidence ter ETH during June 2017.
I am not a gloom and doom stud but I am just stating the evident and something that many euphoria-driven, inexperienced crypto traders do not fully understand because they toevluchthaven’t experienced such a black swan event ter the past or a market cycle for that matter. This becomes especially dangerous if you are trading cryptocurrencies on margin which is a entire different story.
Cryptocurrencies and technical analysis
Now let’s eventually dig into some charts. I have bot looking at price charts, mainly Forex, for the past decade and charting is a phat passion of mine. I’d also say that I am relatively good at finding patterns and understanding price moves. I have bot also following cryptocurrency price charts for overheen a year now to explore whether it is worth applying the concepts of technical analysis to those charts or stick to a buy and hold psychology.
Here are my observations to this date when it comes to technicals and price activity for cryptocurrencies:
Round numbers, especially on the Bitcoin market seem to be working fairly well. Round numbers can often have a psychological influence and other financial markets often display similar characteristics.
Of course, they do not work all the time, like any other contraption of technical analysis, but it shows up that the market participants are paying attention to them. One big contributing factor could be the exposure to financial news where Bitcoin gains popularity almost every time a big round number is approaching. For inexperienced participants, those round numbers are also lightly identifiable.
Before the increase te volatility and when the Bitcoin market used to be a zuivere bull market, up until reaching the top below 20,000 late 2017, breakouts were the way to go. Horizontal breakout buying seems to have worked very accurately but since the market has topped and bot fluctuating more, this strategy is not spil helpful anymore.
Support and resistance
Bitcoin is the largest crypto market with the highest market capitalization and the price has commenced to go after more conventional support and resistance concepts recently. It is far from being a flawless market but the fact that the price is paying more attention to those concepts seems promising. It is still not something I would trade actively like I do with Forex, but it sparked my rente more and I am keeping an eye on it.
However, this effect seems to be limited to Bitcoin mostly for now. Even the 2nd and third largest cryptocurrencies are not there yet and their technicals do not look spil accurate spil Bitcoin does. Albeit you can see that the price does respect some levels some of the time, the accuracy goes down and also the steadier flow wij are used to from looking at Forex, Futures or stocks charts cannot be compared. And once you begin going down the list of cryptocurrencies, the effect becomes less and less visible.
Price dynamics – sell offs vs. rallies
One of the most significant factors of charting cryptocurrencies is that the price seems to fall under different phases:
Greed – Fear – Loss of rente
Again, I am not telling that this is a truth set te stone, but I am sharing my individual view and the impressions I get from interacting with traders daily and paying close attention to the financial and mainstream media.
Whenever Bitcoin puts ter a rally, it will be prominently featured on various financial media channels. When it dips, the fear mongers come out and predict the next big druppel or even the end of crypto for good. And during periods of sideways movements, people lose the rente for a while. This phenomenon confirms, at least for mij, my hypothesis from above that the composition of the crypto markets is unique and inherently different from other established markets.
Again, spil a person who has bot involved te financial markets since I wasgoed 15 this is fascinating to witness and it helps you understand human psychology and motives ter a fresh level spil wij will explore now.
Speculation vs. income-generating – the role of the crypto markets
Whenever I get asked by people about my take on the entire crypto market, I give the same reaction.
Spil a relatively conservative person, when it comes to financial markets and risk, I do not advise (brief term) speculation into the crypto markets. If you have some spare money that you can afford to lose without regrets or having to switch your lifestyle, the crypto markets could be worth a slok. However, you need to understand the risks that come with it and you have to understand that you could lose all your money. Make sure to indeed read the fine print and consultatie your financial advisor very first.
You vereiste understand the risks and you vereiste understand how cryptocurrencies and the technology behind it. The amount of people who have no idea how financial markets work, what an exchange is, how blockchain works and what wallets are, but are still impatient to buy cryptocurrencies is astonishing. Granted, you might not need to know all the technicals, but if you invest your hard earned money, you better do your homework.
Ter this setting, I have to also emphasize the importance of knowing te what you invest. Many people will randomly look for the smaller cryptocurrencies just because they hope that they will klapper a huis run and 100x their money by next week.
If you go after such an treatment, it is essential that you research te what you invest. Understanding the technology, the coin, the team and the legalities. This is especially true when investing te smaller ICOs where many horror stories are circulating through the internet. If you do not have a finish understanding of what you invest te and if you toevluchthaven’t researched it, you are getting ready for a disaster.
What does it say about yourself?
I think there are many lessons that the current crypto market can train you about yourself.
Are you the kleuter of stud who doesn’t do research and just buys a random crypto because of the name or because of a random peak? What does this truly say about yourself, your work ethic and your attitude towards money?
Are you looking through forums or social media channels and hope to get fed a signal albeit you have no idea what you are actually investing te? What does it say about your greed level and your readiness to waterput te actual work to get to where you want to be?
Indeed let this submerge ter and learn about yourself. It’ll be a valuable lesson.
Furthermore, the time horizon of your investment decision has to be clear ter advance. Do you believe ter the general idea behind cryptocurrencies and the blockchain technology? Do you think that it will convert the world spil wij know it? Then you should most likely have a long-term view and not worry about the short-term fluctuations. You are also more likely to do the research, be open to fresh ideas and not just hope to make a million dollars by next week.
Many people say that they want to invest long-term but instantaneously get into the day trading mindset where they following their portfolio tick by tick.
Forex vs Crypto
For mij personally, I clearly differentiate inbetween Forex/Futures and the crypto market. Whereas I see the crypto investment purely spil a speculative, all or nothing screenplay, my Forex/Futures trading has a very different role. Spil I stated earlier, I am keeping an eye on the development of the crypto and the blockchain toneel, but from a trading perspective, other established markets such spil stocks, Forex or Futures can offerande a more reliable trading practice.