If you are just learning how to trade, there are some strategies that you should be aware of before you begin you begin to risk your hard earned cash.
Some of the very best methods you can use to analyze a cryptocurrency are technical analysis strategies.
This is the study of past price movements which will help you determine the future path of cryptocurrency. Technical analysis includes support and resistance, momentum, trend following, mean reversion, and volatility.
Here are some of the best technical analysis strategies.
Support and Resistance
The price of cryptocurrency bounces within defined ranges. Support is a level where buyers are willing to step in and buy a cryptocurrency exchange rate.
You can find support levels using several techniques such as trend line, a price low or even a moving average. The chart of Bitcoin shows three different types of support levels. You can use the same method to find resistance levels.
When prices break through support or resistance they generally track to a new range. Before you place a trade, it’s prudent to find both support and resistance levels.
Momentum is the acceleration or deceleration in an exchange rate. If you are looking for prices to break out, you might consider using a momentum indicator to determine if prices are accelerating or decelerating.
The MACD (moving average convergence divergence) index is one of the most popular momentum indices. You can use the MACD crossover to determine if positive momentum is accelerating or negative momentum is accelerating.
When the MACD signal line generates a crossover buy signal, positive momentum is accelerating. When the MACD signal line generates a crossover sell signal, negative momentum is accelerating.
A trend is your friend. It’s when prices move in a specific direction and this continues to perpetuate. You can use a short-term, medium-term or long-term strategy to generate a moving average crossover strategy.
For example when the 20-day moving average crosses above or below the 50-day moving average a moving average crossover trend signal is generated.
What this is telling you is that a trend is in place. Some traders use this as an immediate signal to buy or sell and others use it as a general idea of the direction of a cryptocurrency.
When a cryptocurrency trades sideways it generally reverts to a specific moving average. One of the best mean revering technical analysis studies is the relative strength index (RSI).
When the RSI becomes oversold, the index reading on the indicator drops below 30. This means that the exchange rate is overbought and likely to rebound. When the RSI indicator climbs above 70, it means the exchange rate is oversold and likely to decline.
Another very good indicator that measures mean reversion, as well as volatility, is the Bollinger bands. These indicators created by John Bollinger help determine the range of a cryptocurrency.
The Bollinger bands show you both the upper and lower bands of a cryptocurrency trading pattern. As the bands widen volatility is increasing and when the band’s contract, volatility is declining.
Before you begin to trade, you should feel comfortable using several different technical analysis tools.