When it comes to forecasting prices, everyone is entitled to their opinion. Social media is rife with analyses mentioning terms you might not be familiar with yet, like resistance, support, moving average… It might be tempting to follow them without a second thought – but as we say in crypto: DYOR (Do Your Own Research)! This article will provide you with the first tools to make your own, informed decisions.
The Key Terms of Technical Analysis
Technical analysts use many metrics to identify trends and inflexion points on the market. Support and resistance levels are two such fundamental concepts, based on the intersection of supply and demand.
The theory goes as follows: if supply is higher than demand, prices fall. Conversely, when demand is higher than supply, prices tend to rise. Suppose the price of an asset is falling. At some point, traders will deem it to be attractive again, and will want to resume buying it. It will have reached its support level: the price will not drop further, but will in fact start rising again because of a surge in demand. As its price keeps rising, it will knock against its resistance level. The uptrend will stop, and prices should fall as supply overwhelms demand.
How do you identify support and resistance levels? Trendlines and moving averages are two handy tools. On a chart, a trendline simply connects prices together to see in which direction an asset is moving. At its most basic, you can draw a line between low points to get a sense of the support levels, and link highs for resistance levels.
A moving average is a more granular way to gauge resistance/support, especially when there is no single historical trend. As its name implies, a moving average smoothes out price levels by continuously updating the average price. For both methods, traders experiment with time frames to fine tune their analysis depending on their trading horizon (short or long-term).
Pay attention to the fact that while these analyses are highly technical and data-based, they do not exclude feelings – at least the feelings of others. Market psychology plays an important role in shaping prices. Traders and investors do not operate in a vacuum: they remember the past, and might react more strongly to some risks (or pieces of news) than to others.
Everybody has access to the same data, and everybody is trying to adapt as fast as possible to “beat the market”. This might in turn trigger bubbles (where there is a global feeling of excessive optimism) or death spirals (when all traders expect a market situation to keep worsening).
Let’s Practice!
Now that we have introduced the basics, let’s apply them to a real-life market example. The chart above tracks BTC prices from May 11, 2021, to June 12, 2022. The moving average is indicated by the blue line. Over the course of a year, you can see a lot is happening.
- On May 11, 2021 BTC dropped below its moving average of $55,000 and initiated a sharp draw down that eventually reached $30,000.
- On July 22, 2021 BTC crossed its $32,000 moving average – its price went above what was at this time its support level – and showcased a strong uptrend, eventually leading to BTC’s ATH (all-time high) in November 2021 ($69,000).
- When BTC went below its moving average on November 9, 2022, a bearish momentum initiated, with its price moving downwards and oscillating within a trend channel (highlighted in blue).
- After spending almost two months under his moving average, BTC rebounded on February 5, 2022 back to its trend channel. It simultaneously crossed its moving average, initiating a short term positive trend.
- This regain of strength didn’t last: on June 12, 2022, BTC dipped under its moving average again, hitting its resistance level, with a sharp drawdown from $30,000 to $20,000.
Can we deduce the current situation from this historical analysis? Not quite yet, but there are still lessons to be learned. It’s hard to predict BTC’s next key support level, with prices unseen for months – even years. It could very well be $10,000 if the $13,500 and $12,500 levels (respectively 2019’s ATH and 2020’s Q3 peak) do not show strength. At the same time,the key resistance level at $19,000 that reversed upward trends, — a level that fuelled BTC’s rise starting from December 2021, has now been broken. This new range between $10,000 and $19,000 is indicated by the red and green line in the graph below.
So the question we are looking for an answer to is the following: when will BTC’s price stop falling? What we know for sure is that BTC is still under its moving average, which tends to indicate the pursuit of the bearish market based on market statistics.
We saw in the previous chart that in July 2021, there was a strong rebound in the $30,000-$32,000 zone. What we are now witnessing is the lack of technical support before $10,000, which might be an indication that this is the direction BTC is headed… before a new rebound?
Conclusion: HAL Strategies Run Their Own Analyses
We have seen the crypto market is volatile and ever-changing. HAL strategies are always active, collecting data in real time to build signals triggering automated trades. And unlike traders, they are not encumbered by emotions: they stick to rules designed by HAL’s experts.
In addition to helping you automate part of your trading process, we regularly publish articles and analyses to help you DYOR (remember: that stands for Do Your Own Research).
Why not join today? Knowledge is just a click away.
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Disclaimer:
Investing involves risk, including the possible loss of all the money you invest. In particular, crypto-assets are a highly volatile and speculative asset class. HAL is only suitable for traders who are willing to bear the risk of loss and experience sharp drawdowns. Past performance is not necessarily a guide to future performance. The performances presented are real performances calculated net of execution fees and slippage from a proprietary Binance account.
The purpose of this material is to provide objective, educational and interesting commentary and analysis on developments in the crypto-assets sector. Nothing in this material should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.