Does technical analysis work for cryptocurrencies?

Technical analysis is vital in price prediction, even if you prefer using fundamental events. 

Technical analysis is one of the trading disciplines applied to measure investments and determine trading opportunities through trends and patterns on a price chart.

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Most technical indicators and patterns were created decades before the cryptocurrency market appeared. Therefore, traders’ most frequent question is whether standard technical tools work for cryptocurrencies. Yes, they do. However, you should learn the unique features of the cryptocurrency market to use them effectively. Let’s discover the most suitable indicators and candlestick patterns for crypto. 

Do indicators work for crypto?

Yes, indicators work for crypto if you know what indicators to use and on what timeframe to implement them. If you are a newbie trader, you should trade on longer-term timeframes. Longer periods allow you to determine the current trade and make a decision without needing to hurry. The most effective technical indicators for cryptocurrency trading are MACD, RSI, support and resistance levels, Bollinger Bands, and volume. 

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  • MACD. The MACD indicator works better on higher timeframes because it’s based on the moving average, which is a lagging indicator. This means it provides signals with a delay. As the cryptomarket is highly volatile, you risk missing a good signal. You are recommended to use the MACD tool on lower timeframes only when looking for convergence/divergence. 
  • RSI. This indicator is also lagging. Therefore, you should apply it on higher timeframes. Be ready for the RSI line to cross oversold/overbought zones multiple times due to high price fluctuations. Evaluate the market and confirm RSI signals. 
  • Bollinger Bands. This tool will help you predict price reversals. However, you should consider that the price may move beyond the bands due to high volatility. 
  • Volume. The volume indicator will allow you to measure buyers’ and sellers’ strengths. This indicator is suitable for all assets. 
  • Support and resistance levels. This is the most effective tool you can use for the cryptocurrency market. Place the levels based on closing and opening prices and be ready for the price to go slightly beyond them. 

Do candlestick patterns work for crypto?

The cryptomarket is highly volatile. Therefore, more candlestick patterns appear on it than on more stable markets. Your challenge is to read their signals correctly and distinguish fake signals from real ones. 

How to read candlestick patterns in cryptocurrency

A beginner’s guide to tick charts

You need to learn how patterns look to read their signals. The price may change its direction too fast. Therefore, you must react without delay. If you start looking for pattern descriptions on the Internet, you will waste time and miss a good entry point.  

As cryptocurrency differs from traditional markets, you shouldn’t take risks. The best candlestick patterns for crypto are the standard patterns. These are those that traders frequently use. Below, you will find the most popular and reliable candlestick patterns that will work for digital currencies.

The second important step is to confirm pattern signals with indicators. The cryptocurrency price suffers significant fluctuations. Therefore, you should be sure the alert still makes sense. The most reliable tools for beginners to confirm signals of candlestick patterns are RSI, MACD, Awesome Oscillator, and Stochastic. However, they are more reliable on long-term timeframes. 

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Do chart patterns work for crypto?

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Any chart pattern will work for crypto if you learn how to measure price volatility. Enormous cryptocurrency volatility may leave you with losses if you place a stop-loss order too close to the entry point. 

Every chart pattern has specific rules that determine an entry point and a potential target. Your aim is to define where to place the stop-loss level. The traditional risk/reward ratio sometimes doesn’t work because the price forms too-long shadows. You should measure the length of previous shadows(no numerical calculations are required). The idea is to determine the average price fluctuations and set an appropriate stop-loss boundary. 

Another point may sound confusing, but you should know how patterns work. 

The price movement on the daily chart of BTC/USD looks like a double-top pattern. However, as you may know, the pattern appears at the end of an upward movement. Therefore, this is not a double-top pattern.  

Final thoughts

Technical analysis will work for cryptocurrencies if you pick the right tools. There are numerous indicators and candlestick patterns for cryptocurrencies. You should start with traditional ones to be sure they don’t fool you. Moreover, you should avoid making too many short-term trades, as cryptocurrencies are a subject of enormous volatility. Only experienced investors can deal with them.

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