5 Technical Analysis Strategies for Crypto Futures Trading
To navigate the extreme volatility of the cryptocurrency futures markets, you need helpful tools to spot patterns and trends. Although no one can accurately predict price movements, you can get valuable insights if you analyze the market carefully. Technical analysis tools will help you predict the potential price movements that can help you to enter and exit trades better.
Overview of Technical Analysis
Technical analysis looks at the past performance and history of an investment. Unlike fundamental analysis, which explores economic and financial fundamentals, technical analysis tools rely on data showing previous and current trends as well as patterns to make predictions on future market activity.
The fundamental assumptions underlying technical analysis are as follows:
- Price is everything. All the factors that go into causing price movements are reflected in the price itself.
- Price movement is not random but follows discernible and repetitive patterns. Trends established by historical movements are repetitive and cyclical.
- What happened in the past will happen again, and analysis of historical data is often a good pointer to the future.
In other words, technical analysis uses historical data in the form of charts and graphs and attempts to project the patterns thus observed into the future. When it comes to crypto futures trading strategies, there is no shortage of options.
5 Technical Analysis Strategies for Crypto Futures Trading
Candlestick Charts, Support and Resistance, Trend Lines, Moving Average, and Relative Strength Index (RSI) are among the most popular analysis tools in the market. Let’s explore how they work.
Candlestick Chart
Since technical analysis is not only predicting probable price moves but also assessing market psychology, candlestick charting is probably the best tool to give the trader these answers in the shortest amount of time. Candlesticks show high and low prices for a given period by using vertical lines which appear above or below the candlestick body. These lines are also known as shadows.
The actual body of the candlestick shows the opening and closing prices. The candle bodies are colored green for upward movement and red for downward. The use of colors makes the charts much easier to read. The general theory underpinning candlestick charting suggests candlestick patterns can forecast changes in market direction.
Support and Resistance
Support is the zone where buyers start buying in large numbers thinking the price to be a good buy. In the same manner, resistance is the price zone where sellers believe that prices are too high and it is time to take a profit and exit the market.
Support is just like the floor of a room. Just like when you hit a ball on the floor, it rebounds and returns. When an asset price action reaches that support level once more, it rebounds and starts rising again. In the same manner, resistance is the price zone where sellers think that prices are too high and it is time to take a profit and exit the market — essentially predicting that the ball will begin falling again.
So support and resistance lines are basically the highs and lows on your chart. Understanding how to identify these levels enables you to predict market prices.
Trend Lines
Trend lines form the basis of crypto trading. The lines are based on historical price action and are drawn on charts that help forecast the asset price’s direction. Traders often utilize multiple trend lines to analyze more complex patterns in the market, determine good entry and exit points, and also help in deciding the ideal areas to set stops.
Relative Strength Index (RSI)
The Relative Strength Index RSI is a popular and solid technical analysis oscillator that has numerous applications, including indicating the strength of a price trend and also generating buy signals with price divergences. RSI is designed to help traders determine whether an asset is overbought or oversold. Measured on a scale of 0 to 100, the RSI is considered oversold when its value falls below 30, while a reading above 70 indicates an overbought asset price.
Moving Averages
Moving Averages smoothen out erratic movements in prices. With this strategy, it becomes easy to see a clear picture of the price behaviour trends. This is a straightforward and easy method of analysis and prediction. Though simple, it is effective in establishing and identifying trends.
With Moving Averages, you can use them to analyze both short-term and long-term trends. Short-term analysis is used to measure or smoothen short-term trends, longer averages are used to measure or smoothen long-term trends.
Drawbacks with Technical Analysis
While technical analysis may be able to tell you what is likely to occur or what is going on at the moment, it doesn’t reflect the probability of success in a trade. There has been some work to quantify the accuracy of different technical indicators, particularly in the area of chart patterns, but this still doesn’t help with the analysis of the trade itself.
One other danger of technical analysis is the temptation to pile on a bunch of indicators in the hope that these will somehow show additional insight or edge in trading. It is essential to understand the use of each technical analysis tool before applying them.
Wrapping Up
While Technical analysis can be used to time an entry or trigger an exit, it’s essential to understand that these technical strategies are most helpful and informative when the market exhibits specific patterns or movements. It is important to note that technical analysis alone cannot predict price movements that require a fundamental analysis of the underlying asset.
While technical analysis can provide valuable insights into potential market trends, it should be used in conjunction with a thorough understanding of the fundamental factors that drive the market and combined with proper money management.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
