How to Apply Technical Analysis to Cryptocurrencies

You can perform technical analysis on cryptocurrencies in much the same way as with traditional assets. There are several ways to perform technical analysis, and most cryptocurrency exchanges offer market analysis data and various charts to read. Analyzing asset data is a smart way to try and get the market to work for you.

For instance, if you want to trade CAD to ETH, you may want to wait for a dip in the market so that you can buy more ETH in the dip. With valuable cryptocurrencies, such as ETH, this is an excellent strategy because we know ETH has staying power despite the ups and downs. By carefully interpreting the data and stats of a particular cryptocurrency, the aim is to determine its short and long-term trends.

Applying a few technical analysis strategies can be helpful to predict when that dip will occur. The analysis uses historical data to predict the future of the market. The techniques discussed here are widespread technical analysis practices. However, even the best methods cannot predict the future market with certainty. It is best to apply several techniques when analyzing any cryptocurrency.

Reading Candlestick Charts

Candlestick charts are so-called because the graph looks like a collection of red and green candlesticks. These candlesticks are of varying lengths and colors based on the recent movement of the market.

To interpret the candlesticks, we look at both the “top wicks” and the “bottom wicks,” as well as the color, either red or green. Red means that the price dropped, and green indicates that the value rose.

Let’s start with the bottom wick of the candle. If the bottom wick is long, this indicates that there is market volatility. The long wick suggests a more significant change in the price of the asset. A long wick can mean either a greater loss if the chart is red, or a gain if it is green.

Volatility suggests that the market may change the next day because it will need to be corrected. So, if there is a long, red bottom on ETH’s charts, then you may have missed your chance to buy in the dip because that long red wick was the dip.

A short wick indicates that the asset is recently at the peak of its value. A short wick expresses less volatility, therefore less movement of the asset. People are holding the asset, or they are not buying it. If this is the case, we can expect that the asset will not move much in the near future.

Looking at the top wick, if it is green, we understand that the asset was high the day before or so and was sold for a profit. Sometimes this indicated a bearish (slow) market is ahead. When the wick is short, it means that the asset continues to be sold, which increases the market supply and means that the price is likely to drop due to a lack of scarcity.

Finally, the long top wick means that traders are waiting for the dip and that soon there will be upward movement in the market.

Market Cap

Market cap or capitalization expresses how much a company or cryptocurrency is worth, determined by the stock market. It is the total market value of all outstanding shares. For cryptocurrencies like ETH, the valuation is different from a typical company with 1000 shares, for example.

Nevertheless, it works in a similar way for cryptocurrencies, as it helps investors understand the present value and future projections. For example, Ethereum’s market cap is $481.8 billion, while Bitcoin’s is $1.1 trillion. Both cryptocurrencies have a larger market cap than either Ford or Coca-Cola. This is in part because Ether and Bitcoin have a nearly unlimited market and more future market potential.

Investing in companies with a high market cap is likely to lead to greater returns over long-term investment. A high market cap means that the company (or crypto) has been around for a while. The historical longevity of a cryptocurrency shows staying power. That means that if you hold on to the asset, then in the long-term, investors will see greater returns, as the value will continue to increase with time, as demonstrated by the past data.

Using Software and Combining Methods

Candlestick charts and market caps are only some of the data that can help make good trading predictions. It is essential to learn how to read the stats offered on many cryptocurrency exchanges. You may also want to consider investing in cryptocurrency software to help with your technical analysis, such as Cryptowat.ch or TradingView.