Cryptocurrency prices are substantially more volatile than the other assets. While the swings are appealing for traders who know what they are doing, they could be disastrous for newbies. Experts say that crypto trading requires the mental fortitude of a Jedi!So, if you’d have the Jedi mindset, we’ve got the light sabre wisdom to help you on your way. Let’s do this.
BTC- DID YOU KNOW?
Bitcoin is the most scarce thing humans would ever come across their lives. The protocol is designed in such a way that it will never produce more than 21 million coins and as we speak 17.5 million coins have been mined!
When trading Bitcoin, analysts work to reveal trends that show the direction the market is headed. Trend lines are a popular way to do this. They help in cancelling out the noise and extreme outliers in cryptocurrency price movements, to identify uptrends or downtrends. Together with other indicators, they can signal whether a trend is likely to continue or reverse its path soon, enabling traders to make short-term decisions.
With that said, isolating these trends could be easier said than done. For a substantially volatile asset like Bitcoin, the charts may reveal a cluster of highs and lows, to form a linear pattern. But technical analysts try to overlook the volatility and find a series of highs and lows to establish these lines. Let’s see how.
What are Trend Lines?
Trend lines are straight lines that connect two or three price peaks or troughs. These can further extend to become lines of support and resistance. More specifically, they are lines drawn over pivot highs or under pivot lows. There are many ways in which these can help traders:
- To determine the current direction of market prices.
- Can be used regardless of timeframes or intervals.
- To determine strengths and weaknesses of an alt coin, in relation to others
- Simpler way of market analysis
There are mostly two kinds of trend lines, upward trending and downward trending lines.
Tip: Bitcoin has historically shown a strong correlation with trends. It has also shown that its price is highly correlated with increased interest in the currency. Meteoric price hikes have been seen associated with important news releases in the blockchain industry.
Upward Trend Lines
An upward trending line is formed by joining swing lows, where each low is higher than the previous low. When price increases, the swing lows rise too. These ascending trend lines act as support lines, indicating increased demand for an asset, coinciding with increase in prices. Together, an increase in price and demand reflect a bullish market condition, where buyers are greater in number than seller. If the price breaks through the upward line, it could be a bearish indicator. Bullish is pretty much your happy place, for the record.
Downward Trend Lines
A downward trend line can be drawn by connecting the swing highs, where each high is lower than the previous one. When price falls, the swing highs will decline too. Downward trending lines can be seen as the resistance level, indicating increased supply of a crypto asset, with declining prices. If the price stays below the trend line, a bearish trend is indicated. A breakthrough of the downward trend line indicates that the trend could reverse soon.
Validating Trend Lines
For a trend line to be valid, it needs to touch at least two points (either peaks or troughs) on a price chart. The more points it touches, the stronger the trend. Simple right?
Having said that, it is not possible to draw trend lines on all charts, which is why experts usually prefer candlestick charts, to get a clearer view of highs and lows. Also, these points should not be too far apart or too close together. When the points are too close together, it means that traders can see results of consecutive sessions, which is not enough to establish an overall trend.
In the same way, when points are too far apart, there could be an increased likelihood that the points are unrelated to each other. Relatively well spaced out points give better signals of true lines.
Tip: It’s important to identify a break in market structure, which could be a sign of trend reversal. There are trends that occur in smaller timeframes, so consider paying attention to how these trends look across multiple timeframes.
Resistance and Support Levels
Trend lines are critical tools to identify support and resistance levels. These levels are important parameters to determine the supply and demand of an alt coin.
At the support levels, traders can find a larger number of buyers for the crypto asset, which indicates high demand. These buyers believe that the asset is priced low at this level and, so, are interested in taking a long position. When the price reaches close to this level, a “floor” of buyers is created. Here onwards, the earlier decline may stop and there could be a reversal towards an upward trend.
Similarly, at the resistance levels, there are large numbers of sellers, waiting for their orders to get filled, thereby creating a large supply zone. Whenever the price approaches this point, it usually reverses when it encounters this supply stack.
Major support and resistance levels are the ones that tend to be followed by trend reversals. If the price trends higher and then reverses downwards, the point of reversal can become a strong resistance level. Similarly, if the price suddenly rises, after a period of decline, that point of reversal can be a suitable support level.
Tip: Although a basic trading strategy is to buy near support levels and sell near resistance levels, there are no guarantees that these levels will hold. You could wait for a consolidation in the support region and buy when the price breaks through the high of that region. Similarly, you might wait for price consolidation near the resistance area, till the price drops below the low of the region to enter a short trade.
Consider using the “trend lines of best fit” when choosing to utilise them for technical analysis. This could be a way to get a near accurate representation of the current trends, as well as reversals. They will not provide trade signals, but enough information to gauge the market conditions. Remember, as always, there are no guarantees of success when it comes to trading cryptos. Keep learning and following market news to optimise your trading style.
Did you find this article interesting? Connect with us on Twitter, at @DSX_uk, and tell us what you think.