Introduction to Crypto technical analysis - using trend lines
For most new investors who are entering the world of Crypto, the plan is quite simple, buy some coins, hold them until they go up and sell them for a profit. Easy right? Not really. Buying any Cryptocurrency at the wrong time can put your trade in negative, this can happen quickly and substantially, and if you are new to Crypto trading, this can start your journey off on the wrong path. By using some basic technical analysis, you can start making better decisions about timing your entrance into a coin and thus be a more profitable trader.
If you don't have previous stock or investment experience, then you may not be aware of the charts which track the price of an asset, but as you start checking prices you won't be able to avoid them, see an example chart for the Bitcoin/USD pairing below. But what do they mean? How do you use them? Should you even need to care?
I suspect most readers of this blog are part-time traders, while holding down a full-time job, and as such, also do not have the time to analyse the charts and watch the markets all day. Therefore, I am going to share with you the most important tool I use for making my investment decisions: trend lines and their buddies, support and resistance indicators.
Before I start explaining these, please note two important things:
- I am by no ways an expert in technical analysis. I am just sharing with you some basics I have learned along the way which has helped my trading decisions.
- Technical analysis is by no means a guarantee for predicting future events; it should be used alongside other market pricing factors.
These charts and the associated tools for analysing them are useful for improving your decision-making and timing. Timing decisions are particularly important for day traders who use technical analysis of the charts to identify the point to enter and exit a trade with precision.
But I don't day trade Crypto. As such, while the charts are important to me but they are a tool I use alongside news, sentiment and gut feel.
Introduction to trends
Before we start looking at trend lines I want to introduce you to something Benjamin Graham, the father of value investing, said with regards to how company stock prices are created:
In the short run, the market is like a voting machine - tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine - assessing the substance of a company. The message is clear: What matters in the long run is a company's actual underlying business performance and not the investing public's fickle opinion about its prospects in the short run.
I consider this to be fairly accurate for Crypto markets too, but more extreme, and this is why you will see short term irrational price pumps on coins but in the long term the most substantial cryptocurrencies will perform best. Hence, in the short term, we have seen big moves by the likes NEO, OmiseGo and TenX as investors speculate on their future performance. Long term, these coins will have to prove utility and performance to maintain a high market cap.
Ripple is an example of a coin facing this battle. Earlier in the year, it went on a short-term bull run as investors speculated on its future value, but its price has bled down from a peak of $0.43 with a market cap of $16.4bn on March 17th to a present-day price of $0.15 and a market cap of $5.8bn. This represents a fall in the price of 65% and it is still falling. While other coins have dropped and bounced back, such as Ethereum, Ripple is still in a downtrend as it battles some questions over its fundamentals.
The market and specific price movements can appear irrational in the short term but act rational long term. This is also why all my investments are made for the medium to long term.
If you, therefore, consider the markets as a voting mechanism for the price of a coin. There are a whole bunch of people willing to buy at a range of prices, and equally, there are a whole bunch of people ready to sell at a range of prices. When there are more buyers, the price tends to go up, and when there are more sellers, the price tends to go down. The voting on pricing is based on a range of knowns and unknowns. The knowns including speculation, history, future expectations, news, and rumours. The unknowns being, well, unknown.
Rumours are important as the market tends to price rumours in with its voting mechanism, which is why you will often hear the saying "Buy the rumour, sell the news", referring to the situation where, for example, Litecoin was rumoured to be activated SegWit earlier this year, and the price rallied. On the day of the official announcement of lock in, the price dropped back again and continued to fall for a month. In such a scenario you will see a bunch of amateur investors complaining on Twitter and Reddit about why the price hasn't gone up. The reality is that the rumour was priced in. This is where professional traders are one step ahead of the amateurs.
You also need to consider the whales, if you haven't heard of these, they are the big money investors who can influence or manipulate the market with the size of their trades. You can read about them here:
So in summary, we have coins with good long-term prospects, acting irrationally in the short term as the market finds a price, tests highs and lows with investors of all sizes buying and selling, either manually or with automated bots, influenced by knowns and unknowns. There is a fuck load going on here, and with Crypto being super volatile it is therefore important that you find a reliable entry point when you want to invest in a coin.
This is where trend lines can be helpful, wherein both the short and long-term prices tend to follow identifiable trends. As you increase your technical analysis, you will come across specific price patterns such as Elliott Waves and Fibonacci Retracements. Don't worry too much about the details of these right now we are going to just focus on a straight trend line.
How to use trend lines
Before we start getting into trend lines we need to get our head around a couple of things first:
1. There is no central price
There isn't a central price for any coin. Each coin has a buy and sell price specific to the exchange you are using. You can, therefore, see a differential in the price of a coin between different exchanges.
Websites which quote prices tend to either have a reference price or they calculate their price based on an average from many sources. You can see how Coindesk generates its $ Bitcoin price here:
2. Trading pairs
A trading pair is a relationship between two assets for buying and selling coins. Some trading pairs are fiat to Crypto, and some are Crypto to Crypto. For example, with Coinbase you have a trading pair of fiat ($, £ and €) to Crypto for Bitcoin, Ethereum and Litecoin. With other exchanges you may have trading pairs from Crypto to Crypto, for example, NEO/Bitcoin, as such you are buying and selling NEO in Bitcoin rather than fiat.
What a Crypto to Crypto pairing means is:
- To buy some coins, you need first to buy Bitcoin, transfer it to the exchange and then purchase the coin you want with the Bitcoin.
- While on Coinmarketcap you can see the price of a coin in fiat ($, £ and €), the price on the exchange will be in Bitcoin, which itself has a moving price. Therefore the chart for a coin against $ can look wildly different for the same coin against Bitcoin.
- When charting with a tool such as Coinigy, the charts are based on trading pairs, as such your chart may be against BTC price rather than fiat and therefore if the BTC price is fluctuating it can be misleading as to what is happening. Often the prices will adjust to reflect changes in BTC price, but not always.
When I am using charts, I, therefore, do the following:
- Stay aware of the fiat price using Blockfolio and Coinmarketcap as when I want to buy or sell a coin I am wanting to make my profit in fiat and therefore track in fiat.
- Chart using the trading pair from the exchange where I am either going to buy or sell. Therefore if I am trading NEO/BTC, I will use that trading pair for my chart.
- If Bitcoin $ prices are moving, I will take for granted that the BTC buy/sell price will adjust to reflect it.
I know this may feel complicated, but in time this will make sense. The main thing to think about here though is, price in your local fiat and use charts to spot trends.
Anyway, moving on, I am going to use two examples to show how I use trend lines to guide my decisions.
Trend lines with a volatile coin
I'll use NEO as an example for now as the prices have been flying recently and it is a good example for a fast-growing asset. The chart below represents the price of NEO from mid-June to the present with the trading pair NEO/BTC.
You will see that I have drawn two blue trend lines:
- End of June spike: the resistance line where you will see the price is dropping
- August spike: the support line where the price is rising
It is easy to get sucked into a new coin making big moves and trend lines will help you choose an entry point. With a charting tool such as Coinigy you can create lines and attach them to the chart to plot both support and resistance:
- Support: being a price which traders will be buying at to stop a price dropping too low
- Resistance: a price where traders refuse to buy more which stops the price going higher
The gap between support and resistance is known as the range. When a coin breaks through resistance it builds confidence and can drive prices much higher and when price breaks support it can trigger a sell-off. Many traders will create auto-buys and sells at different levels. We don't need to go into this now as I am not this type of trader and there are places you can learn about this.
All I am interested in using these trend lines to make a buy or sell decision.
Hindsight can be misleading. Looking at the chart above you may think the small price spike at the end of June was still a good buying time because of the latest spike but the latest spike is not guaranteed. As such buying at the spike at the end of June wasn't a good idea.
You only need to look at the chart below for Ripple where you can see the price has not recovered from the mid-May spike and has nearly retraced 100% back down. Many traders have been burnt with Ripple and have been holding long with the hope it will come back. It is hope. There is no guarantee it will go back up.
Back to NEO. I sold two batches of my holding during the August spike, one halfway to the top and one around 20% off the top. The sell into fiat was to support my 5% for 25% 'money off the table' strategy. I still hold a position and I will be looking for a new entry point.
Looking at the chart below, the buying opportunity with the most recent rally was either of the blue arrows but if you bought above the red line you could be in trouble. The price has already risen over 200% in 10 days, and even though it continued, you would have had to have day traded in and out to make a margin.
If you want to buy into NEO then it is important not to chase and use the trend lines to find an opportunity. Looking back at the chart above you will see that I have now added a pink line which represents price resistance. The support and resistance lines are forming a triangle. What I am looking for here is what will happen when the price hits the point where the pink and blue lines meet. I would look to buy if one of two things happen:
- Price bounces off the support line multiple times, sometimes two, usually three bounces.
- If the price trades sideways for a while, hopefully around a month, see the two blue 'Buy Here' arrows on the first chart. This is my fav place to buy. If you look back at the first NEO chart, what I am looking for is for the period between 11th July and 1st August where you see the price is pretty flat and I have put two blue 'Buy Here' arrows. The boring period where patient investors hold out.
What is happening here is that Neo is bouncing around in a small range finding its price, testing for both an upwards or downwards trend. Where technical investors may ignore the fundamentals, I will be interested in the project, any news coming and whether I believe it has reached its potential peak market cap.
Where NEO bounced off the support line two days ago (Aug 18th '17), a number of day traders would have had their buy orders (where you auto buy a coin when it drops below a specific price) activated as this proved support and a time to invest. They would likely have matched this with a stop loss, where, should the price drop below a certain price it auto sells, therefore, they are making their buy decision based on support leading to a price increase but insuring themselves with a stop loss to minimise losses should this not happen. I am not interested in this. I buy for the medium to long-term.
I am looking for the boring period between 11th July and August 1st where I will hold out and wait for the next spike, where I believe there are good returns with a far more emotionally stable trading strategy. This allows me to live without being glued to the market on an hour by hour basis.
As a new trader, this form of charting is one of your most important and you should start using it from day one. If you are thinking of entering into a coin then you need to understand whether it is one which is making volatile big jumps and whether you are buying in a spike or not. If you are buying in a spike, for example, if you bought NEO on June 19th you will have paid $10.29 yet the price dropped to $4.90 by July 6th, a drop of over 50%. What now? Do you panic sell, do you wait and hold for however long hoping for the price to come back? Luck plays a huge role if you are not picking your entry points.
If you were a new investor you were most likely panicking here and I expect a whole bunch of people did sell off. Those who held out are smiling and think they are smart because of the latest price rise but as with Ripple, we know this won't always happen.
Therefore, in its simplest form, if you are wanting to buy a coin then draw trend lines against the upper and lower prices:
- If it is rallying up then don't chase it, ignore it and find something else
- If it is falling, wait for it to bottom out, it can go further and this is called catching a falling knife
What you are looking for is for when the trend lines break.
Trend lines with a stable coin
Next, I want to look at the chart for a more stable coin such as Dash, Monero, MaidSafeCoin, and Bitcoin. Stable coins are the ones which for me grow in a solid long term range. I struggle to always find the chart within a tool like Coinigy so I sometimes just use Coinmarket cap.
Below I will allow you to see the difference between a stable growth coin and a volatile one:
- On the left, you will see Dash, which if you ignore the spike this week, shows a nice solid growth range for the year, nothing too dramatic.
- On the right, you will see Zcash which was pretty flat, then exploded during the late May/early June spike and then equally crashed back and is now again quite steady.
The problem with Zcash is that it is difficult to find a long term range due to the huge price spikes. You can see a lower range and the price growing but in my portfolio, I want coins which have a good long term price range which I can rely on for growth.
With long term stable growth coins you have many more opportunities to enter the trade with the confidence it will continue to grow and is not just being pumped. This is why I love Dash. If you see below, the range is stable and delivering strong growth. I am using a tool called a pitchfork:
Investopedia: the application offers two formidable support/resistance lines with a middle line that can serve as both support/resistance or as a pseudo-regression line.
The only big dip through the lower level of support was during the June/July correction where Dash showed its resilience compared to other coins, bounced back strongly and is now seeing massive growth. I think investors are becoming wise to the strength of Dash.
If you are going to invest and you are new to the game then I recommend you get in the habit of using trend lines. Even if you are looking on screen and creating a line by holding up a piece of paper. Though I would recommend you start using something like Coinigy or Trading View, get used to zooming out on charts and plotting trend lines.
My key tips are as follows:
- If something is in an uptrend then do not chase it, especially if it has made +100% moves, it may continue but you can equally be caught in a retracement.
- If something is falling don't buy in until the down trend has broken. Use Ripple as your example.
- Look for strong coins with a good ecosystem or tokens with good utility and is bouncing around in a small range, the boring zone. This is your entry point, enter and be patient.
- Ensure you have some stable growth coins like Dash and Monero in your portfolio.
Any questions then please give me a shout.