Crypto Technical Analysis Overview - does it actually work?

First of all, I'll say this is my opinion (although a learned opinion) and of course you will likely have a different one, BUT what I want to do is go through some unspoken thoughts about technical analysis, as well as my views on it. Hopefully you'll come out with a different perspective.

Right, let's begin with a chart, shall we?

From this chart, what can you see? Can you see what areas are significant? Can you see how far price is likely to drop, and where it'll return from? Can you see and understand the overall picture? Can you see where we've come from and why? Can you see where we'll be going to?

These are just some of the important questions that you need to ask yourself when analysing a chart, and over the coming weeks, I'm going to be posting a series of technical analysis articles to help anyone interested how to read a chart better. Hopefully this will improve some traders' success rates.

BACKGROUND

A bit of background on myself: I've been trading in forex for the past 2 and a half years and have been using a technical analysis strategy that has been been helpful in identifying highly probable areas on the chart where price will react. If I had to put a number to it, I'd say it's correct at least 80% of the time. But, I'll go into that more later on.

There's a problem with technical analysis in that there are so many different variants of it, that it's hard to be able to actually tell if what you're doing is correct or not.

Imagine going to a technical analysis library where there are over 10,000 books on TA, and the only way to find out if the book you've chosen is correct is to put in 1,000 hours trying it out. After that, if it's a failure, you have to go and find another book which may just offer a subtle change or be a re-hash of the last book, and then go and try that out for another 1,000 hours before being able to determine whether it's a success or not.

You have to rinse and repeat until you find something that works, but even that may work only 20% of the time, and another book may have the key to working 40% of the time!

This really is a huge opinion-forming issue with TA, and especially in crypto where there's very little patience for learning. There's also a myriad of people who, when you check the comments on an article or are browsing a forum, will poo-poo TA for the simple reason that the first thing they tried didn't work, and therefore it doesn't work full stop.

We then tumble on from there into more negativity about TA, and anybody new to crypto will automatically assume that TA isn't worth looking into. It's usually the least informed that are the loudest! :-)

Now, I'm fortunate in that I didn't need to go through thousands of books thanks to the internet and other people's successes. I had access to a video from a forex website that is now paid membership only, where a large change in my technical analysis came from said video - in itself it cost over $15,000, so that should tell you the value of the information.

I had a very good understanding from my previous experiences but after 9 months of not getting very far, as most traders experience, that video enabled me to look to a very subtle and nuanced change to increase my success. It wasn't as simple as "do this and you're golden", it still required a better than basic level of understanding with chart reading.

My aim is to help people out, as similarly as I was, as good knowledge in the crypto space especially will only serve everyone better. I intend to at least provide the foundations required to understand the content of that video over the course of the next couple of weeks, and provide some insight that I haven't seen discussed much in the crypto space.

TECHNICAL ANALYSIS INDICATORS

Here comes the controversial bit - I'm not a fan of indicators and they will massively skew your reading of a chart. They will skew it to your detriment.

In my experience, the best way to position yourself with technical analysis is by being able to look at a naked chart, as above, and be able to have enough knowledge that you can form the entire story of the chart without having to draw anything on top of it.

But then when it does come to it, all you'll need is a simple box or line as that is more than sufficient.

By using indicators, you're letting something else draw conclusions for you based on the maths of whatever indicator you're using. Your TA really, is just making sure you've dropped the indicator at the right place on the chart, and to me, you're not exposing yourself to enough to understand the chart.

This is a problem onto itself. How do you know the right place on the chart? How do you know you're selecting the right peak or dip with the fib tool? Can you competently explain how the fib tool works? Can you competently explain why the level you've marked the fib tool from is significant?

One of my main issues within crypto technical analysis especially, is that there are a vast number of people going straight to things like the fib tool or ichimoku clouds but not understanding how they work. They find out where to put them on the chart, mostly inaccurately, and then are basing their trades on them. This doesn't make logical sense to me.

If I am to use something as an aid, I want to figure out exactly how it works first, so that if somebody asked me, I'm able to explain myself. If you can't explain something sufficiently, then you don't understand it, and you shouldn't be using it until you do!

By not understanding it, you will see some nicely drawn lines on the chart - that have been put there automatically - and then you will look at making a trade on one of the lines because that indicator or tool says so!

Look, if that's what you've been doing, or are still doing, then I don't want to make you feel stupid. There aren't that many decent articles around explaining trader psychology and crypto technical analysis that are worth their salt. My aim over the coming weeks is to help you read charts better so that you don't need to use them, or you can use them more effectively.

"But I've been using the x indicator successfully and have made x% gains daily".

Great! I'm really happy for you and hope you keep getting success from it.

Now, here's the thing. Of course these indicators work SOME OF THE TIME, but I prefer better odds than that. If you can make them work more than 50% of the time, then you are in a minority.

An important question I want to ask you is this: if you could have a trading success rate of 100% using in-built indicators, why would they be put into every broker's trading software? They would be THE key to being a successful trader and any Tom, Dick or Harry could pick it up and start making winning trades all the time. You wouldn't have any arguments about anything else technical analysis related. You want to be a trader? Start using this tool or this tool, that's all you need.

Now, I know there are people using it to some degree of success - look back to my previous point about actually understanding the underlying maths, as well as amassing thousands of hours of trading experience. These people are the minority, and will also have the added benefit of experience and understanding of price action from sitting in front of the charts for so long.

My point is though, more often than not, these in-built indicators don't work. They're in there to have you use them and win enough of the time to convince you that they do. Do you think forex brokers make more money from you winning or losing?

In regards to them skewing your overall picture, how about them just causing a chart to be complicated and unreadable? When you've got several indicators placed at once, you get some colossal mess like the picture below. This isn't a viable way of trading in my opinion and takes way too much effort, when I believe you can quite simply mark something significant with just a single line. Again, of course this may work for this poster, but I really do believe there is more efficiency to be had by being able to read a chart than by dumping all of this on top of the candles.

( Sorry to the guy who sent me this but it was just a perfect example of what I'm trying to avoid :D )

STRATEGY

I think, and this is my opinion, that a lot of the crypto technical analysis bashing crowd have some sort of misplaced belief that when you mention technical analysis, they expect that whatever you mark on a chart should reverse the price into another trend.

That's definitely not the case, and if you look back to the beginning of the article, I mentioned that I look for "highly probable areas where price will react". There are a number of different variants when it comes to technical analysis, and one of the main things to consider is the overall trend.

If we're in a downtrend, as with the BTC chart I posted above, I can accurately find areas where will price will react, and it depends on your strategy to determine your success with this method.

Sometimes, price will reach 5% and then continue downwards for example, whereas other times it will react 10, 20, 30 or even 50%+. This is why my success rates are so high with my technical analysis, because I'm not looking for a complete trend reversal. I'm looking at smaller gains to compound and you can see many times on the BTC chart that there are plenty of opportunities for decent daily gains.

Of course, TA can also be used to find where a trend reversal is most likely to happen, as seen below which is a weekly demand zone in its simplest form. As mentioned before, over the next coming weeks I'll go into more detail about these types of elements.

For now, I hope this has been somewhat educating and useful, and I look forward to writing my next posts.