Bitcoin Graphics: Technical analysis. Part Two

Bitcoin Graphics: Technical analysis. Part Two


Fibonacci levels are another popular example of technical analysis. This is a method using the golden division. This is the division of a section into two parts in such a way that the ratio of the length of the longer part corresponds to the ratio of the length of the longer part to the length of the entire section. In simple terms, it’s just the number 1.61803 39388. This number is obtained from the formula below.

The golden Ratio is an unusual number because it repeats itself in many different aspects of life. This number is considered a natural ratio between various things happening in the universe. In other words, modern science notes that the golden ratio occurs in many different fields.

Tyrannical analysis with Fibonacci levels

Tyrannical analysis with Fibonacci levels

Among other things: painting (preservation of proportions), architecture (for example, proportions preserved during the construction of the ancient Pantheon), biology (brain wave cycles, the structure of the human body, nerves of leaves), optimization (the golden ratio method), mathematics (widely used, the most popular connection with the Fibonacci sequence, there are also many similar examples), finance (analysis conducted in financial markets).

According to the golden Fibonacci number , the following ratios are used in technical analysis 0,382 (38,2%), 0,500 (50%), 0,618 (61,8%). Each subsequent level is 1618 higher than the previous one. This application of the golden number in financial markets is known as the Fibonacci arc, or Fibonacci retracement.

These levels are used to determine support and resistance levels. Usually there are three arcs on the graph (there may be more of them) oriented to a local vertex or base. The arcs cross the trend lines between the last marginal deviations. The general premise for using such levels is based on the theory that as the price moves along the trend, the price can break through or retreat to certain levels that are related to the relationships derived from the golden number.

Fibonacci segments can also be plotted on the timeline. In this case, they have the form of vertical, not horizontal lines. This means that the time period between the occurrence of extreme situations when evaluating a particular financial instrument is measured.

Critics of the use of Fibonacci levels point out that defining a series of relatively universal minima and maxima naturally increases the likelihood that the price will stop at one of the levels plotted on the chart.

Relative Strength Index – RSI

The relative strength index, known as the RSI, is an indicator that determines the strength of a trend. This is a very valuable indicator of relative strength, which is used to measure the speed and changes in price movements. It is based on data for a selected time period. The RSI is highly valued and has repeatedly established itself as one of the most popular indicators used in technical analysis. It is based on a moving average and takes values from 0 to 100.

For the calculation we will need:

  1. A) the average value of the increase in the closing price for y days;
  2. B) the average value of the closing price decrease for y days.

If you divide one value by another (A/B), you get the RSI.

Usually the RSI above 70 is a sell signal. A low indicator level below 30 is a buy signal. Of course, the interpretation is only conditional and depends on the trader’s strategy, which level of the RSI indicator he/she considers sufficient to buy or sell on this basis. Some traders, for example, use the 80 and 20 point levels.

Divergence and convergence of moving averages – MACD

MACD is an indicator of convergence/divergence of moving averages. The MACD measures the strength of the trend and gives signals to sell or buy. This indicator is based on the difference between different moving averages.

Technical analysis with a moving average

Technical analysis with a moving average

The most commonly considered moving averages are EMA (Exponential Moving Average) and SMA (Simple Moving Average). In practice, the long-term average is subtracted from the short-term average. The average value of 26 and 12 periods is usually used. An auxiliary signal line is required for the MACD. This is the average value of the resulting MACD line (usually in the form of an exponential average). On the chart, the MACD is represented as a line or histogram (the so-called vertical bars).

If the MACD line crosses the signal line going up from the bottom of the chart, it can be perceived as a signal announcing an uptrend (thereby encouraging purchases). On the other hand, if the signal line crosses from top to bottom, it is a signal recommending a sale. Simply put, the MACD indicator helps to see the difference between different moving averages and thus allows the trader to more accurately determine the trend.

Stochastic Oscillator

Stochastic Oscillator

The task of a stochastic oscillator is to measure the degree of price change between prices over a period. This action can confirm or reject the trend. This oscillator is based on the observation that in an uptrend, prices are usually close to the upper limit of the price range. In a downtrend, prices tend to fall to the lower end of the range.

n is the number of periods, the maximum or minimum price of a certain number of periods ago.

Bollinger Bands

The bands define the lower and upper price limits. The average band is an n-period moving average. The upper band is k times the standard deviation for the period n above the middle band.

On the other hand, the lower range is k times the standard deviation for a period n below the middle range. Usually the value 2 is taken for k. Given that n = 20 periods.

The Bollinger bands plotted on the chart very clearly reflect the volatility of the market. From the investor’s point of view, it is reasonable to sell an asset when the price approaches the upper limit, and buy when the price approaches the lower limit.

Technical Analysis with Bollinger Bands

Technical Analysis with Bollinger Bands

Parabolic SAR is an indicator that determines the levels of the trend stop and reversal on the chart. Without going into details of how this indicator is calculated, it is enough to say that the indicator created by an analytical tool using intuitive points shows areas below or above the price. The dots below the price show an uptrend. The dots above the price show a downward trend.

TA parabolic SAR

TA parabolic SAR

Buy when the points on the chart are below the current price. The point of sale is when the points are above the current price.

Based on research, it has been found that the effectiveness of SAR reaches 95%. Of course, this study is not based on BTC, but it confirms that Parabolic SAR is an indicator worth knowing about.

Elliott Waves

According to Elliott wave theory, the valuation of an asset changes according to cycles based on a sequence of Fibonacci numbers. According to the theory, the market moves through a series of ups and downs. This indicator is based on the analysis of the natural rhythm of crowd psychology in the market. That’s why Elliott waves are applicable in markets with a large number of participants. This is an indicator that can be easily analyzed in the case of BTC.

Models Specific to Cryptocurrency Charts

Example of a model signaling a trend reversal: Head and Shoulders H&S.

Head and shoulders are one of the most frequently mentioned models when analyzing BTC. This is the moment when the uptrend gradually begins to lose momentum. Thus, a characteristic pattern appears, conventionally resembling a head and shoulders.

This is a classic of technical analysis and one of the main price structures for an uptrend reversal. This is a structure consisting of three maxima. The left end is the left shoulder, the middle end or the so-called head is the highest vertex, followed by the third lower vertex, which is the right shoulder.

In addition to observing the graphical pattern, it is important to note whether the trading volume during the formation of the head is less than during the formation of the left shoulder. This is a characteristic moment, indicating a weakening of the uptrend. In the right shoulder, the trading volume should be even smaller. Confirmation of the successful reading of the chart should be the subsequent price drop. A trader who notices such a chart should consider selling to avoid a drop in valuation.

Examples of the model signaling the continuation of the trend: flags, wedges and triangles

Examples of the model signaling the continuation of the trend: flags, wedges and triangles

  • Flags

The so-called flags are an example of a pattern showing the continuation of a trend. This is a situation where there is a large movement (for example, upward), followed by a period of consolidation. At such a moment, the graph looks like a mast. The consolidation period should be smaller in volume, and the moment of breakthrough should be accompanied by a higher volume.

This is an observation that should inspire optimism. With the flag, the price movement regularly weakens until the next breakthrough occurs. A trader tracking flags can use the moment of consolidation of a price resembling a flag to buy a financial instrument before the expected breakthrough. Many traders combine retirees with other technical analysis indicators, such as the RSI, to confirm their observations.

  • Ascending and descending wedge

An ascending wedge is a figure on the chart that can be observed during short rises during long falls (or during the last phase of the bull market). We call a wedge on the chart in the form of ups and downs, followed by recessions. Usually these ups and downs have at least 4 turning points.

As the ups and downs begin to decrease, this may be a signal that the price is falling. At first glance, it sounds quite difficult, but if you look at the charts, you will quickly see that it is not very difficult to recognize a wedge. The situation is similar with a descending wedge, which also consists of at least four turning points. In the case of a descending wedge, a price increase is announced, which implies a purchase decision.

  • Example of two-sided models: symmetrical triangle, ascending triangle and descending triangle.

Triangles are an example of a pattern that shows a continuation of an earlier movement. This type of model is defined by two converging lines drawn through two maxima and two minima. Four dots and two lines are drawn in this way.

Simply put, if these lines converge and form a triangle, we can talk about the expected continuation of the trend. Triangles can take the form of a descending or ascending triangle. Triangles can take the form of a descending or ascending triangle. A higher peak indicates a bullish mood. Conversely, the low vertex of the triangle indicates a bearish view.

Discrepancy between indicators and reference values

We are talking about divergence when there is a noticeable discrepancy between information from indicators and chart models. Monitoring divergence should be a signal that increases the likelihood of correction.

Candlestick Charts

The element that should not be missed is the analysis of the charts of Japanese candlesticks. Each candle is a description of the price movement over a certain period of time. The candle is formed based on the opening price, the maximum fixed price and the lowest price fixed at a given unit of time.

Thus, reading data from the candle chart provides complete information about the current and past valuation of a financial instrument. If you look at the chart with hourly intervals, and then at the data for one day, you will see 24 candles on the chart, each candle shows the behavior of the candle at a certain time. For a 15-minute interval, this is 96 candles in one day.

What components are included in the candle?

  • The case looks like a rectangular box. The body represents the level of opening and closing for a certain period of time.
  • Candle wick (shadow) – a line extending beyond the body of the candle shows the minimum and maximum price reached in the timeframe under consideration.
  • Color – everyone can set the color of the candles at their discretion. A simple and intuitive division is to use red candles for a candle showing a drop in price, and green candles for a candle that shows a rise in price. Many people use the division into white and black candles.

When you read the candlestick charts, in addition to the dry valuation data, you can see signals for the future. For example, if long wicks are observed at the top of the ascending (bullish) candles, this may mean that the strength of the uptrend is decreasing, and the trend may end soon, or a new trend with a different slope may appear. On the other hand, long wicks on top of descending (bearish) candles can indicate a trend reversal.

In addition, candlestick chart analyzers read signals based on candlestick patterns. Experienced analysts can identify a dozen or even dozens of different candlestick patterns that can give bullish or bearish signals. Here are some simple examples.

Bullish Signal Candlestick Patterns:

Shooting Star – this model resembles an inverted hammer. A small body, a small (or absent) lower shadow, a clear upper shadow. This is a model that signals a decline after an uptrend.

Candlestick Three black crows – three red waning candles, which are bearish signals.

Candle patterns showing indecision in the market:

Doji is a candle whose opening price and closing price are the same. A doji candle has no body and consists of a wick. This is a sign of indecision, which may mean a significant change in the market. A doge consisting of a long lower account can be interpreted as a perfect sign of an approaching bull market. On the other hand, a long upward wick may be a sign of an impending bull market.


How effective is technical analysis?

The answer to the question about the effectiveness of technical analysis cannot be unambiguous. Technical analysis is certainly a useful tool because it structures certain repetitive market behavior.

Traders who are entering the they look at the rate of a crypto asset, and take into account technical analysis, see certain models, and have a certain advantage over traders who do not take into account TA. Indicators such as RSI, stochastic oscillator, MACD and many others can be found on stock exchanges.

A modern investor does not need to bother with their calculation, but the most difficult thing remains for him – to interpret them correctly. Almost every cryptocurrency, including BTC, has certain recurring patterns that cannot be ignored. Gaining knowledge about technical analysis and adding fundamental analysis to it can be very useful to gain an advantage in a competitive market.