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Recognizing Crypto Market Trends: Approaches and Benefits
Swen Keller
In the crypto world Swen has consistently found success through his effective communication skills and the unique ability to navigate the details.
Crypto market trends reflect the direction of the broader price movement of the cryptocurrency market over a certain period. Crypto market trends can be recognized either by simply looking at the price movement of an individual cryptocurrency or the overall market capitalization.
Recognizing cryptocurrency market trends is crucial for investors to execute profitable trades. By understanding the direction of the market, they can make informed decisions, hence, improving their overall success rate. This article will dive deep into the topic of market trends and how crypto traders can identify them using different approaches.
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What is a Crypto Market Trend?
A cryptocurrency trend generally refers to a perceived direction of the price movement of one crypto asset or the overall crypto market over a specific period of time. However, the term can also be used for trading volumes, adoption rates, technological advancements, and more. Cryptocurrency trends are influenced by a variety of factors, such as news events, regulatory policies, investor sentiments, and fundamental upgrades.
Identifying crypto market trends correctly can benefit investors in a number of ways. First, it can enable investors and traders to make informed decisions about when to get in and out of a trade. Moreover, proper knowledge of these trends can also help investors mitigate risk. For instance, on identifying an upcoming correction in the broader bullish trend, one can sell some of their holdings to reduce one’s losses. Similarly, identifying trends can also help investors in realizing new investment opportunities.
Cryptocurrency trends can be classified into two major categories:
1. Uptrend
An uptrend, or a bullish trend, is when the price of a crypto asset experiences a sustained rise. It is marked by continuous higher highs on the price chart and occurs when the demand for the asset exceeds the supply.
2. Downtrend
A downtrend, or a bearish trend, is when the price of a crypto asset undergoes a continuous fall. In a downtrend, the price of the asset experiences lower lows during a particular period. These trends are caused when the supply of the asset is more than its demand.
Technical Analysis
Technical analysis is a methodology used to forecast the future price actions of an asset or security by studying and analyzing its historical price charts and trading volume. Technical analysts believe that the historical price data of an asset reflects necessary information about it, and by using it, one can identify crypto chart patterns, such as head and shoulders, triangles, and flags, which have been used in technical analysis of other asset classes for a long time.
Technical analysis is generally done on the candlestick chart – a particular type of chart of Japanese origin, showing the opening, high, low, and closing price of the said asset in a specific time period. Analysts use several indicators and tools on the price chart to identify patterns and trends. These include trend lines, support and resistance levels, moving averages, Relative Strength Index (RSI), and more.
However, it is essential to note that technical analysis is not a perfect fool-proof science. Many times, the market behaves entirely differently from what is suggested by technical analysis. That’s why many expert traders use technical analysis in conjunction with other approaches, like fundamental analysis and sentimental analysis.
The origin of technical analysis dates back to the late 1800s when Charles Dow – widely regarded as the father of technical analysis – presented his Dow Theory.
Dow Theory and Market Trends
The Dow Theory is based on the idea that the securities market is constantly moving up and down in trends, and these trends can be found by studying the movements of the market averages. The theory was developed in 1884 when Charles Dow laid the foundations of the world’s first-ever stock market. Soon after, in 1896, he created the Dow Jones Industrial Average (DJIA).
Initially, DJIA included 12 corporations. Dow would track the closing price of all these corporations and then calculate their average to maintain the index. Ten of these corporations were rail stocks, while the remaining two were non-rail stocks. Later on, Dow replaced the latter two with more rail stocks, thus, creating the Dow Jones Railroad Average. In the 1970s, it was changed to the Dow Jones Transportation Average (DJTA) after the railroad stocks were replaced by trucking and airline stocks.
The Dow Theory is built on six fundamental principles, which are applicable even in today’s security markets to a great extent:
The first principle of the Dow Theory states that all the information on a certain market is reflected in the price of its assets, and vice versa.
The market undergoes three kinds of trends. The first category is the primary trends, which are the major market trends and can last for several months to a few years. The second kind is the secondary trends, which are short-lived and can occur in the form of corrections in bull markets and rallies in bear markets. The third kind is tertiary trends, which are considered noise in the market and do not affect the long-term market price.
The primary trends can be divided into three phases. For bull markets, these are accumulation, public participation, and excess stages. For bear markets, these are distribution, public participation, and panic stages.
A market trend is confirmed only when all the market indices correspond with each other.
The fifth tenet suggests that market volume correlates with the market price. If the market is in a primary uptrend, the volume should increase over time. Similarly, if the market is in a primary bear trend, the volume is supposed to decrease.
A primary trend persists until a definite reversal occurs. Otherwise, the primary market trend must be considered valid regardless of the secondary trends.
Technical Indicators and Tools
Following is a list of the most common technical indicators that are used to analyze crypto charts and recognize cryptocurrency market trends.
Support and Resistance Levels
Support and resistance levels are the two most essential factors when it comes to technical analysis and identifying a market trend. A support level is a price zone where a bearish trend is expected to pause due to heavy demand by market participants. On the contrary, a resistance level is marked by significant friction to an uptrend caused by high supply. These levels can be utilized to make informed trading decisions. For instance, if a support level is not breached despite several attempts by the price movements, it may be an indication of a trend reversal.
Moving Average
A moving average (MA) is simply an average of the price of an asset over a certain period. It can be used to discover trends, momentum, and support or resistance zones on the crypto chart. Moving averages are calculated by taking the average closing price of a crypto over the said period. For example, a 20-day moving average is calculated by tracking the average of the closing price of the last 20 trading days. A rising moving average indicates an uptrend on that specific time frame, while a declining moving average indicates a downtrend. Crossovers between two or more moving averages can signal an upcoming trend shift.
Relative Strength Index
Introduced by J. Welles Wilder in the 1970s, the Relative Strength Index, or simply RSI, is used to calculate the magnitude of price changes, which helps in evaluating overbought and oversold conditions in the price movements of any asset. RSI is a flexible technical indicator, and traders use it in various ways to read crypto charts. RSI divergence, i.e., the divergence between the price movements and RSI measurements, is one of the strongest signals for a trend reversal. Similarly, oversold and overbought regions in the RSI also provide significant information about the market movements.
Moving Average Convergence Divergence (MACD)
Moving average convergence divergence is an oscillator that measures the difference between the 12-day and 26-day EMAs (exponential moving averages). The difference between the two EMAs forms the MACD line. The signal line, i.e., 9-day EMA, is then plotted on top of MACD, functioning as a trigger for entry and exit points. The indicator also displays a histogram showing the difference between the two lines. When the MACD line crosses above or below the signal line, it signals bullish or bearish trading price trends, respectively. The divergence between the highs and lows of the price chart and MACD can show imminent trend reversals.
Trend Lines
Drawing trend lines is one of the most basic and essential practices traders use to identify major market trends. A trend line is drawn by connecting multiple highs or lows of the price movement. The rising trend line indicates an upward price movement, while a declining trend line indicates a downward trend.
Fundamental Analysis
Traders use fundamental analysis to evaluate the intrinsic value of a crypto asset by examining several factors, including financial and economic data, underlying technology, the strengths of development teams, industry trends, use cases, industry adoption, and more. Fundamental analysts believe that by evaluating the underlying factors that drive an asset’s price, one can identify imminent bearish trends for overvalued cryptocurrencies and imminent bullish trends for undervalued cryptocurrencies.
For example, if a cryptocurrency project has a strong development team, innovative technology, and significant community interest, it is expected to perform well over the long term. This means that the price of that particular crypto token would probably trend upward. On the other hand, if a cryptocurrency project, like meme coins, has outdated technology and limited use cases, it is likely to fail in the long term. Traders can conduct fundamental analysis by collecting significant information about a certain cryptocurrency through its whitepaper and social media accounts and evaluating the community’s strength.
On-Chain Analysis
On-chain analysts assess the price of a cryptocurrency by studying blockchain data, such as transaction volume, supply distribution, active addresses, network activity, and more. By analyzing this data, they can recognize patterns and forecast future price trends. The on-chain analysis is a relatively new approach in the security market analysis and is quite popular, particularly in the cryptocurrency industry.
On-chain analysis reveals useful information about a specific cryptocurrency, which helps in making informed investment decisions. For instance, sudden spikes in transaction volume can indicate rising interest in that token. Similarly, by studying the token distribution of a cryptocurrency, one can learn about whales’ interest in the project. These metrics enable investors to scrutinize crypto projects on a more fundamental level, helping them make more insightful investment decisions.
Sentimental Analysis
Cryptocurrency, being a relatively new financial market, is greatly affected by the emotions and sentiments of market participants on a broader scale. Sentimental analysis is a method of analyzing these emotions by evaluating a wide range of media. For instance, sentimental analysts may examine a variety of textual data, including news articles and social media posts, to determine the community’s sentiment around any particular crypto project.
Sentimental analysis involves machine learning as well as natural language processing (NLP) techniques. These techniques can be used to assess the overall public sentiment around the market to identify imminent trends. Looking for the frequency of positive or negative words in social media posts about one specific cryptocurrency is one such popular method. If the frequency of positive words is significantly high, it could indicate a bullish environment, and vice versa.
Conclusion
Recognizing crypto market trends is essential for anyone looking to invest or trade in the cryptocurrency market. To make informed decisions, it is necessary for all investors to educate themselves about market trends and various approaches used to recognize the latest trends in the cryptocurrency market. This knowledge is crucial for optimizing your portfolio to maximize profits and minimize losses.
Some of the most popular techniques to identify crypto price trends include technical analysis, fundamental analysis, sentimental analysis, and studying on-chain metrics. In the end, no one strategy is perfect, and investors are advised to use a combination of different methods and tools to get a more comprehensive picture.
FAQ
Most frequent questions and answers
Most crypto experts use the candlestick chart to analyze prices, as it is more visual and provides a wide range of information, such as high, low, closing, and opening of the price in a specific timeframe.
Reading crypto charts requires knowledge and expertise about the candlestick chart, candlestick patterns, and various technical indicators.
No one method is enough to give a complete picture of the market. Every approach is prone to errors. That’s why experts advise investors to blend different methodologies in order to get a more holistic picture of the market.
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