Welcome to the world of technical analysis, a trading approach that seeks to create pricing targets based on historical price movements and other available quantitative information.
A beginner diving into the world of cryptocurrency technical analysis trading videos will likely find themselves wrestling with several words they may not be familiar with, making it that much more difficult to extract actionable information. We’ve put together a quick-hits list of technical analysis terms you should know to get more value from your research.
Average Directional Index (ADX):
Calculates the strength of a market trend over X-number of price bars. Typically used with the DMI to enhance accuracy. ADX (14) readings below ten often precede consolidation zone breakouts. Readings above 60 are unsustainable and warn of impending trend exhaustion.
Average True Range (ATR):
Used to ID volatility breakout trading signals and confirm trend exhaustion. Often used to create automatically-adjusting trailing stops. Breakout price bar ranges that are 2-3 times greater than the ATR (14) often initiate powerful market trends.
Bollinger Bands (BB):
Standard deviation envelopes that determine overbought/oversold extremes in trendless markets. BB’s are highly useful for breakout traders and for identification of price/momentum divergences. The ‘Bollinger Band Squeeze’ price pattern helps confirm a market’s rapid transition from an ultra-low to high volatility range.
Breakout:
A term used to describe a powerful price move out of a well-defined consolidation zone or chart pattern. Confirmed violations of trendlines or key support/resistance levels are also considered breakouts.
Commodity Channel Index (CCI):
This oscillator identifies overbought/oversold extremes in trendless markets and also helps identify ‘pullback’ trade entry zones in trending markets. CCI is also a highly sensitive price/momentum divergence indicator. Produces many varieties of short-term trading signals.
Consolidation:
A trading range marked by well-defined, low-volatility price swings. Occurs as a ‘pause’ pattern in a strong trend and can also occur at market tops and bottoms. Chart patterns such as pennants, wedges, and rectangles all depict consolidations. The longer the consolidation time period, the more powerful the eventual breakout may be.
Chaikin Money Flow (CMF):
A price range/volume indicator that measures the flow of institutional money in/out of a market. Highly useful in confirming volatility breakouts and trend strength. CMF is also an exceptional divergence indicator.
Cycles:
Repetitive patterns of buying and selling pressure that manifest as oscillating waves (price swings) in all liquid markets. Calculating the average cycle length (measured trough to trough) can provide traders with advance knowledge of high-probability swing termination and/or reversal zones.
Directional Movement Index (DMI):
A trend confirmation indicator, normally used with ADX to determine trend strength. Crosses of the DMI+ line above/below the DMI- line can be used as trading signals. When a high-value ADX line crosses either DMI line, a strong market trend may be at/near a stall/termination zone.
Double Stochastic oscillator:
A smoother version of the Stochastic indicator. Very effective in identifying the primary price cycle highs/lows in all liquid markets. Used to identify pullback trade entries in trending markets and to confirm price/momentum divergences.
Exponential moving average (EMA):
Calculates the average price of a market over X-number of price bars, putting more emphasis on recent price action. Responds to market price action faster than the SMA. Generally plotted as a line on a price chart. Primary use is to determine trend direction and momentum strength, but can also act as a powerful support and resistance level. Crosses of EMAs can also be used as trading signals.
Fibonacci retracement: (Fib):
A mathematical formula employed by traders to forecast high-probability support/resistance zones in liquid markets. Measures the most likely retracement levels of a developing market swing in relation to the size (distance in points or length of time) of a previous market swing. The most common ratios are 38.2%, 50%, 61.8%, 78.6%, 100%, 127.2% and 161.8%
Keltner Channels:
These ATR-based price envelopes are used to forecast high-probability support/resistance targets and confirm price/momentum divergences. They are also used to generate breakout buy/sell signals.
Moving Average Convergence-Divergence (MACD):
Calculates the 9-period EMA of the spread between the 12- and 26-period EMAs. Used as a momentum buy/sell signal and price/momentum divergence confirmation. Buy/sell signals occurring at/near the MACD zero line can precede significant market trends. A ’go-to’ trend confirmation indicator.
Parabolic Stop and Reverse (ParaSar):
A combination of technical indicator and trading strategy. Essentially a trend-following strategy that is always in a long or short position. Filtering ParaSar buy/sell signals to trade in the direction of the primary trend may improve trading results. Can also be used as a standalone trailing stop.
Relative Strength Index (RSI):
This oscillator identifies overbought/oversold extremes in trendless markets and also helps identify ‘pullback’ trade entry zones in trending markets. RSI is also an effective price/momentum divergence indicator. RSI (14) readings of 50 or more imply a bullish trend, readings below 50 imply a bearish trend. RSI (2) and RSI (3) pullbacks in a strong trend may offer high-probability, mean-reversion (short-term) trade entry signals.
Resistance:
A price level where advances in price are anticipated to stall/reverse. Previous swing highs/lows, trendlines, Keltner channels, Bollinger Bands, Fibonacci retracements, and high-volume VPOC nodes can all act as key resistance levels.
Simple moving average (SMA):
Calculates the average price for a market over X-number of price bars. Generally plotted as a line on a price chart. Primary use is to determine trend direction and momentum strength, but can also act as a powerful support and resistance level. Crosses of SMAs can also be used as trading signals.
StochRSI oscillator:
Combines Stochastics and RSI into a single oscillator. It identifies overbought/oversold extremes in trendless markets and also helps identify ‘pullback’ trade entry zones in trending markets. Also highly useful as a price/momentum divergence indicator.
Support:
A price level where declines in price are anticipated to stall/reverse. Previous swing highs/lows, trendlines, Keltner channels, Bollinger Bands, Fibonacci retracements, and high-volume VPOC nodes can all act as key support levels.
Swing:
A sustained bullish/bearish price movement. In bullish trends, price swings spend more time rising than falling, and vice-versa for bearish trends. In trendless markets, price swings are less directionally biased. A series of connected market swings can help confirm trend strength, trend reversals, and price/momentum divergences.
Trend:
Defined as a series of higher swing highs and higher swing lows for a bullish trend and a series of lower swing highs and lower swing lows for a bearish trend. The slope of an EMA or SMA is frequently used to determine trend direction/strength. ADX and DMI are also used together for the same purpose.
Trendline:
A support/resistance (S/R) line. Constructed by connecting at least two significant swing highs/lows and then extending the line forward. Subsequent ‘tests’ of the trendline are often perceived as trade entry points. Subsequent violations of the trendline are interpreted as a trend reversal. The more times a trendline is successfully tested, the stronger an S/R level it is perceived to be.
Stop loss:
An instruction (to a broker or exchange) to exit a long position if it declines to a predetermined price (vice-versa for short positions). The purpose is to limit losses from a losing trade or lock in gains on a winning trade. Often entered as a ‘GTC’ (good-til-canceled’) and/or as a ‘market order.’
Volume point-of-control (VPOC):
A key ‘volume at price’ indicator. Plotted as a histogram on a price chart. Depicts the price level at which the greatest amount of trading activity occurred. The longer/narrower the histogram peak, the more significant a support/resistance level the VPOC may be. Strong breakouts beyond a VPOC often initiate a tradable market swing.
Final Thoughts
This basic list of indicators and charting concept definitions will guide you to a better understanding of cryptocurrency technical analysis terms.
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