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Technical analysis of the cryptocurrency market

Abstract. The article is devoted to the study of the possibilities and prospects of using graphical technical analysis to predict asset price movements by an online trader on the example of bitcoin (BTC – BitCoin). The article analyzes the theoretical and methodological aspects of technical analysis of cryptocurrencies in the conditions of modern financial markets, conducts a comparative analysis of short- and medium-term strategies of technical analysis in online trading, and studies the analysis of cryptocurrencies

Keywords: cryptocurrency, Bitcoin, technical analysis, risk, online trading, market

Introduction.  Since 2015, cryptocurrencies have become a part of our lives. Initially, they were mostly represented by bitcoin. However, as their popularity grew, the cryptocurrency market expanded, and the range of “alternative money” expanded, cryptocurrency trading developed. And today, trading in bitcoin, altcoins, etc. is of interest to many professional traders and investors. The key feature of trading this type of asset is risk. Cryptocurrencies are highly volatile; due to this, people have a large profit or loss in the wrong hands. This segment of the stock market is extremely susceptible to the influence of news markers. Thus, any news that spreads quickly, for example, about the purchase or sale of a large batch of cryptocurrency, is reflected almost instantly on the exchange rate. As such money is a relatively young asset, the analysis of exchange rate fluctuations is very complicated by the lack of statistical data for the last 3-5 years. The available information is mostly of no analytical value, reflecting only the evolution of the initial bubble that burst in 2013 and 2018. Today, the work of a trader is facilitated by the availability of an impressive number of charts that show real cryptocurrency movements per unit of time. At the same time, forecasting the course is a serious problem, as the behavior of cryptocurrencies is highly dependent on the content of news and rumors and the factors included in the analysis.

Technical analysis in the markets is a historical practice that helps investors and traders make decisions based on the analysis of charts and asset performance data. This trend began in the 17th century when Dutch diamond trader Joseph de la Vega began using charts to analyze price movements in the markets. Since then, technical analysis has continued to evolve, adding new techniques and technologies such as Japanese candlesticks, wave analysis, and others [1]. Technical analysis of cryptocurrencies is one of the most common methods of market analysis. Its main task is to determine future price changes in a currency pair, securities, or other assets.

Cryptocurrency and securities market analysis is extremely useful for traders to determine the future price of assets. However, regardless of the method, there are three main rules that traders should take into account: it is necessary to control risks, follow the trend, and make decisions based on facts only. Following these rules will help traders make better decisions and trade successfully on the market [1]. Based on the information from the sources [1,2], the author has formed the following basic patterns of technical analysis:

Table 1: Patterns of technical analysis:

The market takes everything into accountPrice movements are subject to trendsHistory repeats itself
any factor that affects the price of an asset (economic, political, psychological) is taken into account in advance and will be displayed on the price chartunlike a chaotic market, a market that is prone to certain trends can be analyzedmarket dynamics are most closely related to human psychology, therefore graphic price models that have been identified and classified over the past hundred years reflect the features of the psychological state of the market  

In technical analysis, the series of values ​​of the share price for some time intervals, the volume of trades and the number of open deals are used as a basic time series [4]. The main tools of analytical methods are the indicator, which is a set of functions from one or more basic time series, with a certain time interval. Indicators can be conditionally divided into five categories presented in table 2.

Table 2. Indicators used in analytical methods [1,3].

Group of indicators  Characteristic  
variabilitymeasure the daily degree of change in prices of the underlying asset and are extremely important for short-term trend analysis; include indicators Chaikin’s Volatility, Standard Deviation, Bollinger Bands, etc.
momentmeasure the rate of price change over a certain period; include indicators
cycleserve to identify cyclic components and their length and work well on lateral trends; important for futures traders working in commodity markets; include Fibonacci Time Zones indicators, MESA Sine Wave Indicator, etc.  
dynamicseither the volume of transactions or the number of open positions are used as one of the basic independent variables; based on volume data series, signal the strength of the current trend; include indicators This category includes On Balance Volume, Volume Accumulation  

Features of short- and medium-term strategies of technical analysis. When planning his activity, any trader should choose the period in which he will enter into transactions. As a rule, beginners mainly choose a short-term (intraday) strategy, since it is aimed at obtaining profits for a relatively short period of time. short-term strategy has many tools for analysis. It is interesting that this can negatively affect the profit from deals, because people cannot remember and effectively combine all the rules of behavior when using tools, take into account their differences among themselves. For example, some beginners use a large number of indicators that are not related to each other: MA, MACD, ROI, Bollinger Bands. These indicators work in different conditions, which reduces the effectiveness of their use for the trader. So, if MA is a moving average, which is used to analyze the continuation of the trend, then MACD is used to reverse it. Therefore, they cannot work together due to different principles of their operation. Medium-term futures trading also has many advantages, it is good for beginners, and the analysis here takes less time. This type of trading is based on profiting from the movement of the price within the month. Therefore, the main time frames (timeframes) for analysis are monthly, weekly and daily. A significant contribution to the cryptocurrency industry was made by Trach Roksolana, her book “Analytics of the future: How to predict trends in the crypto market”, 2020 is suitable for both beginners and experienced traders. But as we can see, each of the strategies is not perfect, so every trader, when choosing his own path, should weigh all the pros and cons of the mentioned strategies and use a large number of indicators, respond to news in a timely manner and read the press and scientific publications from this field.

Conclusion

Studying today’s financial markets can pose many challenges because market fluctuations are very complex and heterogeneous. Market trends can surprise both a beginner and an experienced trader in this area. The application of researched approaches of technical analysis based on the comparison of advantages and disadvantages of short- and medium-term strategies significantly facilitates the orientation of cryptocurrency market participants in the signals it provides. However, it is very easy to forget some elements, get emotional and misunderstand the clues provided by the graphs. If you don’t succumb to these weaknesses, even a novice can analyze and make money from it.

References:

1. Trach R.I., “Analytics of the future: How to predict trends in the crypto market”, 2020, STUDFILES., P.7-19, https://studfile.net/preview/21712221/.

2. Technical analysis – what is it, definitions and concepts. Economy-Wiki.com, 2021. URL: https://uk.economy-pedia.com/11030832-technical-analysis.

3. Lakshman Prabhu. Technical analysis 101: The best technical indicators for crypto and stocks. 2022. URL: https://coinmarketcap.com/alexandria/article/technical-analysis-101-the-best-technical-indicators-for-crypto-andstocks.

4. Technical analysis and possibilities of its application in the financial market of Ukraine. Bibliofond, 2022. URL: https://www.bibliofond.ru/view.aspx?id=726198

Author :

Kravets P.O., Candidate of Technical Sciences, Associate Professor of the Department of Information Systems and Networks, Institute of Computer Sciences and Information Technologies, Lviv Polytechnic National University.

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