Does technical analysis work with cryptocurrencies?

I have been a technical analyst for the last 10 years and the study of historical patterns and raw price data is a very important part of this field of analysis. 

During this time the rise of cryptocurrency trading has been a massive development! 

The fact that this was price discovery from something that had no intrinsic value is key to the development in the field of technicals. 

That's what technical analysis is, the study of price action. What levels are historically important? What trends are going to break? These are all key questions.

There is one key issue that remains. On the smaller coins, where participation is limited is there enough volume to monitor the behaviour in the markets?

There are many areas of technical analysis that need to be observed to answer this question.

• Patterns
• Elliott Wave
• Dow Theory
• Indicators including moving averages
• Support and resistance and trendlines
• Different Chart types ie. P&F, Market Profile, Candlestick Charts and many others.

Without doubt support and resistance analysis works in the major coins. There have been many occasions where important price levels have been observed. 

When an underlying trend is in place levels obviously break, like in any other market. But when very important support and resistance levels are in the market there have been many rejections and observations.

 

Patterns

Now we could be looking at different patterns on many different timeframes. ie. bull/bear flags, triangles, wedges etc. 

Example of a triangle break and retest:

Now after doing some backtesting it seems pattern works very well on the one hour chart for Bitcoin. The classification for the patterns has to be two price touches either side of the consolidation pattern before the break. The triangle pattern was the main area of focus for this test.

For the last 20 patterns test on the hourly chart 65% failed but with a decent risk to reward ratio. The way this was determined in this instance was three times pattern length in price terms.

For example, if the top to bottom of the pattern is USD 200, then the target must be USD 600. 

Now to do a thorough quantitative study you would need to perform this many times on a multitude of time frames. This would give you a great picture of how patterns could be used in cryptocurrencies.

Indicators

There are several popular indicators, in this study, I will be focusing on the RSI, Stochastic and MACD. 

In terms of parameters its hard to quantify them for indicators. For this example, I will be using the previous wave low or high for stop placement and again a three to one risk reward. 

Example:

The picture above is a one hour Bitcoin chart with an RSI trade example. The RSI went overbought above the 70 level and then when it came back below 70 the sell signal was triggered. I then have marked a three to one risk to reward. 

On twenty examples of exactly the same type of trade with a one to three risk to reward, six trades won and fourteen trades lost.

So if USD 200 was risked per trade and USD 600 was gained per win. That is a profit of USD 800. (losing trades 14 x 200 = 2800) (6 x 600 = 3600) (2800-3600= 800).

The psychological mindset would have been very important. 

To be continued

This subject will have to be broken up as there are too many variables to consider. 

This is the end of part one of the articles looking at technical analysis in cryptocurrencies, stay tuned for more.