What Is Technical Analysis in the Crypto Market?

DeeBit Exchange Futures Beginner Course: Helps users build a framework for technical analysis, including candlestick basics, technical patterns, moving averages, trendlines, and the application of technical indicators.

This Session: As the first lesson of "Mastering Technical Analysis," it introduces the concept of technical analysis, its foundational theories, and its purpose, laying the groundwork for future lessons.

Technical analysis in the crypto market refers to studying market behavior (primarily crypto assets like BTC and ETH) to identify inherent patterns for determining market trends and making buy/sell decisions based on these trends.

The prevailing view is that modern technical analysis, which is systematic and comprehensive, originated after the Dow Theory. Charles Henry Dow, the creator of the Dow Jones Industrial Average, is regarded as the father of modern technical analysis, and the Dow Theory forms the foundation of all technical analysis principles.

All technical analysis theories are based on three assumptions:

(1).Market behavior (price or index) reflects and digests all information.

(2).Markets move in trends, and trends have inertia.

(3).History repeats itself.

Candlestick Chart Analysis 

Candlestick charts, also known as Japanese candlesticks, originated in 18th-century Japan during the Tokugawa shogunate. Initially used to record rice market price fluctuations, they are now the most widely used technical analysis tool in capital markets. A candlestick is drawn using the opening, highest, lowest, and closing prices of a specific trading period (e.g., weekly, daily, or minute-based). The rectangle between the opening and closing prices is called the "body." The line connecting the highest price and the body is the "upper shadow," while the line connecting the lowest price and the body is the "lower shadow." In the crypto market, a candlestick with a closing price higher than the opening price is called a "bullish candle" and is represented by a green body. Conversely, a "bearish candle" is represented by a red body. Candlestick combinations and technical patterns, including bullish patterns, bearish patterns, bottom-finding patterns, top-escaping patterns, and consolidation patterns, form the foundation of crypto market technical analysis.

 

Trend Analysis 

Trends are the fundamental way in which natural and social phenomena, including the material and spiritual worlds, evolve periodically and with certain amplitudes. Markets also evolve in trends, meaning trends have inertia. Trends can be categorized by period into long-term, medium-term, and short-term trends. By direction, they can be categorized into uptrends, downtrends, and sideways trends. Trend analysis, based on Dow Theory, includes trendlines, support and resistance lines, and channels, which play a significant role in crypto market technical analysis.

 

Moving Average Analysis 

Moving Averages (MA) are based on the concept of average cost from Dow Theory and use the statistical principle of "moving averages" to plot the average price or index over a specific trading period. Moving averages reflect historical price or index fluctuations and trend directions, helping traders predict future trends. They are a digital, graphical, and visual representation of Dow Theory and Elliott Wave Theory. Moving averages and their derived forms, including MA combinations, convergence and divergence, and various MA patterns, are among the most common and important tools in the crypto market. In addition to MA analysis, combining indicators like MACD, RSI, VOL, and BOLL can provide a more comprehensive understanding of market dynamics, including the balance of power between buyers and sellers, price trends, and trend strength.

Determining Market Trends 

The premise of profitable trading is that market trends align with the expected direction of the trade—either rising after buying or falling after selling. Therefore, determining market trends is the most basic and crucial task in technical analysis. According to Dow Theory, trends have inertia and are unlikely to change once established. Following market trends and avoiding counter-trend trades are iron rules for professional traders. Using technical analysis to accurately determine whether the market is in an uptrend, downtrend, or sideways trend and adopting corresponding trading strategies are key to profitability in crypto futures trading.

 

Identifying Entry and Exit Points 

After confirming the market trend and determining whether it is in a bull market, bear market, or consolidation phase, the next step is to find the right timing to enter the market—identifying buy or sell points. A common strategy is to use larger timeframes (e.g., daily or weekly charts) to determine the overall trend and smaller timeframes (e.g., 4-hour, 1-hour, or 15-minute charts) to find patterns like head and shoulders, double bottoms, or rounding bottoms to identify entry points. The same logic applies to identifying exit points.

 

Setting Stop-Loss and Take-Profit Points 

A good trader always has a logical basis for each trade and sets stop-loss and take-profit points. Due to market randomness and unpredictability, black swan events can occur at any time. Incorporating risk management into trading strategies makes stop-loss and take-profit points essential. Take-profit points lock in profits, preventing potential losses if the market reverses. Stop-loss points limit losses, keeping risks within acceptable levels.

In traditional financial markets, technical analysis has evolved over a century into a complete and systematic methodology. Based on the three assumptions—market prices reflect all information, trends have inertia, and history repeats itself—technical analysis believes that all market dynamics, including capital flows, bull-bear battles, trading psychology, and information impacts, leave traces in market prices. Through scientific analysis, patterns can be identified.

Investing is simple: there are no new things under the sun. Markets alternate between bull and bear phases, and greed and fear influence traders' decisions during these transitions.

For beginners in futures trading, learning the classic technical analysis system, understanding its underlying logic, and finding a strategy that works for them are essential for survival and growth in the competitive market.

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This article is for informational purposes only. The information provided by DeeBit Exchange does not constitute investment advice and is not responsible for any investment decisions. Topics such as technical analysis, market trends, trading techniques, and trader insights may involve potential risks, investment variables, and uncertainties. This article does not provide or imply any guarantees of profit.