Simple ELI5 technical analysis for trading Bitcoin

Hi friends, a lot of things happened since last post here. First, we have ditched the news section, it’s a lot of hard work to keep up with every news around crypto, others are better than us, let them do what they know best. Also, the team got smaller, so there’s that. 

From now on, the focus will be on trading techniques and explaining how some crypto projects work. 

How TA works?

So, coming to the title of this post, I see a lot of Youtubers explaining (potential) triangles and wedges and (not yet formed) head and shoulders on various charts, all “exactly predicting” the Bitcoin price. And ultimately the whole crypto space direction, because Bitcoin is leading and altcoins follow its move.

Before going into advanced (many times subjective or nonsensical) technical analysis, like Wyckoff patterns, Fibonacci levels, Gann boxes and pitchforks, let’s start understanding the simple things like support and resistance. More often than not, simple things are more profitable than complicated ones.

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Tools I use for this: free TradingView account and a bit of time tinkering with it.

Sometimes its features are integrated into the exchange chart, but I prefer going to the source. Do what you like, this is a not required step if the chart you look at has a basic set of indicators.

What are support and resistance lines?

Support and resistance are price values where price changes direction in a certain timeframe. 

I find this to be the simplest definition for it. Price can’t go above a resistance level and below a support level. If that happens, that level is broken and we should look for lower/higher support/resistance levels.

Support turning into resistance and resistance becoming suppport

What happens very often at these key levels in trading is that when a support line gets broken it transforms itself into resistance and the resistance that seemed impossible to break above gets broken turns into support.

Let’s look at an example from ETHUSDT chart, 4 hours candles

Support resistance

The $2600 price was a support for Ethereum for 3 times, once this level got broken it became resistance, 2 times the price was rejected from this level.

Simple rule for breakouts: wait for at least one candle close above/below the level before calling the support/resistance inversion. Even after few closes the price can go to the old territory and affect your trade. The probability of inversion is high, but not a guarantee.

How to recognize support and resistance levels easily?

There is no fixed rules set, the market is made of many people who buy and sell according to their own bias. 

To ease our job, we’ll use a few simple rules to see where the market itself decided to place these price lines that are so important.

First, we are looking for highs and lows. Specifically the lowest lows and highest highs. To understand better where are we now, this minute, in terms of price, we have to understand first where we are this month, this week, this day, last 4 hours, last hour, last 15 minutes and last 5 minutes.

It sounds like a hard work, but is actually simple and not to be done often for higher intervals.

TLDR: Support and resistances are highs and lows on many timeframes.

 

Let’s draw some lines

I started this on Twitter, but it’s hard to keep track of every step given the limits of a tweet. 

We will draw the support and resistance levels for BTC-USD chart, adding relevant steps one by one. I will be using the tweets already posted where they fit.

 

First, let’s see where we are at monthly level, defining some support and resistance lines on chart.
We have a low at 0 and a high at $64899. Placing the corresponding horizontal lines at the exact values. Simple, right?

 

Added monthly support resistance for Bitcoin

 

Quick explanation: in order to test the highest and lowest monthly prices, the market has to travel through a lot of other levels, break them or get rejected. Shorter timeframes lead the higher timeframes, a massive move to the upside on monthly starts actually on the one minute chart.

 

 

This is original tweet for daily chart, some may wonder why I picked that level instead of something at $20000+  levels. For higher timeframes, I chose the low that’s visible on chart at first glance, without zooming or changing anything. My personal preference, it works for me, but you can do as you like. I also explained why the low and not the high (which should be suppport after being resistance) in that case.

Take a break, learn about Parabolic SAR

Before going to lower timeframes, i will introduce you to Parabolic SAR. It’s an indicator that shows trend changes, by using a series of dots above or below the current candle. If the dot is above the candle, it shows a downtrend, if dot is below uptrend. This indicator is lagging and maybe not great for entries/exits if price is not trending, but it’s good for defining support/resistance.

 

 

What we want is lowest low before dot went below price. Or highest high before dot goes above price.

Once the first dot in a new series appear, we can mark the previous high or low.
The low here is $35575, I will let you identify the high. It’s the one minute chart, just to exemplify.

This helps a lot in realtime trading, when you don’t know if the trend has changed or not. In the above chart, looking at it live, you don’t if that’s the lowest low in the current trend until the dot moves below the candle.Once the dot has moved you can mark that low with a horizontal line.

Is Parabolic SAR the only way? No, there are other ways to determine trend changes, like moving averages crossovers or price action itself.Higher highs and higher lows defines an uptrend, and lower highs and lower lows a downtrend. 

However, I like Parabolic SAR for its simplicity, also it shows the change fast enough for the purpose of marking supports and resistances.

Bitcoin chart, lower timeframes

By using this new tool, we can draw, at any moment, horizontal lines marking supports and resistances.

Let’s go with the 4 hours chart on Bitcoin.

Bitcoin 4 hours chart

So, we said that before reaching lowest lows and highest highs we have to travel to smaller timeframes. 4hours chart, what Parabolic SAR shows? $41322 for high, $30000 for low.

Just by looking at the chart, we can safely say that the market is not trending, just ranging between these two values. This is an important information that we can use in our trades.

If the price forms a higher high or lower low outside of this range, we can say we are trending on higher timeframes, like daily or weekly.

But let’s move on to lower timeframes, even if we appear to stand still on higher timeframes, we can find useful informations if we zoom in apparently.

 

Here we are adding 2 new lows for hourly interval, what prices we may test first on this interval, blue dotted lines on this chart.

Break again, to learn trend lines

Before going even lower to get specific price targets, we will add another useful tool to our arsenal: trend lines. So far we have only horizontal lines, let’s add some diagonals

Trend lines may act as support and resistance as well and can be broken too. That’s another useful information for a trader.

What defines a trend line?

Trend lines should connect at least 2 highs or 2 lows in order to be valid. Again, very simple definition, no need to overcomplicate things. To make it even simpler, we will be connecting the last two highs and last two lows only, wherever that’s possible.

One example from the one minute chart, where trend lines are converging.

How to interpret these converging lines? Simple again, at some point price will have to break out of these two lines and form a higher high or lower low outside of this structure. Not because of some market constraints, but because price tends to move in a certain range, if not on this timeframe, on a higher one.

Buyers or sellers who don’t look at lower timeframes ignore these smaller moves and drive the price according to the information they have from that timeframe. 

What if the lines are parallel?  

In that case, we have a trend, a series of highs and lows that go in the same direction.

That’s how triangles and wedges are formed on charts, by drawing two converging trend lines. Most traders interpret them by looking either at where the convergence point is in relation to current price or by looking at previous trend.

In our example above, that would be a rising wedge, because the converging point is above current price. Most traders interpret that as a bearish sign and sell at the breakout of lower line

The opposite happens for a falling wedge, where the convergence point is below the current price.

Although some see this as a trade signal, I personally see it at most as a trade confirmation after a rejection at a key support/resistance level.

I will let you decide what’s the best spot to sell on this recent chart of Bitcoin. 

Now let’s go back to drawings

Trend lines on Bitcoin chart

As we said, we are going to connect two recent highs and two recent lows for some trend lines, wherever it makes sense to do so.

Let’s start with monthly chart

As can be seen, we have two parallel lines forming an uptrend. We are currently at the lower line, staying right above it, so we can say we are bullish but experiencing a pullback.

Let’s see the pullback on weekly for more clarity.

Again, parallel channel. We are in a downtrend (monthly pullback) and we are moving sideways. Let’s see if this ranging period has something interesting to show us, on daily timeframe.

 

Things start to get interesting, we have two converging lines. 

4 hours chart next, not much of a difference now

With that said let’s move further down

The hourly chart has an added pink line connecting two last highs. So far we are testing the lower line formed by higher timeframes..

Lastly, which is enough for the purpose of this article, let’s add the 15 minutes chart and try to analyze all the information we gathered so far after that.

15 min chart Bitcoin

Final analysis

Many Youtubers and CT community throws prediction after prediction, all exactly showing direction and price targets.

Final Bitcoin chart with levels and trends

This is our finalized chart with support and resistance levels and also trendlines.

Let’s see step by step where we are, listing every timeframe information.

  1. Monthly: uptrend, currently in a pullback, trading at the lower trend line. We are at the middle of the range between high and low
  2. Weekly: ranging between $30k and $40k. Could be seen as a pause from the previous drop from $64k. Price can go up or down forming a new trend if we break the range boundaries. 
  3. Daily: converging trend lines. At the time of this writing, price broke out of these two lines, to the downside. Next support should be at ~$32k where is the monthly trend line. If that breaks out, next level is at ~$30k, weekly range recent support.
  4. 15 minutes chart had a converging lines structure, which broke down.
  5. Lower timeframes show the same thing, except for the 5 minutes and 1 minute chart, where there is a pause in the current downtrend. Price could reverse and re-enter the converging lines structure, but it needs confirmations of reversal on the 15 minutes chart. It also could continue the move down.

What next?

We learned a lot of things about suppport and resistance, trend lines and Parabolic SAR. No moving averages, no RSI, no Stochastic, not even looking at previous Bitcoin history or correlations with hashrate and other on chain data.

What can we expect in a realistic way for a short term prediction?  

Price has a high probability to test again the $32k and even $30k levels. The likelihood of testing the $32k level and failing is lower than for $30k level, because those are coming from different timeframes. Higher timeframe, higher strength. 

In the current situation, the $32k level is at the lower edge of the monthly uptrend and $30k is the lower support of the weekly range.

At these two levels, price can do many things: bounce straight up, range for hours or days around that level then go up, range around then going down. The market will decide.

The probability of price going straight down, slicing through these levels is very low, because of their strength. 

So, what next?

I placed two scenarios, for the extreme situations that may be happening during next weeks or months.

Bullish one: we bounce from the $30k area, go up to $41k, fight with it, break it and go at fight with higher levels. More buyers see the price going up and they chime in, getting the price to $80k levels around September and $100k level in December, also respecting the timeline of previous bullruns for Bitcoin.

Bearish one: we fail at the $30k suppport, pause at $24k level, more sellers chime in (institutions and recent investors), price  goes down to $20k then bouncing up from the $16k level as the lowest low. This is full bear market that will end only after next halving.

Of course, both scenarios don’t take into account further economic developments, like inflationary policies that may lead to a crisis like in 2008, or countries accepting Bitcoins as legal tender, increasing the adoption. Or maybe countries banning Bitcoin and cryptocurrencies, or billionaires tweeting various stuff.

 

Conclusion

Predicting actions in the market is hard, but not impossible. There are no guarantees, only probabilities. 

No matter if you day trade or invest for long term, charts can help you buy or sell at profitable prices. Only by watching for support and resistance and buying or selling at these levels can improve your profitability by a lot.  

By combining the information presented in this article with other informations, provided by other indicators on TradingView or maybe paying attention to the latest news you might predict the direction of price faster, but the basics are here.

 

 

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