TCAP Technical Analysis - Intro Post

Hello Everyone,

This is my first post in a series of posts where I will analyze the technical movements of the total crypto market capitalization (TCAP) to keep readers up to date with what's going on, and what could happen in the future based on past trends.

During these posts, I hope readers learn a sense of how to read the market, and how to plan decisions accordingly and efficiently.

My background

Everything I will express in these posts are my views and my thoughts only. They are not my recommendations or predictions of the future. I learned TA as a technical short-term day-trader for years in the stock market. I have read numerous books about technical indicators, market psychology, market cycles, and trading patterns. I have applied this knowledge into hundreds of hours of chart time, during which I learned what works and what doesn't. I learned how to spot trends and breaks in those trends as I will demonstrate later.

Common questions

''Why can you adapt what you learn in the stock market into the crypto market?'' Easy. Both are traded by people, and people think and act the same way regardless of the type of investment they are in. You could take this knowledge and apply it to the potato market, view it on a chart, and you will know what's going on.

''But sometimes it's not just people who are trading, it's bots & algorithms too?'' Correct. Bots & algorithms that are, like us, trying to predict the emotional decisions of the masses.

"How do charts explain people's emotions?" At the core of everything we are trying to understand, is market psychology. Humans are predictable. They set mental barriers for themselves, and they rarely break their habits. The charts we look at are just a visual representation of buyers & sellers.

Now let's get into it...

What Type of Chart Do I Use?

Candlestick charts. Only candlestick charts. Not line charts or any other dumbed-down or wacky type of chart. We will only use candlestick charts for these posts, and I encourage you to use them yourself.

"Why candlestick charts?" They paint a full picture.

As you can see from the image above, with a candlestick chart you can see where the period opened, how low/high it could have reached, and the body of what the buyers and sellers had to say about this particular time frame.

We usually describe green candles as Bullish* and red candles as Bearish* but is that always the case?

tcap strat 2

The above candle is a red candle, but is it really bearish? It indicates that the sellers brought it all the way down to that bottom, but the buyers were determined enough to push it all the way back to the top.

tcap strat 3

The above candle is green, but is it really bullish? it indicates that the candle opened at the bottom, had a huge spike up, but the sellers were determined enough to push it all the way back to the near where it started.

Using candles like these, we can infer what's going on in the moment which helps us understand the market as a group of buyers & sellers or just people.

Understanding candlesticks is definitely something I hope everyone spends at least an hour on. They are the basis of everything we do here. You don't need to know the names of each type of stick to understand what it's telling you.

Next, we put these candlesticks in a chart and try to see what patterns emerge. Then, we'll try and understand what these patterns are telling us.

Why are Patterns Important?

Similar to my explanation above with candlesticks, patterns give us an idea of how the psychology of the market is moving. Are buyers or sellers in control? They are also important because other people & algorithms see these patterns as well, and they make their decisions based on them.

Patterns are an important tool in trying to figure out the market's next move and they are so effective because anyone that's looking can see them.

Here is an example of a well-known pattern: "The Head & Shoulders"

tcap strat 4

I will go over some more patterns that come up in the upcoming posts, and I will define and explain them as they go by. However, I implore you to get a good understanding on some basic patterns/formations that are the most powerful and most effective. A whole trading/investment strategy could be based around single patterns or formations.

Timeframes

Each candle you see in a candlestick chart represents 1 period of time. This period falls in an even larger chart-wide timeframe.

Intraday Timeframes: These fall within one day, for example a 1Day/1Min chart will show you each candle as 1 minute periods in the entire chart which represents one full trading day. Other examples would be 1D/5Min, 1D/15Min, 1D/1Hr, 1D/2H, 1D/4H.

Intra-Year Timeframes: These are bigger periods such as 1 Day, or 1 Week, and the entire chart represents a full year. So, for example, a 1Y/1D chart is where the entire chart represents a full year of trading and each candle is 1 trading day. Other examples would be 1Y/3D, 1Y/1W.

Multi-Year Timeframes: These are even bigger periods such as 1 Month, and the chart represents more than 1 year. So, a 1M/3Y chart will show you each candle as 1 month, and the whole chart spans 3 years worth of time. Other examples are 1M/5Y charts.

So a Bitcoin daily chart (1Y/1D) chart should have 365 candles representing 1 day each making up a full year.

"What timeframes should I look for?"

All of them are important because they paint a full picture. If you are looking to start a position, I would start with looking at a longer timeframe - Is this asset looking like it's going up/down in the long run? Then I would dial it into a smaller timeframe to see if I'm opening a position at the right time. Bitcoin could look good on the daily chart, but zooming in to an hourly chart might show you that its actually due for a cool-down and it might be best to wait for later in the day to start a position at a lower price.

Again, it all depends on your strategy, and your goals. If you are a day-trader, you won't be looking at long-term timeframes, you would probably be more interested in what’s going on by the minute. If you are investing long-term, you might be more interested in a long-term chart that spans months or years.

The important thing to note is that sometimes we see multiple patters/set-ups in multiple timeframes which is called Multiple-Timeframe Confirmation. This strengthens the odds of what we think these patterns will do, actually happening.

Indicators

''What are Indicators and why do we use them?''

Indicators are tools that we apply to the charts that also help give us a fuller picture of what's going on. There are tens or probably hundreds of indicators that people can use. Some work, some don't.

Again, we will never predict the future or know exactly what's going to happen. What we are doing is painting ourselves a picture and utilizing information to determine the probability of various possible outcomes.

"But no one ever knows what's going on in the market?"

That's not entirely true. We usually know what's going on in the market. You hear it all the time: "We are in a bull market." or "We are in a bear market." However, what people usually don't know is when does the bull or bear market end.

That's why we use the knowledge we have using the patterns, indicators, and charts presented to us, coupled with what we know of market psychology to give a definitive answer: ex: "Yes. I believe the market is taking a down-turn."

Here's an example that I like to use to show people how we can use indicators to give us an answer to our questions about the market.

The Bitcoin Bull Market

tcap strat 5

  • The yellow line represents the 20-Day Simple Moving Average
  • The blue line represents the 50-Day Simple Moving Average
  • The red line represents the 200-Day Simple Moving Average

Notice in the example above that despite Bitcoin dipping on 3 occasions on its way to its all-time high, it never once dropped under the blue line. That's a trend.

On the 4th dip, however, BTC dropped significantly under the blue line before recovering once again to around $60,000 - Someone who might've not noticed this obvious trend-break would have probably invested expecting a new high. I wouldn't have touched it with a ten-foot pole as there is a clear break in the long-term trend (From $9,000 to $64,000).

So when someone tells you: "No one has a clue what's going to happen." or "No one can time the market." MAYBE THEY DON'T HAVE A FULL PICTURE?*

The indicators we will be using in these posts are:

  • 20, 50, 200 Daily Simple Moving Averages
  • Bollinger Bands
  • RSI or Relative Strength Index
  • MACD Crossover
  • OBV or On-Balance Volume

The most important indicators of all will always be PRICE & VOLUME.

*A note about volume: High volume is only good on an up-leg. Low volume is only good on a down-leg.

  • Simple Moving Average: A simple moving average (SMA) calculates the average of a selected range of prices, usually closing prices, by the number of periods in that range. These act as support/resistance levels. Usually, the longer the period of the SMA the more definitive it is as a support/resistance level. Thus, breaking a 200 SMA is more significant than say a 20 SMA.

tcap strat sma

*Note: Simple Moving Average VS Exponential Moving Average: An exponential moving average (EMA) places a higher weight on recent data than older data. Therefore, we will be using the simple moving average because we are looking at a broader timeframe, and simple moving averages are the simplest form of this indicator as the name suggests.

Bollinger Bands: From Investopedia - A Bollinger Band is a technical analysis tool defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security's price but which can be adjusted to user preferences. In the example above, the "green cloud" area of the chart represents the Bollinger Bands. The tighter the bands get the more likely it is that there is going to be a breakout - whether up or down in the price, characterized by a big move up or down. The tighter and longer the bands, the more explosive the move. Breakouts in the downwards direction are sometimes called "Breakdowns.''

tcap bollinger bands

RSI or Relative Strength Index: The relative strength index (RSI) is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of an asset. Overbought/Undersold is usually when the RSI is above 70 which indicates that the asset is looking like it's due for a cool-down. Sometimes during breakouts this rule becomes irrelevant until the breakout is over.

rsi png

MACD Crossover: The Moving Average Convergence/Divergence (MACD) is a technical indicator which uses the difference between two exponential moving averages to determine the momentum and the direction of the market. The MACD crossover occurs when the MACD line and the signal line intercept, often indicating a change in the momentum/trend of the market.

macd png

OBV or On-Balance Volume: On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator, adding volume on up days, and subtracting it on down days.

obv png

Things to Note: Indicator movements sometimes precede a price movement. If you see a spike in the On-Balance volume for example, and the price hasn't moved - it is a good indication that the market is lagging and will correct up/downward.

market stages png

btcstages png

There are 4 market stages generally acknowledged:

  • Stage 1: Accumulation - Usually characterized by sideways movement.
  • Stage 2: Uptrend - Characterized by a break in the top of the sideways channel followed by higher highs and higher lows.
  • Stage 3: Distribution - Characterized by a break in the up-trend. A lower low, & lower high. Sometimes after a Stage 2 Uptrend, an asset could enter Stage 1 accumulation again if it were to make another upwards move.
  • Stage 4: Downtrend - A series of lower lows, and lower highs which ends with seller exhaustion and a spike down in price followed by a relief bounce. After this stage the market enters either stage 1 accumulation or stage 3 distribution based on what move is to come next.

It is important to know what stage of the market you're in. You never want to open a long position in a stage 4 downtrend. You also don't want to be in a choppy sideways market that lasts forever and gives you sleepless nights. We'll discuss the perfect conditions of opening/closing positions later.

Resistance & Support

You've probably heard these terms before if you're familiar with investing, or trading. Let's dig deeper into the psychological aspect of resistance & support levels.

What are Resistance/Support levels?

  • Resistance: A certain point where the buyers can't seem to surpass because there is too much selling pressure.
  • Support: A certain point where the sellers can't seem to get below because there is too much buying pressure.

How do we spot Resitance/Support levels?

There's a certain saying in trading: "Look to the left." Which means to look to the left of the chart or to the past. If, in the past, an asset reached a certain level which it could not pass and dropped, people will be looking to sell at that level or right below it on the next move up because they deem it a safe place for the asset to return because it's been there before.

Also, people set mental limits for themselves on round, and sometimes obvious numbers. If you buy something at 1$ - to you maybe $2 is a significant milestone because it represents double your money. If the price of the asset spent a good amount of time around 1$, with a lot of volume occurring in that range, then there is a good chance that many people shared your favorable views towards the $2 number as they wish to double their money as well. Thus, $2 becomes a point of resistance. The same can be said about $.50 on the way down.

Important Rule: The resistance becomes the support and vice versa. To visualize this, picture the asset we used as an example above. Let's say it reached the $2 price before hitting resistance. Picture 10 million shares on the order book on the ask. Let's say after a tug-of-war between buyers & sellers, the buyers came in and bought up the orders and took the price to $2.10 - Because all those people and all that money was needed to cross $2, you have a new floor for your price. Because all those people that bought are now hoping to sell at $3 instead of $2, and they buy more when the price drops back to their entry point. Thus, the ceiling became the floor, or the resistance became the support.

*Note: The indicators we use may also act as resistance/support levels as indicated by the Bitcoin example.

btcrs png

An example of how resistance becomes the support and vice versa on a weekly Bitcoin chart.

The Market Mindset

The absolute MOST important aspect of technical analysis is keeping an unbiased mindset when analyzing the market. Regardless of what you want to happen, you must accept & consider the other possibilities that could happen, and what to do about it.

"The market is being so stupid today."

"Who's selling at these prices?"

"This is just manipulation.''

How many times have you heard/read these phrases in the investing/trading world? Probably every day on every discussion for every asset. The most important rule of the market is: The Market Is Always Right.

The Market Is Always Right Mentality: Because a buyer, and a seller agreed to buy/sell a certain asset for a certain price means that there is no right, or wrong in the market. Their very agreement proves that.

The market simply is. It's your job, as an analyst, to flow with the market, not against it. Unless you're one of a few select people on earth that can move the market with your own funds, you simply cannot go against what the market wants. If you do, you will always lose.

Stop thinking in terms of what you want, or you wish to happen, and start thinking in terms of what the market wants to happen.

Be flexible enough to notice and acknowledge when the market deviates from what you thought it would do. Which leads to the next important point.

Have A Plan

A plan would look like this:

  • Entry Price
  • Take Profit Price
  • Exit Price

You need to know when you're getting in, at what price and for how many units. You need to know when you are planning on taking profits, and when to exit if the market makes a sudden turn against you.

Now that you've learned what candlestick charts are, how to read them, what indicators we will be using, and the mentality we will be having. We are ready to dive in to applying this knowledge.

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