Trading Basics & Technical Analysis
A quick, free primer on how all this "trading" stuff works.
Hello satoshi snipers!
It’s hard to imagine that less than a year ago I was doing simple, degenerate “buy low, sell high” 1x spot trades and not having a clue about how the price (action) relates to the movements of money flow and how “technical analysis” can unlock those patterns for profitable gains.
Now it’s my full-time job and I have grown to love it as much as I’ve loved writing software and building digital products; in fact, it’s very similar and a perfectly-creative way to spend time while waiting for other things to clear. I really can’t believe it.
I mean, if you were like me then none of this made any sense to me whatsoever:
I knew about “candles” and “wicks” but nothing about their significance and how you can use them to interpret and predict the future. But I knew that I had gotten recked not knowing what I was doing and I was determined to figure it out.
So, I set about it and used everything that I’ve put together in the Trading Library to teach myself from scratch. But, what I really needed was a primer, a basic 101 course on what the heck I was jumping into. I couldn’t find a good one so I built my own.
And, here it is.
I hope you find this high-level introductory material insightful and even exciting! It is the beginning of a very long journey that ends in you making money at any time and from any place in the world, as long as you have an internet-connected device and time to study the markets, learn the art and science of the “ticker tape” and give it its worthy due. You will be handsomely rewarded for serious, intentional follow-through!
Finally, this isn’t “comprehensive” by any means but it should get you started; there are tons of better resources out there for those that want to take it way beyond this introduction.
Good luck and may fortune and profits find you so that you may stack fat sacks of satoshis for you and your loved ones!
To infinity & bitcoin,
What is Technical Analysis (and How Does It Relate to Fundamental Analysis)?
That’s a great question!
Technical analysis looks at (repeated) patterns in pricing and price action via market data so as to predict how the price might change in the future. In contrast, fundamental analysis does not consider the daily price changes of an asset or security and instead focuses on the larger picture. This might include reviewing financial accounting of the asset and/or project, the quality of the community around said project, and how the company’s products and services provide real-world value and utility.
You often times hear folks say: “Do Your Own Research” (or DYOR) which is effectively this type of high-level analysis of what the project might do in larger value creation terms.
Technical analysis watches historical price performance by looking at charts and data for much more precise interactions (e.g. orders, trades) taking into consideration factors such as volume, relative “strength” of direction (“is it going up or down?”) and how much volatility (or price movement) is occurring at different times when the market is open.
I mean, it’s charts, lots of charts.
There are as many ways to do fundamental analysis as there are ways and means to do technical analysis and there is definitely not a “one size fits all” type of engagement. There are, most-certainly, “best practices” and common tooling / toolkits that folks use but one can do quite a lot with very little. You might be surprised!
This is also one of the reasons I really enjoy trading is because it is such a creative act that, when done properly, can quickly reward you for the time spent. And each trading style is deeply personal so the artist within each of us can really shine.
Pretty neat when you think about it.
Although (bitcoin) trading specifically requires technical analysis as a primary tool for profit, the savvy and wise trader will also consider the larger economic climate (fundamental analysis), competitive projects in similar industries and markets, and other global phenomena that directly impact the asset that is being traded.
For instance, knowing better the relative background of bitcoin, its place in the larger ecosystem of (token) products to be traded, and how money moves from different asset (classes) during different seasons of time can be used to great effect and great profit.
It truly is a “the more you know, the more you profit” type of thing.
This, of course, requires more time but it is a true “Proof of Work”-ish-like system where the better and more equipped you are, the more effective your decisions and outcomes will be.
This is just statistical science; everyone can learn to do this effectively and well. But you must put in the work and the more time you necessarily spend to acquire a better set of skills, techniques, and tooling, the better your outcomes will be.
Just like learning to ride a bike, put a ball through a hoop, and kick something into a net. Practice, practice, practice. There’s a very common saying in trading that captures this sentiment perfectly:
It’s not about “timing the market” but “time in the market”; the more exposure, the better.
It’s just like going to the gym, doing the workout, even when you don’t want to. But, the gains will show, over time. If, of course, this is your type of work and jam.
So, How Does Technical Analysis Actually Work, Bruh?
Technical analysis is a numbers and data-driven approach to (trade) decision-making. It assumes that the (bitcoin) market has “priced in” all of the information resulting in the current price. As these things change, so does the price.
Because current prices (action) reflect market forces like supply and demand, capitalization of project and/or business, the wise and prudent trader knows that the price is the present and precise sentiment of the sum total of all participants in the market. Yes, this is effectively a feeling that is represented in a price tag and you can then see the history of how that sentiment has changed over time.
But remember that the market is the most ruthless thing you’ve ever encountered and it is purpose-built to take the money from the unsuspecting and, even worse, the overly-confident and emotionally-inclined. History doesn’t repeat but it can rhyme but if you know that then thousands of others also know this and will willingly bet against you and you gross naïveté.
Consequently, only use capital for trading that you can afford to completely lose. This is the “risk” and “reward” part of the decision as to whether or not you actually pursue this.
And if you’re already feeling anxious then it’s probably best to stop right here and move on; there are better, less risky ways to build wealth and stack sats. No harm, no foul, no fuss, no mess, and no loss of finances.
Buy, Sell, and Manage an Order
Now comes the fun part! How does one actually “do” this thing called trading? Or buying and selling and asset at a set price and then to profit from it going up or down?
I snagged this from Coinbase and it has a good overview:
Here’s what this video covers:
How to view or cancel open orders.
Select different currency pairs to trade and/or buy, like BTCUSD
How to buy a “market” or “limit order” and to view the price of that pair that you’re buying and/or trading. Sometimes your order may not be entirely filled and is the risk you run placing precise bets on price.
Some exchanges will also show the “order book” where you can see how many orders are being placed for similar sizes and prices.
Here’s what a “Market Order” really looks like:
If you care less about the exact price and more about having your trade executed as quickly as possible, you can use a market order. Market orders typically allow you to buy or sell at the best available market price. For buyers, this will generally be the lowest current ask. For sellers, it will generally be the highest current bid. Market orders are useful if prices are changing fast and you want to enter or exit your position as soon as possible.
That said, market orders may not get you the best price possible, especially if you’re trading large volumes. Slippage happens when there isn’t enough of an asset available at the current market price to completely fill a market order. As a buyer, this can result in part of your order being filled at a higher price.
This is different than a “Limit Order” which can give you a bit more precision:
A limit order lets you set a maximum price for the order — it will only execute at this price or better. This gives you much more control. For instance, if you’d like to wait and buy at a lower price you can set a limit order to buy 0.1 BTC at $29,000 — which would mean you’d pay $290 (plus fees) instead of the $300 you’d pay via market order.
Limit orders are executed in the order they appear on the order book. Your limit order would only be filled if the exchange can match a seller for $29,000 or below. Of course, there’s no guarantee that the market price will reach $29,000 again, so your limit order may never be filled.
Limit orders are also a good way to trade large amounts because they ensure you’re only paying your preferred price as it becomes available. The downside is that there’s no guarantee your order will be filled, since the market price may never reach the price level you specified.
What is a Stop Limit Order?
Stop-limit orders allow you to automatically place a limit order to buy or sell when an asset’s price reaches a specified value, known as the stop price. This type of order can help traders protect profits and limit losses.
And there is nothing more important than the latter; the former happens when you play a “defensive” posture with your portfolio and trading table! This is counter-intuitive but you don’t have to be “aggressive” to win at trading. Instead, patience and emotional stability are your sword and shield.
There are two different parts of a stop-limit order: The stop price and the limit price. These don’t have to be the same amount, and traders use them together to help manage risk. The stop price is based on the best available price — not necessarily the price you set. The limit price adds an extra control by setting a more precise price constraint on your trade. With a stop-limit order, your trade will only go through at your desired price or better.
And, of course, there are no guarantees that you’ll get your order filled. But if you can time it precisely you’ll maximize your gains.
A quick list of definitions:
Pair: The market in which you placed an order (for instance, BTCUSD).
Type: The order type (market or limit order).
Side: The transaction type (buy or sell).
Price: The price set for this trade in your local currency (e.g. USD, GBP, or EUR).
Amount: The amount of cryptocurrency in your order.
Size: The quantity of cryptocurrency for this order.
% Filled: The quantity of this order that has been filled. Orders may be partially filled depending on market availability.
Total: The cash value of the crypto in local currency.
Fee: The total fee for this trade in your local currency.
Time: A timestamp for when this order was placed.
Status: The status of your trade.
There’s a lot there so give it a once-over and take your time feeling it out. Here’s a good overview of what an “Order Book” really is:
Coinbase is just one place to experience this and Bitget, my favorite exchange (at the moment) is another one where you can trade without KYC or a VPN.
Pretty fucking cool, tbh.
They have all you need to buy, sell, and trade as well as future (option) contracts.
How to Read a Historical Bar Chart
Now it’s time to get into the nitty-gritty of reading a bar and historical price chart!
Again, Coinbase has a good high-level and I’ll add a few notes:
What you are reading are called “candlesticks” and “candlestick charts” — there are many ways to represent them in a variety of different modalities. Again, another opportunity for creative decision-making and creative choice when it comes to trading!
Here’s an example of a chart, as you may already know:
Each and every candlestick gives you a snapshot of market price movement and whether it goes up (negative) or whether it went down (positive) and how fast and/or slow these movements might be.
You get a different picture based on the time frame (tf) that you set, ranging from one minute to one day. Usually, “day traders” are using faster or smaller time frames while "swing traders” or “value traders” will use slower, larger time frames like week or month.
Each candle is made up of a body and a wick. The body of the candle tells you what the open and close prices were during the candle’s time frame.
Green candles show prices going up, so the open is at the bottom of the body and the close is at the top. Red candles show prices declining, so the open is at the top of the body and the close is at the bottom.
The lines stretching from the top and bottom of the body are the wicks. These represent the highest and lowest prices the asset hit during the trading frame.
Relative Strength Index (RSI)
One of the most common charting indicators in a traders’ toolbox is the Relative Strength Index, or RSI. The RSI measures the strength of an asset’s upward and downward price movement over a period of time.
At the top of the screen is a candlestick chart showing the range of daily BTC prices over the course of 2021. You can choose a variety of price visualizations, timeframes, and charting indicators you want to see via the fields in the top right of the price chart.
If you choose the Relative Strength Index, the blue RSI line chart appears below the candlestick price chart. As you can see, the blue RSI line oscillates between a value of 0 and 100. It’s calculated by dividing an asset’s average gains by its average losses over a selected timeframe.
In the example above, the range is set to 10 days — so we’re seeing BTC’s relative strength as calculated by dividing the average gains by the average losses over the past 10 days.
With this formula, the RSI will always be a number between 0 and 100. If that sounds complicated, don’t worry — the chart does the calculations for you. The main thing many traders look for is when the RSI jumps above 70 or below 30.
A RSI higher than 70 is often thought to signal that an asset might be overbought — and can indicate that the price’s upward momentum might be slowing. And an RSI under 30 is often thought to signal that an asset might be oversold and its downward momentum might be slowing.
It’s important to know that overbought doesn’t necessarily mean it’s time to sell and oversold doesn't necessarily mean it's time to buy. All it means is that according to this one index, BTC’s momentum up or down might be slowing — and might even be due for a reversal.
Remember that advanced traders rarely ever rely on one indicator. They typically combine multiple indicators in their analysis — including moving average indicators. So let’s look at those next.
Simple Moving Average (SMA)
The Simple Moving Average indicator (commonly referred to as SMA) shows you the average price of an asset over a period of time — which can help you understand an asset's overall price movement.
If the SMA is set to 50 days, the first point on the graph will be an average of the prices from each of the last 50 days. Many traders, when seeing this upward trend, will anticipate further inclination and upward momentum. And when it goes below the line this is more of a bearish sentiment and momentum, leading many to sell or to short the asset through options.
Personally, I make more money shorting bitcoin than longing her and I’m not entirely sure why that is but right now it is definitely a season of bearish sentiment (as of May, 2022).
Exponential Moving Average (EMA)
An alternative to the Simple Moving Average is the Exponential Moving Average (EMA), which is usually better for identifying short-term trends. Like the SMA, the EMA shows you the average price of an asset over a period of days — but the EMA puts more weight on the most recent days.
This means the EMA will both respond more quickly to new price movements and fluctuate more than the SMA — which is why the EMA may be better suited to quickly identifying a new shift in price. In the event of a significant price reversal, the EMA will slope sharply upward or downward more quickly than the SMA would.
Like the SMA the same philosophies apply. The EMA is something I use for every single oscillator in my toolkit because I care much more about recent price (action) than historical price action. But that’s because I’m a day trader and will put multiple orders in through-out any given day.
To each his own!
Moving Average Convergence Divergence (MACD)
The Moving Average Convergence Divergence (or MACD) indicator is calculated by subtracting the 26-day EMA from the 12-day EMA.
The most important thing to remember is that the MACD line appears in relation to another line called the signal line. The signal line is the 9-day EMA, which is a useful baseline for comparison, because it reacts more slowly to price changes. The red and green graph that looks sort of like a mountain range is called the MACD histogram — more on that in a moment.
By watching how the MACD line moves in relation to the signal line, you can get a sense about the direction and strength of price movements. The “convergence” and “divergence” in the MACD’s name gives you a clue about what to look for: Moments when the MACD moves closer to or further away from the signal line.
When the MACD line crosses the signal line moving down, it could signal a bearish trend.
When the MACD crosses the signal line moving up, it might signal a bullish trend.
The bigger the gap between the two lines, the stronger the signal.
This is where the Histogram is most useful. Histograms measure the strength of the signal — by showing the distance between the MACD and signal line.
Remember that none of these things are perfect and if everyone is using them then you can be sure that folks will try to “play” these systems against you. That is why you must spend time learning these techniques in-concert with other trade signals and data to boost the confidence of your trades and the profits that you’ll make.
Find the right tools that work for you and you alone.
Finally, let’s look visually how all this comes together via a “Depth Chart”:
A depth chart is a visual representation of the information in the order book. Learning to read depth charts is a useful skill, because they’re an excellent tool for getting a quick sense of what’s happening in a market.
When people talk about “depth,” they’re referring to the supply of an asset — the total amount available to buy and sell at each price point. In general, the more buy and sell limit orders there are for a given asset across prices, the “deeper” the market is considered to be.
You can think of the depth chart as the order book, but flipped on its side. On the x-axis, you’ll see price points, increasing from left to right. On the y-axis, you'll find the total amount of, say, bitcoin available to buy or sell, increasing from bottom to top.
Just like the order book, the depth chart has a buy side and sell side. The green bid line shows the total value of the bids, or buy orders. And the red ask line shows the total value of the asks, or sell orders. In the middle, you’ll see the current mid-market price, along with the spread — the gap between the highest bid and lowest ask.
Experienced traders look for familiar patterns in these charts, and use them to make educated guesses about where the market might move next. For example, steep cliff-like patterns are known as walls. On the buy side, they’re called buy walls, and on the sell side, they’re called sell walls.
Walls can indicate that a lot of people want to buy or sell at a specific price, and they can act like literal barriers to price movement. Buy walls can mean that an asset has support at a given price — a very large buy order, for example, or lots of people looking to buy can keep prices from going down. And sell walls can show resistance at that price — a large sell order or lots of people looking to sell could block prices from going up.
Like any chart or indicator, the depth chart provides one of many perspectives for analyzing crypto markets, forming an opinion on where prices are headed next, and deciding the price of your next trade.
Good luck and that’s it! You should have a good overview of what “all of this is” and if this is of any interest then feel free to join our Community Discord and if you want to take your trading to the next level and get some personalized 1-on-1 coaching via a Paid Subscription then I’d love that too!
I share how I put together every single trade, for instance! I hope I can help you take your game to the next level: