Trading Guides

 

Definitions

What is a cryptocurrency?

What is altcoin?

What is Blockchain?

What is mining?

What are Transaction Fees?

What is a wallet?

 

Technical Analysis

1. Chart Types

Line Charts

Bar Charts

Candlestick Charts

2. Trends

A Formal Definition

Trend Lengths

Trendlines

3. Support and Resistance.

Why Does This Happen?

Round Numbers

Role Reversal

Importance of Support and Resistance

 

 

4. Moving average.

Types of Moving Averages

Simple Moving Average

Linear Weighted Average

Exponential Moving Average

How to Use Moving Averages

 5. Indicators and Oscilators.

Accumulation/Distribution Line

Average Directional Index

Aroon

Aroon Oscillator

Moving Average Convergence/Divergence

Relative Strength Index

On-Balance Volume

Stochastic Oscillator

 

 

 

 

 


 

Definitions[1]

 

What is a cryptocurrency?

cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems.

The decentralized control of each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.

Bitcoin, first released as open-source software in 2009, is generally considered the first decentralized cryptocurrency. Since the release of bitcoin, over 4,000 altcoins (alternative variants of bitcoin, or other cryptocurrencies) have been created.

 

What is altcoin?

 

The term altcoin has various similar definitions. Stephanie Yang of The Wall Street Journal defined altcoins as "alternative digital currencies," while Paul Vigna, also of The Wall Street Journal, described altcoins as alternative versions of bitcoin. Aaron Hankins of the MarketWatch refers to any cryptocurrencies other than bitcoin as altcoins.

 

What is Blockchain?

The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data. By design, blockchains are inherently resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.

 

 

 

What is mining?

In cryptocurrency networks, mining is a validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network. The rate of generating hashes, which validate any transaction, has been increased by the use of specialized machines such as FPGAs and ASICs running complex hashing algorithms like SHA-256 and Scrypt.

 

What are Transaction Fees?

Transaction fees for cryptocurrency depend mainly on the supply of network capacity at the time, versus the demand from the currency holder for a faster transaction. The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest. Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time.

 

What is a wallet?

cryptocurrency wallet stores the public and private "keys" or "addresses" which can be used to receive or spend the cryptocurrency. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet.

 

 

Technical Analysis[2]

 

1. Chart Types:

Line Charts

Line charts are the most basic type of chart because it represents only the closing prices over a set period. The line is formed by connecting the closing prices for each period over the timeframe. While this type of chart doesn’t provide much insight into intraday price movements, many investors consider the closing price to be more important than the open, high, or low price within a given period. These charts also make it easier to spot trends since there’s less ‘noise’ happening compared to other chart types.

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Fig.1 Line Chart

Bar Charts

Bar charts expand upon the line chart by adding the open, high, low, and close – or the daily price range, in other words – to the mix. The chart is made up of a series of vertical lines that represent the price range for a given period with a horizontal dash on each side that represents the open and closing prices. The opening price is the horizontal dash on the left side of the horizontal line and the closing price is located on the right side of the line. If the opening price is lower than the closing price, the line is often shaded black to represent a rising period. The opposite is true for a falling period, which is represented by a red shade.

 

 

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Fig.2 Bar Chart

 

Candlestick Charts

Candlestick charts originated in Japan over 300 years ago, but have since become extremely popular among traders and investors. Like a bar chart, candlestick charts have a thin vertical line showing the price range for a given period that’s shaded different colors based on whether the stock ended higher or lower. The difference is a wider bar or rectangle that represents the difference between the opening and closing prices.

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Fig.3 Candlestick Chart

2. Trends

The idea of a trend is perhaps the most important concept in technical analysis. The meaning in finance isn’t all that different from the general definition of the term – a trend is really nothing more than the general direction in which a security or market is headed.

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Fig. 4   5-Year S&P 500 SPDR (SPY) Chart

It isn’t difficult to see the trend higher in Fig. 4. However, it’s not always that easy, as demonstrated in Fig. 5 below.

 

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Fig. 5   2-Month S&P 500 (SPY) Chart – Source: StockCharts.com

There are a lot of ups and downs in this chart, but there isn’t a clear definition of which direction the stock is headed.

A Formal Definition

Trends aren’t always easy to spot because prices almost never move in straight lines. Rather, prices tend to move in a series of highs and lows over time. In technical analysis, it is the overall direction of these highs and lows that constitute a trend. An uptrend is classified as a series of higher highs and higher lows, while a downtrend consists of lower lows and lower highs.

 

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Fig. 6    Trend Diagram – Source: Investopedia.com

 

Fig. 6 is an example of an uptrend. Each of the high points of the trend – 2, 4, and 6 – are higher than the previous high, while each of the low points of the trend – 3 and 5 – are higher than the previous low. For the uptrend to continue, the next low point must be above 5 and the next high point must be above 6, else the trend will be deemed a reversal. 

Types of Trends

There are three types of trends:

1.      Uptrend

2.      Downtrend

3.      Sideways / Horizontal Trends

Sideways or horizontal trends occur when there is little movement up or down in the peaks and troughs of a trend. If you want to get technical, you might even say that a sideways trend is actually the absence of any well-defined trend in either direction

 

 

 

Trend Lengths

In addition to their direction, trends can be classified in terms of their length. Most traders consider trends short-term, intermediate-term, or long-term. Long-term trends occur over a timeframe of longer than one year; intermediate-term trends occur over one to three months; and, short-term trends occur over less than one month.

Trends are also embedded within one another. For example, Fig. 4 above is an example of a long-term five-year trend and Fig. 5  is a two-month subset of that trend. In other words, long-term trends consist of a series of intermediate-term trends which consist of a series of short-term trends. Long-term uptrends may have several short- and intermediate-term downtrends along the way.

Here’s an example of how these trend lengths look in practice:

 

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Fig. 7   Trend Comparisons – Source: StockCharts.com

 

When analysing a trend, it’s important that the chart is constructed to best reflect the type of trend being analysed. Daily or weekly charts are best for identifying long-term trends, while minute or hourly charts are best for short-term trends. It is also important to remember that long-term trends carry greater weight than short-term trends. For instance, a one-month trend isn’t as significant as a five-year trend.

Trendlines

A trendline is a simple charting technique whereby a line is added to a chart to represent the trend in a market or stock. Drawing a trendline is as simple as drawing a straight line that connects lower lows or higher highs to show the general trend direction. These lines are used to cut through the noise and show where the price is headed, as well as identify areas of support and resistance. Support levels are where the price rebounds higher multiple times, whereas resistance levels are where prices rebound lower multiple times. The strength of support and resistance levels are determined by the number of rebounds from the trendline.

 

3. Support and Resistance.

Support and resistance are the next major concept after understanding the concept of a trend. You’ll often hear technical analysts talk about the ongoing battle between bulls and bears, or the struggle between buyers (demand) and sellers (supply). The proverbial ‘battle lines’ can be defined as the support and resistance levels where the most trading occurs. Support levels are where demand is perceived to be strong enough to prevent the price from falling further, while resistance levels are prices where selling is thought to be strong enough to prevent prices from rising higher.

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Fig. 8   Price Channel – Source: StockCharts.com

As you can see in Fig. 8, the price channel from the previous section, the bottom trendline represents a key support level while the upper trendline represents a key resistance level. The arrows near the top and bottom trendlines show the levels where the price seldom surpassed until it broke out higher. After the breakout, the upper trendline transitioned from a resistance level to a support level for the new trend.

Why Does This Happen?

Support and resistance levels are psychologically-important levels where a lot of buyers and/or sellers are willing to trade the stock. When the trendlines are broken, the market psychology shifts and new levels of support and resistance are established.

Round Numbers

Round numbers tend to be important support and resistance levels due to their psychological importance. For instance, many investors watch the Dow Jones Industrial Average’s 20,000 or other levels as key milestones. Traders watch round numbers like 10, 20, 35, 50, 100, and 1,000 since they often represent important turning points where traders will make buy or sell decisions.

Buyers will often purchase large amounts of stock once the price starts to fall toward a major round number, which makes it more difficult for shares to fall below that level. On the other hand, sellers start to sell off a stock as it moves toward a round number peak, making it difficult to move past the upper level. This increased buying and selling pressure makes them important points of support and resistance and, in many cases, major psychological points as well.

Role Reversal

A trendline doesn’t cease to be an important area of support or resistance when it’s broken; rather, it’s role is simply reversed. If a price breaks out from a resistance trendline, the trendline becomes a support level moving forward. The only catch is that the reversal needs to be a true reversal rather than a false breakout or breakdown, which generally means that it’s accompanied by significant volume and a price spike.

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Fig. 9   Support and Resistance – Source: StockCharts.com

For example, Fig. 9 shows a situation where a resistance level becomes a support level before returning to a resistance level after a series of breakouts. The trendline’s strength also becomes increasingly greater over time given the number of ‘touches’ and rebounds. Many traders underestimate the importance of these role reversals and fail to realize how frequently they occur – even in popular stocks like Wal-Mart Stores Inc. (WMT) seen above.

In almost every case, a stock will have both a support and resistance level and will trade in between them before breaking out higher or lower. The breakout will transform the trendline that was broken into the opposite role and a new price channel will be established.

Importance of Support and Resistance

Support and resistance levels are a critical part of trend analysis because it can be used to make specific trading decisions and identify when a trend is about to reverse. For example, a trader might identify an upcoming support level and decide to start buying the stock as it approaches knowing that it will likely rebound higher. These levels both test and confirm trends and should be closely monitored by anyone using technical analysis. As long as the price remains between these two levels, the trend is likely to continue in the prevailing direction.

However, a break beyond support or resistance does not always indicate a reversal. For example, a breakout higher may be the start of a faster bullish trend and vice versa for a breakdown below trendline support. There are also instance of ‘false breakouts’ when a price may breakout higher on low volume and then fall back into a price channel.

Traders should be aware of support and resistance levels and avoid placing orders at these major points since they’re usually characterized by a lot of volatility. If you feel confident about making a trade near these levels, it’s important to avoid placing orders directly at the level since they are rarely reached. This is because the price never actually reaches the whole number, but rather, flirts with the levels before rebounding. Traders may also place stops or short selling orders around these levels to capitalize on a breakdown or breakout.

 

4. Moving average.

Types of Moving Averages

The three most popular types of moving averages are Simple Moving Averages (SMA), Exponential Moving Averages (EMA), and Linear Weighted Moving Averages. While the calculation of these moving averages differs, they are used in the same way to help assist traders in identifying short-, medium-, and long-term price trends.

 

Simple Moving Average

The most common type of moving average is the simple moving average, which simply takes the sum of all of the past closing prices over a time period and divides the result by the total number of prices used in the calculation. For example, a 10-day simple moving average takes the last ten closing prices and divides them by ten.

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Fig. 10 Simple Moving Averages – Source: StockCharts.com

Fig. 10 shows a stock chart with both a 50-day and 200-day moving average. The 50-day moving average is more responsive to price changes than the 200-day moving. In general, traders can increase the responsiveness of a moving average by decreasing the period and smooth out movements by increasing the period.

Critics of the simple moving average see limited value because each point in the data series has the same impact on the result regardless of when it occurred in the sequence. For example, a price jump 199 days ago has just as much of an impact on a 200-day moving average as one day ago. These criticisms sparked traders to identify other types of moving averages designed to solve these problems and create a more accurate measure.

Linear Weighted Average

The linear weighted average is the least common moving average, which takes the sum of all closing prices, multiplies them by the position of the data point, and divides by the number of periods. For example, a five-day linear weighted average will take the current closing price and multiple it by five, yesterday’s closing price and multiple it by four, and so forth, and then divide the total by five. While this helps resolve the problem with the simple moving average, most traders have turned to the next type of moving average as the best option.

Exponential Moving Average

The exponential moving average leverages a more complex calculation to smooth data and place a higher weight on more recent data points. While the calculation is beyond the scope of this tutorial, traders should remember that the EMA is more responsive to new information relative to the simple moving average. This makes it the moving average of choice for many technical traders.

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Fig. 11 EMA v. SMA Moving Averages – Source: StockCharts.com

Fig. 11 shows how the EMA (red line) reacts more quickly than the SMA (blue line) when sudden price movements occur. For example, the breakout in late-November caused the EMA to move higher more quickly than the SMA even though both are measuring the same 50-day period. The difference may seem slight, but it can dramatically affect returns.

How to Use Moving Averages

Moving averages are helpful for identifying current trends and support or resistance levels, as well as generating actual trading signals.

The slope of the moving average can be used as a gauge of trend strength. In fact, many momentum based indicators (as we will see in the next section) look at the slope of the moving average to determine the strength of a trend. For example, Figure 16 (above) has moving average slopes that clearly show a moderate sideways period between September and October and a significant upswing between December and April.

Many technical analysts often look at multiple moving averages when forming their view of long-term trends. When a short-term moving average is above a long-term moving average, that means that the trend is higher or bullish, and vice versa for short-term moving averages below long-term moving averages.

Moving averages can also be used to identify trend reversals in several ways:

1.      Price Crossover. The price crossing over the moving average can be a powerful sign of a trend reversal, while the price crossing above the moving average indicates a bullish breakout ahead. Often, traders will use a long-term moving average to measure these crossovers since the price frequently interacts with shorter-term moving averages, which creates too much noise for practical use.

2.      MA Crossover. Short-term moving averages crossing below long-term moving averages is often the sign of a bearish reversal, while a short-term moving average crossover above a long-term moving average could precede a breakout higher. Longer distances between the moving averages suggest longer term reversals as well. For instance, a 50-day moving average crossover above a 200-day moving average is a stronger signal than a 10-day moving average crossover above a 20-day moving average.

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Fig. 12  Crossover and Support Illustrations – Source: StockCharts.com

 

And finally, moving averages can be used to identify areas of support and resistance. Long-term moving averages, such as the 200-day moving average, are closely watched areas of support and resistance for stocks. A move through a major moving average is often used as a sign from technical traders that a trend is reversing.

 5. Indicators and Oscilators.

Indicators represent a statistical approach to technical analysis as opposed to a subjective approach. By looking at money flow, trends, volatility, and momentum, they provide a secondary measure to actual price movements and help traders confirm the quality of chart patterns or form their own buy or sell signals.

There are two primary types of indicators:

1.      Leading Indicators. Leading indicators precede price movements and try to predict the future. These indicators are most helpful during periods of sideways or non-trending price movements since they can help identify breakouts or breakdowns.

2.      Lagging Indicators. Lagging indicators follow price movements and act as a confirmation tool. These indicators are most useful during trending periods where they can be used to confirm that a trend is still in placing or if it’s weakening.

Indicators can be further divided into two categories based on how they’re built:

1.      Oscillator. Oscillators are the most common type of technical indicator and are generally bound within a range. For example, an oscillator may have a low of 0 and a high of 100 where zero represents oversold conditions and 100 represents overbought conditions.

2.      Non-bounded. Non-bounded indicators are less common, but still help form buy and sell signals as well as show strength or weakness in trends. However, they accomplish this in many ways without the use of a set range.

Indicators generate buy and sell signals through crossovers or divergence. Crossovers are the most popular technique whereby the price moves through a moving average or when two moving averages crossover. Divergence occurs when the direction of a price trend and the direction of an indicator are moving in opposite directions, which tends to suggest that the direction of the price trend is weakening.

Indicators can be extremely helpful in identifying momentum, trends, volatility, and other aspects of a security. But, it’s important to note that indicators work best when combined with other forms of technical analysis to maximize the odds of success.

Accumulation/Distribution Line

The accumulation/distribution line is one of the most popular volume indicators that measures money flow in a security. The indicator attempts to measure the ratio of buying and selling by comparing the price movement of a period to the volume for that period.

The calculation is:

Acc/Dist = ((Close – Low) – (High – Close)) / (High – Low) * Period’s Volume

Traders use the indicator to gain insight into the amount of buying compared to selling in a given security. If the accumulation/distribution line is trending upward, it’s a sign that there is more buying than selling and vice versa.

Average Directional Index

The average directional index (ADX) is a trend indicator that’s used to measure the strength of the current trend – although it has limited use identifying the direction of the current trend.

The ADX is comprised of the positive directional indicator (+DI) and the negative directional indicator(-DI). The +DI measures the strength of the uptrend while the –DI measures the strength of the downtrend. These two measures are also plotted along with the ADX line that measures on a scale between zero and 100.

Traders generally look for readings below 20 that signal a weak trend or readings above 40 that signal a strong trend.

Aroon

The Aroon indicator measures whether a security is trending higher or lower as well as the magnitude of that trend. In addition, the indicator can be used to predict when a trend is just beginning to help traders capitalize on the movement.

The indicator is comprised of the ‘Aroon Up’ blue line and the ‘Aroon Down’ red line. The Aroon Up line measures the amount of time that has passed since the highest price during the time period. The Aroon Down line, on the other hand, measures the time that has passed since the lowest price during the time period. The number of periods used in the calculation depends on the timeframe that the trader wants to analyze.

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Fig. 13  Aroon Indicator – Source: StockCharts.com

 

Aroon Oscillator

The Aroon oscillator expands upon the Aroon indicator by plotting the difference between the up and down lines by subtracting them. This new line is then plotted between the range of -100 and 100 with the centerline being the major signal line that determines the trend. The distance from the centerline is used to determine the strength of the trend higher or lower. A trend reversal occurs when the oscillator crosses above or below the centerline, while divergence between the price and oscillator can be used to foreshadow a reversal.

The Aroon lines and oscillator are simple concepts to understand, but they yield powerful information about trends that can be invaluable in a traders’ arsenal. 

Moving Average Convergence/Divergence

The moving average convergence-divergence (MACD) is one of the most powerful and well-known indicators in technical analysis. The indicator is comprised of two exponential moving averages that help measure momentum in a security. The MACD is simply the difference between these two moving averages plotted against a centerline, where the centerline is the point at which the two moving averages are equal. The exponential moving average of the MACD line itself is also plotted on the chart.

The MACD compares short-term momentum and long-term momentum to signal the current direction of momentum rather than the direction of price. Traders can think of it as the ‘derivative’ of price-based moving averages.

When the MACD is positive, it signals that the short-term moving average is above the long-term moving average and the security’s momentum is upward. The opposite is true when the MACD is negative, which signals that the short-term moving average is below the longterm average and suggests downward momentum.

The most common EMAs used in the calculation are the 26-day and 12-day averages, while the signal line is often created using a 9-day MEA of the average of the MACD values. These values can be adjusted by traders, but it’s worth noting that these values are the most widely followed.

The MACD histogram is also plotted along the centreline using bars. Each bar represents the difference between the MACD and signal line, or in most cases, the 9-day exponential moving average. Higher bars in either direction represent greater momentum behind the price movement.

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Fig. 14   MACD Crossovers – Source: StockCharts.com

Fig. 14 shows some of the major MACD crossovers that suggest a change in price momentum over time.

Relative Strength Index

The relative strength index (RSI) is another well-known momentum indicators that’s widely used in technical analysis. The indicator is commonly used to identify overbought and oversold conditions in a security with a range between 0 (oversold) and 100 (overbought).

A reading above 70 suggests that a security is overbought, while a reading below 30 suggests that a security is oversold. Often times, the indicator is used by traders to determine if the price has been pushed to unreasonably higher or low levels after a snap reaction to news.

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Fig. 15  RSI Overbought and Oversold Points – Source: StockCharts.com

The standard RSI calculation uses 14 trading days as a basis, although this figure can be adjusted based on a trader’s individual needs.

On-Balance Volume

The On-Balance Volume (OBV) indicator is a simple volume-based indicator that’s used to understand changes in volume over time.

The OBV indicator is calculated by taking the total volume for a trading period and assigning it a positive or negative value depending on whether the price increased or decreased over the period. When the price increased, the volume is assigned a positive value and a negative value is assigned when the price decreased. The positive or negative volume total for the period is then added up to a total that is accumulated from the start of the measure.

Traders often look at the trend in OBV over time rather than the indicator’s specific value at any given point in time.

Stochastic Oscillator

The stochastic oscillator is one of the most recognized momentum indicators in technical analysis. The indicator works on the premise that prices should be closing near the highs of a trading range during upswings and toward the lower end of a trading range during downswings.

The stochastic oscillator is plotted within a range of zero and 100. Readings above 80 are considered overbought while readings below 20 are considered oversold. The oscillator has two lines, the %K and %D, where the former measures momentum and the latter measures the moving average of the former. The %D line is more important of the two indicators and tends to produce better trading signals.

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Fig.16  Stochastic Overbought Signals – Source: StockCharts.com

The stochastic oscillator generally uses the past 14 trading days in its calculations, but as with any indicator, can be adjusted by traders to meet their needs.

 

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