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Cryptocurrency technical analysis 201: Trend lines, channels and moving averages

2021.09.28 Hunain Naseer

A guide to cryptocurrency technical analysis using trend lines, price channels and moving averages

Trading is primarily about buying an asset — relatively undervalued at the time — and selling it for profit at a higher price. In order to assess whether or not an asset is undervalued, traders perform various types of analyses, broadly categorized into fundamental and technical analysis.

While fundamental analyses rely on a variety of information sources, ranging from on-chain metrics to news, correlations between markets and monetary policies, technical analyses focus purely on historic and present price action in an attempt to predict future market behavior.

In this guide, we focus on technical analysis, or TA, and present a more detailed overview of intermediate strategies and concepts that build on our introductory guide to technical analysis. It is assumed that readers are familiar with the basics covered in the introductory guide, such as candlesticks, support and resistance levels, etc.

Before we begin, however, it’s important to mention that technical analysis largely revolves around finding patterns across price charts and denoting them visually to compare with historic movements and trends. There are varying schools of thought when it comes to technical analysis and professional traders often take multiple sources of information into account when executing their strategies.

That being said, the concepts we discuss below are relevant to nearly all types of technical analysis-based strategies and should be useful when readers explore more advanced concepts as they progress.

For the purposes of this guide, we will be using TradingView, one of the leading market tracking and charting tools.

Trading trend lines

Trend lines are among the simplest yet most powerful tools when it comes to technical analysis. In our introductory guide to TA we discussed support and resistance levels that are horizontal. Trend lines are similar, except that they are sloping upward or downward and are useful for identifying market trends.

On the chart below, we can see two trend lines, one sloping upward (yellow) and the other sloping downward (pink), tracing a trend over time, from left to right.

Note: An upward sloping trend line is drawn below the price, while a downward sloping trend line is drawn above the price.

OKEx BTC/USDT 4h chart with two trend lines (upward and downward sloping). Source: TradingView

How to draw trend lines?

Drawing trend lines is fairly simple. When using TradingView, you can select the Trend Line tool via the panel on the left and choose from a variety of options, ranging from a basic trend line to an extended line and more.

Using the Trend Line tool on TradingView. Source: TradingView

Once you’ve selected the Trend Line tool, you take a price swing (a point where the price has set a low or high) as the starting point for the line and connect it to another swing low or high before extending it further. While two points suffice for a trend line, one should try and connect as many existing points as possible.

Note: The two points used to draw a trend line should ideally be at some distance (10–20 candles) from each other, depending on the chart’s time frame.  

A trendline drawn on the OKEx BTC/USDT 4h chart using two points. Source: TradingView

On the chart above, we see an example of a trend line drawn using two swing lows. We also see how the trend line acts as a support for future price action (the third point of contact on the trend line).

In the next section, we discuss how trend lines are read, interpreted and used for trading.

How to use trend lines for trading?

Trend lines are arguably the most versatile tools in any trader’s system. They can be used and interpreted in a variety of ways and can remain valid for long periods of time.

In general, trend lines are useful for identifying:

  1. The current price trend
  2. Changes in the current trend over time
  3. Potential support/resistance levels
  4. Potential trend reversals (from bullish to bearish and vice versa)
OKEx BTC/USDT 4h chart with horizontal levels and an upward sloping trend line. Source: TradingView

The chart above shows two horizontal levels and an upward sloping trend line. Looking at it, the first thing we can identify is that BTC had been in an uptrend (bullish) between early February and mid-April, as the price respected the trend line throughout that period.

We also note how successful tests of the trend line (green check marks) and the subsequent bounces resulted in the price making higher highs. This means any long entries taken after successful bounces were highly profitable.

However, near the end of April, we saw that the price dropped sharply and went below the trend line (marked by the first red X). This move marked an obvious shift in the trend, but a major trend reversal (from bullish to bearish) sign came when the price attempted to reclaim our trend line and was rejected (marked by the second red X).

Following that rejection, we could consider BTC to have fallen into a bearish trend and would need to draw a downward sloping trend line to track that.

Multiple trend lines drawn on the OKEx BTC/USDT 1d chart. Source: TradingView

Let’s take a look at another example — but this time, we’re working with a higher time frame (daily candlestick) and have trend lines covering months of price action.

Once again, we can see that BTC remained in an uptrend as long as it respected the longest upward sloping trend line. However, between December 2020 and April 2021, we see that the uptrend intensified, and we had to draw a supplementary trend line (blue upward sloping) to monitor the steeper climb.

After BTC fell below the blue upward sloping trend line, it tried to reclaim it and was rejected (just like we discussed in the prior example). This was the start of its downtrend, which we then tracked by drawing the blue downward sloping trend line.

While we can see that the price did not strictly follow our trend lines, they remained relevant each time the price interacted with them. All these interactions are highlighted on the chart above with blue check marks.

It is clear that these trend lines either acted as support levels or resistance levels each time the price tested them. In fact, the longest blue upward sloping trend line we drew from mid-October 2020 is still acting as a resistance level for BTC in September 2021, preventing it from crossing 50,000 USDT. A successful breach of this trend line followed by a bounce from it would be a major bullish sign for BTC.

In all these examples, however, we saw that trend lines gave us one part of the picture, either providing support from below or acting as resistance from above. In the next section, we discuss channels, which cover both sides.

Trading price channels

A price channel is essentially made up of two parallel trend lines marking a range in which the price oscillates while moving in a particular direction. Just like trend lines are upward or downward sloping, channels are ascending, descending or horizontal.

Ascending channels denote bullish price action, descending channels show bearish movement and horizontal channels show indecisive, range-bound price action.

A price channel drawn with two parallel trend lines on the OKEx BTC/USDT 1h chart. Source: TradingView

How to draw price channels?

As mentioned earlier, price channels are made up of two parallel trend lines. You can either draw them with two trend lines (as shown above) or use the dedicated Parallel Channel tool on TradingView (shown below).

Using the Parallel Channel tool on TradingView. Source: TradingView

After selecting the tool, you will need to choose three points on the chart to draw a price channel. The first will be your starting point, followed by the second connecting price swing (making a trend line) and the third will be a point above or below that line, corresponding with the top or bottom of the price action in that range.

A price channel drawn using the Parallel Channel tool on TradingView. Source: TradingView

The resulting channel highlights a price range with both highs and lows. In the next section, we go over the basics of trading using price channels.

How to trade using price channels?

The way price channels are used is very similar to how trend lines are interpreted. The bottom line of the channel denotes possible points of support while the top line represents resistance levels.

Typically, the price oscillates within the channel, and any touches on the bottom are opportunities for long positions, while failed tests of the top are shorting opportunities.

A price channel on the OKEx BTC/USDT 4h chart with support and resistance tests. Source: TradingView

As shown on the chart above, BTC’s price respects the descending channel for nearly a month and tests the bottom and top ranges twice. 

Another thing to note is how when the price breaks out of the channel (just before the farthest right green check mark), it returns for a test of the top range and bounces from there upon finding support (green check mark). Such a breakout can be used to open a long position while the opposite of this (i.e., the price breaking down from the channel and getting rejected at retest) is a good place to sell.

A price channel, much like trend lines, can remain valid for long periods of time, even if the price starts trading outside it.

Another price channel on the OKEx BTC/USDT 4h chart. Source: TradingView

The chart above shows a nearly month-long channel that provides numerous trading opportunities. Each time the price respects the channel, there is either a buy or a sell opportunity. Even after breaking out of the channel, the price can retest it and, at times, re-enter it.

All of these interactions (marked on the chart above with check marks and Xs) present trading opportunities even without the use of other charting tools and indicators, showing the versatility of price channels.

Trading moving averages

A moving average is another extremely versatile yet simple tool that is widely used for technical analysis across all types of markets. A moving average essentially takes any specified number (you can decide) of price candles into account and displays their average. Since the average keeps changing with each new candle, it is said to be “moving.”

For instance, using a 20-period moving average, or 20 MA, means that you want the average price calculated based on the twenty latest candles for whichever time frame you have selected. If you’re using the hourly time frame, the 20-period moving average will take the latest twenty hours into consideration. On the daily time frame, it takes the latest twenty days into account, and so on.

A 20-period moving average drawn on a 4h OKEx BTC/USDT chart. Source: TradingView

How to display moving averages for trading?

Unlike the trend lines and channels, moving averages are not drawn but calculated. When using TradingView, the platform automatically does it for you if you select the Moving Average indicator from the top bar.

Using the Moving Average indicator on TradingView. Source: TradingView

Once you’ve opened the “Indicators” window you can type “moving average” in the search bar and select Moving Average from the list of indicators.

Note: You can see various types of moving average indicators on the list. For our purposes, we select the simple “Moving Average” as opposed to the “Moving Average Exponential” or any other variants.

After its selection, a moving average will automatically be shown on the chart. However, the default length (period) is often 9 and you can change it via the settings menu as shown in the screenshot below.

Using the Moving Average settings to change its length (period) value to 20. Source: TradingView

You can use the settings menu to enter any value for a moving average’s length. There are no set values, but the most commonly used are 20, 30, 50, 100 and 200. Even multiple moving averages can be set up on the same chart for comparison and observing crossovers (discussed in the next section).

OKEx BTC/USDT chart with three moving averages (20, 50 and 100). Source: TradingView

Note: When using multiple moving averages, it is recommended that you use the settings menu to switch their colors for easier differentiation.

How to trade using moving averages?

Moving averages are effective for getting a quick overview of the market trend. Since they are average values, they disregard random price movements and present a clearer price trajectory.

In general, moving averages are useful for identifying:

  1. Price trends
  2. Support and resistance levels
  3. Trend reversals

20 MA on the OKEx BTC/USDT chart. Source: TradingView

The chart above just shows the 20 MA on the BTC/USDT chart. At a quick glance, we can note how the moving average going up or down shows a change in the market trend. The steepness of the moving average also shows the magnitude of the trend shift.

We can also observe how the exaggerated peaks and troughs in the price tend to return to the moving average over time (shown on the chart below). This means we can use a moving average to filter out extreme moves that are likely to correct with time. 

OKEx BTC/USDT chart with arrows showing how extreme price moves correct toward the MA. Source: TradingView

The shorter a moving average, the more reactive it is to recent price changes. For example, a 20 MA will be more reactive than a 50 MA, which will be more reactive than a 100 MA. However, the use of multiple moving averages is helpful in identifying support and resistance levels as well as trend reversals.

100 MA on the OKEx BTC/USDT chart with marks showing support and resistance levels. Source: TradingView

The 100-period moving average on the chart above is clearly less reactive to recent price changes because it considers the last 100 candles. However, given its smoothness, it also makes it easy to identify support and resistance levels (as shown by check marks and Xs).

Trend reversals, on the other hand, are identified using at least two moving averages, where one is shorter than the other.

Two moving averages used to identify trend reversals on the OKEx BTC/USDT chart. Source: TradingView

In the example above, we are using two moving averages, 20 MA and 50 MA, to identify trend reversals and trading opportunities. The principle here is that every time a shorter MA (20) crosses and rises above a longer MA (50), the price is starting to trend upward. On the other hand, every time a shorter MA drops below a longer MA, the price declines.

On the chart above, the 20 MA is blue and the 50 MA is purple. Each time the blue (20 MA) crosses the purple (50 MA) from below (green checkmarks), the price is trending upward. When the blue crosses the purple from above (red X’s), the price trends downward.

This works for all types of moving averages, as long as one is shorter than the other. For instance, using 50 MA and 100 MA will also give us similar trend reversal crosses.

Note: A shorter MA crossing a longer one from below is also called a golden cross (bullish), while its crossing from above is known as a death cross (bearish).

While we primarily discussed the simple moving average, another popular type among cryptocurrency traders is the exponential moving average (shown in one of the screenshots above). The only difference between the two is that the exponential moving average gives more weight to recent price actions, making it more reactive compared to a simple moving average. Ultimately, the choice between these two types of moving averages depends on a trader’s personal preference and trading style.

Finally, the three tools we discussed in this guide can all be used in conjunction with each other — and with other indicators, for even better results. However, new traders are advised to practice — try OKEx demo trading — and get familiar with these tools before using them to trade cryptocurrency.

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Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.



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