There's no denying that price action is a crucial tool in forex and stock analyses. But what about cryptocurrency? Does price action have a role in this market?
The cryptocurrency market has not been around for so long when compared to the more traditional markets such as commodities, forex, and stocks which have abundant historical data from which traders can draw information. And this historical data is crucial to the effectiveness of price action.
Price action refers to the behavior of the prices of a particular financial asset over a specific period which is plotted on a chart. Price action is at the core of technical analysis whether it is stocks, forex, bonds, commodities, or cryptocurrency.
Considering that Bitcoin, the first cryptocurrency, has only been around for about 13 years, the statistical modeling and strategy backtesting on cryptocurrencies are limited in significance. Since the data samples are small, the results derived are likely to be unreliable and misleading.
See Also: Bitcoin Price Action for Beginners
Why Price Action is Relevant for Crypto Analysis
Despite the lack of significant historical data on cryptocurrency, price action is still relevant in this market because the price action of a financial instrument remains one of the most important factors to consider when making trading decisions. This is because the price of an asset is still a reliable parameter for understanding what is happening with that asset, at least from a technical perspective.
While the crypto market is relatively new compared to the more traditional markets, traders participating in the market are not new to trading financial markets. This means the thought processes and behaviors will be similar and eventually, the various participants in the market will end up reacting to certain market conditions in the same way as in the more "established" markets.
Furthermore, the law of demand and supply that is prevalent in other markets also plays a major role in crypto; as the market continues to grow and provides more trading opportunities, it is expected to keep exhibiting price behaviors that are characteristically predominant in traditional markets. Therefore, traders will increasingly employ technical analysis price action techniques that are usually applied in traditional markets.
However, for price action traders to enjoy success in the crypto market, the price action strategies will have to be customized to specific cryptocurrencies, since each crypto asset tends to behave differently. Nevertheless, it remains a fact that combining the immense underlying strength of excellent price action strategy with sensible risk management has a very high probability of bringing success.
This is why crypto traders will employ price action in conjunction with chart analysis to identify trends, formations, and patterns in the market structure which enables them to create trade ideas. The reason price action is so crucial to technical analysis is that it uses past prices to try and predict future price movements or behaviors.
How to Utilize Price Action in Crypto
Crypto traders use price action depending on the analysis of the price action of particular crypto to generate profits. This allows them to identify trade setups to ensure that they endeavor to make the right trading decision. To fine-tune the process and increase the chances of being profitable, these traders can combine specific technical indicators with their price action analysis. This ensures that the trading signals generated are more reliable.
There are various charting tools and chart settings used for the analysis of price action. The most common ones include the bar chart, line chart, and the Japanese candlestick chart.
Candlestick patterns in particular are a crucial part of price action trading. They are simply reoccurring formations in price action which can be easily identified by traders and then used to create trade ideas that can be applied in the market. The idea behind using this form of trading is that these patterns tend to behave in similar ways, thus the trade ideas created using these patterns might have higher chances of profitability.