Does Technical Analysis Work on Cryptocurrencies? What About Bitcoin?


Cryptocurrency trading is still very young, with the first Bitcoin trade in 2010. During that short trading history, there have been some incredible price swings. So, you may well wonder if technical analysis works on cryptocurrencies, including Bitcoin.

Technical analysis does work on cryptocurrencies, including Bitcoin. But the choice of strategies and their parameters can impact results, and what works on one cryptocurrency may not work on another. Further, even successful strategies may perform poorly under changed market conditions.

Of course, it’s easy to say technical analysis works on cryptocurrencies. But is there anything to back this up? As it happens, there is, as we’ll explain below. 

IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!

What Is Technical Analysis?

Let’s start with a quick summary of what technical analysis means.

Technical analysis involves examining historical pricing information. The purpose is to use that price history to predict future price movement.

Traders often use charts to visualize this information, looking for price patterns, channels, support, and resistance.

Alongside price information, traders also use various technical indicators. Such indicators include moving averages, relative strength, and MACD, but there are many more. 

Not much in life is certain, and technical analysis is no different. Essentially, it’s a predictive tool to help identify possible price movements. So, you can only glean from it what might happen, not what will happen.

What Are Cryptocurrencies?

Cryptocurrencies are a medium of exchange, and you can use them to buy goods and services, much like money. But unlike money, they’re entirely digital, so they don’t exist in physical form.

Further, there’s no centralized issuer or manager. So, no central bank or government controls cryptocurrencies. This decentralization is one reason cryptocurrencies came into being.

Why crypto? That’s because cryptocurrencies use cryptography to secure and verify transactions. It’s all done using a disparate peer-to-peer network of computers. These computers also store the digital ledger recording transactions. It’s this ledger that we call the blockchain.

No doubt, you would have heard of Bitcoin. It was the first cryptocurrency, but there are many others, including Ethereum, Litecoin, and Ripple.

If you’ve used cryptocurrencies to pay for something, welcome to the minority. They’re not yet a popular payment method. 

However, there are signs of them starting to enter the mainstream. PayPal is allowing some cryptocurrencies to be a funding source for PayPal accounts.

Need an easy visual explanation of cryptocurrencies? The following video will help:

Armed with an understanding of these basics, let’s get down to the issue at hand.

How Do We Know If Technical Analysis Works On Cryptocurrencies?

So, we’ve said above, technical analysis does work on cryptocurrencies. Doubtless, you want to know the basis for that statement. So, let’s go.

Well, it’s not something we’ve plucked out of thin air. Researchers have studied whether technical analysis works on cryptocurrencies.

One such study, titled – ‘Technical trading and cryptocurrencies’, looked at five popular trading indicators. It applied those indicators to the cryptocurrencies Bitcoin, Ethereum, Litecoin, and Ripple.

Within each trading indicator, there are adjustable parameters that can impact outcomes. The researchers used various settings for each indicator, and the number of different settings produced around fifteen thousand trading rules to test.

So, the testing the researchers undertook was pretty extensive.

Which Five Trading Rules Did the Study Look At?

The study mentioned above looked at five technical trading strategies. These are strategies that are popular in technical analysis, and you may recognize some, if not all:

  • Moving averages: Traders use moving averages to identify trends and potential reversals in direction.
  • Filter rules: Filter rules aim to help traders buy or sell into trends. They trigger signals when prices rise or fall by a preset percentage.
  • Support-resistance: Support and resistance levels show potential buying and selling opportunities. They’re based on previous rebounds and pullbacks.
  • Oscillators: Traders use oscillators to identify when an asset is overbought or oversold. Often, such conditions suggest a price reversal.
  • Channel breakouts: Traders use channel breakouts to identify trend continuations.

As you can see, they’re all standard technical analysis tools. So, they’re typical of the tools that technical traders use in real-life trading.

Which of These Trading Rules Worked?

Remember, there were around fifteen thousand rules across the five trading strategies, so researchers averaged the returns from all the variations of each strategy. And their conclusion?

You might find it surprising, but the study found positive returns from all the trading rules.

The findings showed average annualized returns ranged from 1.96% to an impressive 16.45%.

Which Strategies Performed the Best?

Across all the cryptocurrencies, there was remarkable consistency in which strategies worked best.

In fact, two strategies showed the highest annualized returns overall. They were the filter and channel breakout rules. It was the filter rule applied to Ethereum that gave the 16.45% annualized return referred to above.

Which Strategies Performed the Worst?

Similarly, there was consistency in the worst-performing rule. Across all the cryptocurrencies studied, the support-resistance strategy gave the lowest return. That was the 1.96% mentioned above, so it was still positive.

Even the risk-adjusted performance was positive across the board. That’s important because risk adjustment shows how risky it is to achieve returns.

Here, the positive risk-adjusted performance meant the various strategies outperformed the risk-free rate.

Does Technical Analysis Work on Bitcoin?

Bitcoin was amongst the cryptocurrencies looked at in the study, and it found the strategies used didn’t produce the best performance with Bitcoin. Still, the returns were impressive.

Indeed, the highest annualized return on Bitcoin was 10.24%, using the filter rule. The channel breakout strategy wasn’t far behind, returning an annualized 10.11%. So, not too shabby at all.

Does Technical Analysis Work All the Time For Trading Cryptocurrencies?

Well, it would be wonderful if you could find a strategy that made money all the time. However, if there were such a system, we’d all be using it from our beach-front mansions on our private Caribbean islands.

So, no. Unfortunately, the strategies in the report weren’t effective all the time. The positive returns mentioned above were averages for the study period.

Still, a high percentage of trading signals generated positive returns.

In fact, on Bitcoin, 100% of the buy signals for the filter and channel breakout rules were profitable. And most of these also had positive returns at the 5% statistical significance level. But, there are a couple of things you should note from the results:

  • The percentage of sell signals giving positive returns was much lower. In some cases, much lower. For example, take Bitcoin and the oscillator rule. Sell signals gave a positive return only 1.98% of the time. In contrast, buy signals from this strategy were profitable 99.75% of the time.
  • At times, there were negative returns on most strategies on every cryptocurrency. During the study period, the worst negative return was with the moving average rule on Ethereum, at -3.9%. Still, the highest positive return for that rule on that cryptocurrency was 21.49%.
  • The study focused on a period ending on 31 December 2017, which included a huge price surge. In 2018, cryptocurrencies suffered a significant pullback from that surge. On Bitcoin, one of the best strategies was the channel breakout, but applying that strategy to Bitcoin for the first six months of 2018 gave negative returns. That suggests changing market conditions can impact even the most successful trading strategies.

Author’s Recommendations: Top Trading and Investment Resources To Consider

Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.

Conclusion

It seems clear that technical analysis does work on cryptocurrencies, including Bitcoin. Obviously, you need to select the right strategies and parameters.

You should also recognize that sometimes even successful strategies will fail. A change in market conditions is one thing that can increase this risk, so don’t allow complacency to set in when using technical analysis. Instead, stay agile.

Remember, nothing stays the same, and there are no guarantees. Keep your strategies under review, and make adjustments when necessary.

BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!

Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.

Subscribe To Our Mailing List

We send no more than 1 newsletter every month

and, you can unsubscribe at any time

    We respect your privacy. Unsubscribe at any time.

    1. Bitcoin. (n.d.). Bitcoin – Open source P2P money. https://bitcoin.org/en/
    2. Corporate Finance Institute. (2020, October 2). Risk-adjusted return ratios. https://corporatefinanceinstitute.com/resources/knowledge/finance/risk-adjusted-return-ratios/
    3. Cryptocurrency on-PayPal-faq. (n.d.). Send Money, Pay Online or Set Up a Merchant Account – PayPal. https://www.paypal.com/us/smarthelp/article/cryptocurrency-on-paypal-faq-faq4398?app=searchAutoComplete
    4. Medium of exchange. (2003, September 7). Wikipedia, the free encyclopedia. Retrieved April 12, 2021, from https://en.wikipedia.org/wiki/Medium_of_exchange
    5. Risk-free rate (RFR) definition. (n.d.). Risk.net. https://www.risk.net/definition/risk-free-rate
    6. Technical analysis. (n.d.). Investopedia. https://www.investopedia.com/terms/t/technicalanalysis.asp
    7. Technical trading and cryptocurrencies. (2019, August 30). Annals of Operations Research. https://link.springer.com/article/10.1007/s10479-019-03357-1#Tab1
    8. Technical trading rules in the cryptocurrency market. (n.d.). ScienceDirect.com | Science, health, and medical journals, full-text articles, and books. https://www.sciencedirect.com/science/article/pii/S1544612319308852

    Navdeep Singh

    Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes.

    Recent Posts