This fifth article in our series covers short-term crypto investing using advanced technical analysis. We’ll build on earlier concepts with more complex calculations. Remember, technical analysis can seem obvious in hindsight but often gives false signals, so always confirm with multiple indicators and other analysis methods.
1. Key concepts
All the tactics discussed in this article take moving averages and their derivatives to identify price trends, dynamic resistance levels, and potential price movements.
- Band Constriction: Narrow bands indicate low price volatility, signaling potential periods of consolidation and the inevitable breakouts.
- Band Expansion: Widening bands reflect increased volatility, often accompanying strong price movements.
- Band Breakouts: Price rarely breaks out of the expected range, but when they do, it may signal a potential trend reversal or the start of a new trend.
2. Bollinger Bands
Bollinger Bands (BB) consists of 3 lines: the middle line is a 20-period-SMA of price, along with upper and lower bands set at 2 standard deviations above and below the middle line.
Bollinger Bands’ best attribute is its visualization of price trends and volatility. When the bands constrict, they indicate lower volatility, signaling a consolidation period. When the price is bouncing near the upper or lower bands, it signals a strong uptrend or downtrend respectively. Finally, price line breakouts beyond the upper or lower bands are overbought or oversold signals, which can be a potential reverting to the mean.
The Bollinger Bands boundaries are also good dynamic support and resistance lines, since 95% of the time, the price bounces inside the bands.
Again, moving-average-derived indications like Bollinger bands are lagging, and can’t reflect recent price signals. Experienced traders can customize their bands by using EMA, adjusting the length of moving averages, or trying different deviation bands.
Double Bollinger bands
Double Bollinger Bands, aka Bollinger Bands bands, is a variant of the traditional Bollinger Bands. It adds 2 additional lines at plus and minus 1 standard deviation.
When the price remains between the plus and minus 1 standard deviation, it is considered to be in a neutral zone. If the price stays between the plus 1 plus 2 standard deviations, it indicates a bullish trend. Conversely, if the price remains between the minus 1 and minus 2 standard deviations, it suggests a bearish trend.
Traders may follow the trend and execute buy orders when the price stays in the upper zone and sell orders when it stays in the lower zone. Alternatively, traders may range trading inside the double bands.
3. Keltner Channel
The Keltner Channel (KC) is very similar to the BB. But it uses a 20-period-EMA of price, then charts 2 lines at twice the Average True Range from the base EMA.
Due to these differences, the KC’s baseline is more reactive to recent price signals, but its bands are not as sensitive to volatility. Usage is similar to Bollinger bands.
4. Donchian Channel
Donchian Channel (DC) is a three-line indicator, resembling both the Bollinger Bands and Keltner Channel in its form, yet significantly simpler. Its upper line is the highest price of the last X periods, lower line is the lowest price of the same timeframe. X typically is 20 periods. The middle line is then calculated as the average of these lines.
Due to its simplicity, the DC only works to indicate trends and identify overbought and oversold zones.
5. Comparison between Bollinger Bands, Keltner channel, Donchian channel
| Bollinger Bands (BB) | Keltner Channels (KC) | Donchian Channels (DC) | |
| How It’s Calculated | 20-period SMA ± 2 standard deviations | 20-period EMA ± 2x Average True Range (ATR) | Highest & lowest prices over 20 periods |
| Usage | Mean reversion strategies
Spotting price extremes |
Trend following
Breakout tactic |
Breakout trading
Identifying resistance level |
| Key Benefits | Adapts well to volatile markets, clear overbought/oversold signals
Measure volatility and identify overbought/oversold conditions |
Smoother, less noisy, adapts to volatility
Identify trend direction and volatility |
Simple, effective for breakout signals
Identify breakout levels and price extremes |
6. Ichimoku Cloud
Ichimoku Cloud is a comprehensive technical analysis tool that offers insights into possible trends, momentum, and support or resistance levels, all in one place. It consists of five lines, with the area between two of them shaded into a cloud for visual clarity.
Base Line (Kijun sen): Average of the highest high and lowest low over the past 26 periods
Conversion Line (Tenkan sen): Average of the highest high and lowest low over the last 9 periods
Leading Span A (Senkou Span A): Average of the Conversion Line and the Base Line, plotted 26 periods ahead
Leading Span B (Senkou Span B): Average of the highest high and lowest low over the previous 52 periods, also plotted 26 periods ahead
Cloud (Kumo): The space between the Leading Span A and B lines
Lagging Span (Chikou Span): The close price of the last 26 periods, plotted 26 periods back
Like MACD, Ichimoku Cloud combines the long and short averages to account for both recent fluctuations and bigger price trends, also generating dynamic support and resistance levels.
Some trade signals provided by the Ichimoku Cloud indicator include:
- Conversion Line – Base Line cross: Similar to the Double Moving Average Crossover, the short-term Conversion Line crosses above the long-term Base Line indicates a bullish trend and conversely indicates a bearish trend when the Base Line crosses above the Conversion Line.
- Leading Span cross: A bullish signal occurs when the Leading Span A crosses above the Leading Span B, and a bearish signal when the Leading Span B crosses the A line
- Cloud breakout: When the price line crosses above the cloud, it generates a bullish signal. From this point on, the cloud acts as a support line. Conversely, a breakout below the cloud may indicate a bearish reversal.
- Lagging Span confirmation: Bullish momentum is confirmed when the Lagging Span crosses above the price. Conversely, when the Lagging Span is below the price chart, it may confirm a bearish trend.
- Cloud edge bounces: bullish momentum is signaled when the price fails to breach the lower edge of the cloud, while a failure to surpass the upper edge signals bearish momentum.
- Future cloud condition: A bullish momentum is suggested when the future cloud is green and widening, indicating potential upward movement in prices.