HARMONIC

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Derivatives Mastery

Core Curriculum

MODULE

Series Derivatives Mastery

Module 7 of 8

Topic Technical Analysis

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Core Curriculum Module 7 of 8 · Derivatives Mastery

Technical Analysis

Four frameworks for reading price.

Understand Apply Case Study

Technical analysis does not predict the future. It identifies patterns and conditions that have historically preceded certain outcomes, and gives you a structured framework for deciding when the probability of a trade working is higher than the probability of it failing. There are four distinct frameworks. Applying the wrong one to the wrong market condition is one of the most common sources of trading failures.

Understand

Framework before indicators.

There are four distinct frameworks within technical analysis. They are not interchangeable, each describes a different type of market condition and requires different tools. A mean reversion signal in a trending market leads directly to a loss. A trend-following signal in a range-bound market leads to whipsaws. The framework comes first, the indicators follow.

The critical insight before the indicators: the same indicator can give opposite signals in different frameworks. RSI above 70 means overbought in mean reversion, a sell signal. In momentum, RSI above 70 means strong trend, a continuation signal. MACD in trend following confirms direction; in momentum it confirms the rate of change of that direction. Understanding which framework you are in determines how you read every indicator on your screen.

Framework before indicators. Identify the market condition first: trending, mean-reverting, momentum, or consolidating for breakout. Then select the appropriate indicators. Never run an indicator without knowing which framework it is serving.

Understand, continued

Framework 1: trend following. Framework 2: momentum.

Trend following is the simplest and most widely used framework. The core assumption is that prices in motion tend to stay in motion. You identify an established trend, higher highs and higher lows for an uptrend, lower highs and lower lows for a downtrend, and position in that direction until it shows signs of reversing. These trades tend to have lower win rates but larger wins when they work, the discipline is staying in while the trend continues and exiting when the structure breaks, not when the trade is uncomfortable.

Framework 1 · Trend following indicators

Moving Average

50 EMA above 200 EMA = uptrend. Price above 50 EMA = trend intact. Death cross (50 below 200) = potential reversal.

MACD

MACD line above signal line = bullish trend. Histogram expanding = trend strengthening. Use to confirm entries in the direction of the trend.

ADX

Above 25 = trend strong enough to follow. Above 40 = very strong trend. Below 20 = no trend, do not use trend-following tools.

MA crossover

9/21 EMA crossover for short-term entries. 50/200 EMA crossover for longer-term confirmation. Lagging but reduces false entries.

Fibonacci retracement

38.2%, 50%, and 61.8% pullback levels within an established trend. A bounce off one of these levels in the direction of the trend is a lower-risk re-entry than chasing new highs.

Ichimoku Cloud

Price above the cloud confirms an uptrend, below confirms a downtrend. Cloud thickness signals how strong the support or resistance is likely to be if price reaches it.

Momentum assumes that assets moving strongly in a direction will continue, at least in the near term. This differs from trend following: trend following identifies the existence of a trend, momentum identifies the strength and acceleration of it. Momentum traders enter when the move is already in progress and confirmed. In crypto, funding above 0.05 percent per period combined with rising open interest and high RSI is a momentum confirmation stack, all three pointing the same direction means the move has crowd participation behind it.

Framework 2 · Momentum indicators

RSI (momentum)

Above 70 is NOT a sell signal here, it confirms strong upward momentum. Only consider fading when RSI diverges from price.

MACD (momentum)

Histogram expanding = momentum building. Histogram shrinking = momentum fading, tighten stops. Crossover after a pullback = re-entry signal.

Stochastic

Crossing above 80 in an uptrend confirms strong momentum continuation. Not a reversal tool in trending conditions.

Rate of Change

Accelerating ROC = momentum building. Decelerating ROC = momentum fading, often before the price chart shows it.

On-Balance Volume

Running total of volume on up days minus down days. OBV rising with price confirms the move has real participation; OBV flat or falling while price rises is a warning the move lacks conviction.

Funding rate

Above 0.05% per 8h with rising OI = strong long momentum but elevated reversal risk. Confirms crowd participation alongside RSI and volume.

Understand, continued

Framework 3: mean reversion. Framework 4: breakout.

Mean reversion assumes prices tend to return to an average after moving to extremes. It works best in range-bound markets with no clear trend, and fails in trending markets where price can stay extended far longer than expected. The practical test: ADX below 20 suggests no trend, price oscillating between identifiable support and resistance without new highs or lows, and funding near zero or alternating with no persistent crowding.

Framework 3 · Mean reversion indicators

Bollinger Bands

Price touching upper band = potentially overbought. Lower band = potentially oversold. Target the middle band as the exit. Do not use in trending conditions.

RSI (reversion)

Above 70 = potential sell, below 30 = potential buy. Divergence is a stronger signal than level alone. Only valid when ADX confirms no trend.

VWAP

Price significantly above VWAP = potentially stretched. Below = potentially undervalued. Reversion to VWAP is one of the cleanest targets in crypto.

Stochastic (reversion)

Crossing back below 80 = sell signal. Crossing back above 20 = buy signal. Works well alongside Bollinger Bands in range-bound conditions.

Market / Volume Profile

Maps traded volume by price level rather than by time. The point of control, the price with the most volume, and the value area around it act as magnets. Price stretched away from the point of control in a range is a reversion candidate.

Breakout strategies enter when price moves decisively through a significant level, resistance, support, or a period of low-volatility consolidation. The assumption is that energy built up during consolidation releases directionally, and the early part of the move is the highest-probability entry. The biggest risk is the false breakout, price moving through a level briefly then reversing. The solution is confirmation: a breakout on high volume with momentum indicators aligning is far more reliable than a breakout on thin volume. In crypto, the Bollinger Band squeeze, a prolonged contraction in volatility followed by expansion, is one of the cleanest breakout setups.

Framework 4 · Breakout indicators

Bollinger squeeze

When bands narrow significantly over multiple periods, a large move is approaching. Enter on the first strong close outside the band, volume confirmation required.

Volume

A breakout on volume at least 50% above the recent average is genuine. Low-volume breakouts are likely false.

ATR

Use for stop placement, 1.5 to 2x ATR below the breakout level. ATR expanding after the breakout confirms the move is real.

RSI (breakout)

Crossing above 50 on the breakout candle confirms bullish momentum. Above 60 to 70 at the time of the break is an additional positive signal.

Support / resistance

Mark horizontal levels where price has reversed multiple times. A close above a well-tested resistance on volume is the highest-conviction breakout signal.

Chart patterns

Triangles, flags, and wedges mark the consolidation itself. The pattern’s height projects a rough price target once price closes decisively outside it on volume.

Fibonacci extension

127.2% and 161.8% extensions of the prior move give a first and second target once a breakout confirms and the prior range no longer offers resistance.

The same indicator reads differently across frameworks. RSI above 70: sell in mean reversion, continuation in momentum, confirmation in breakout. Bollinger Bands: fade the extremes in mean reversion, enter on band close in breakout. Always know which framework you are in before you read any indicator.

Apply

Five-step technical context check.

Run this sequence before entering any derivatives trade.

Check ADX. Above 25, use trend following or momentum. Below 20, use mean reversion. Tight range with contracting Bollinger Bands, prepare for a breakout entry.

Identify the dominant structure: higher highs and higher lows, lower highs and lower lows, or oscillating between levels. This confirms the ADX reading and the framework.

Select two to three indicators from the appropriate framework bucket, not from multiple buckets. Two pointing the same direction is standard, three is the threshold for high conviction.

Add the crypto-specific layer. Check the funding rate, open interest direction, and recent liquidation levels. These confirm the technical setup has positioning support behind it.

Set entry, stop, and target before executing. The stop should invalidate the setup: below the recent higher low for trend following, beyond the Bollinger Band extreme for mean reversion, 1.5 to 2x ATR below the breakout level for breakout.

Case study

BTC 2020 to 2022: a full cycle through all four frameworks.

BTC 2020–2022: Full Market Cycle Mid-2020 → End of 2022

Phase 1, breakout, mid-2020. BTC consolidated between roughly $9,000 and $12,000 for months, Bollinger Bands contracting, ADX below 20. When BTC broke above $12,000 in August 2020 on elevated volume, ATR expanded and RSI broke above 60, all three breakout confirmations aligned.

Phase 2, sustained uptrend, mid-2020 through Q1 2021. The framework shifted to trend following. The golden cross, 50-day MA above 200-day MA, had fired back in May 2020 near $10,000, and stayed intact through the entire run. ADX climbed above 25 and kept rising. Mean reversion traders fading RSI above 70 during this phase were fighting the trend and losing, trend following was the only appropriate framework from the breakout to $65,000.

Phase 3, momentum extreme, March–April 2021. As BTC approached $65,000, funding ran above 0.1 percent per period, over 100 percent annualized, weekly RSI above 85. The momentum framework confirmed extraordinary crowd participation, warning that the risk of continuation was high but so was the risk of a sharp reversal.

Phase 4, correction and range, May–July 2021. BTC fell from $65,000 to below $30,000 in six weeks. ADX fell below 20 by June and July as BTC oscillated between $30,000 and $40,000. The mean reversion framework activated for the first time in months, traders still applying trend-following tools found no edge.

Phase 5, second trend leg and reversal, Q4 2021–2022. BTC recovered to near $69,000 in November 2021, reactivating trend and momentum frameworks, then broke down with lower highs. By early 2022 the death cross, 50 EMA below 200 EMA, confirmed a downtrend. Mean reversion longs at apparent support repeatedly failed, you do not fade a confirmed downtrend with mean reversion tools. The full cycle touched every framework in sequence: breakout, trend following, momentum extreme, mean reversion, trend reversal, downtrend. The traders who performed across the cycle were those who identified which phase they were in rather than applying the same framework throughout.

Summary

Identify the regime before selecting indicators.

Key takeaway

Technical analysis is a framework for reading market conditions, not a prediction engine. The four buckets, trend following, momentum, mean reversion, and breakout, each describe a different market regime and each require different tools. The same indicator gives opposite signals in different frameworks. Identifying the regime before selecting indicators is the discipline that separates systematic technical analysis from noise. Module 8 closes the curriculum with risk management.

Risk warning: technical analysis signals fail regularly, including in conditions where they have historically been reliable. No indicator or combination of indicators guarantees a profitable outcome. Apply the risk management principles in Module 8 to any technically-derived trade entry.

This content is produced by Harmonic for educational purposes. It is strategy education, not investment advice.