3.02 Understanding technical analysis

As we discussed in earlier lessons, trading cryptocurrencies requires the knowledge and ability to perform fundamental, technical and sentiment analysis. This knowledge can help you make better investment decisions. While fundamental analysis focuses on data related to the project itself, technical analysis focuses on market activity. Let's now take a look at technical analysis and explain its features and how it differs from fundamental analysis.

In this lesson we will learn about the role of technical analysis in cryptocurrency trading.

Content

• What is technical analysis

• Characteristics of technical analysis

• Technical analysis vs. fundamental analysis

• Pros and cons of technical analysis

 

What is technical analysis?

Technical analysis is defined as the study of the profitability of investments in various assets, such as cryptocurrencies, stocks, currencies, commodities, etc. It is supported by numerous technical indicators and statistical analysis tools, such as moving average, standard deviation, median, etc.

The main purpose of technical analysis is to determine when to buy or sell an asset. It is created based on charts that include price changes, turnover values, order volumes and various technical indicators. Technical analysis allows you to take into account all the factors that have or could have influenced the supply and demand of the asset in question. This type of analysis interprets the behaviour of the market by monitoring the charts, which in turn helps to avoid improper transactions. Technical analysis is not fortune telling or a self-fulfilling prophecy. It helps you see the repeatability of certain asset price movements and allows you to forecast future prices. It focuses on the actual choices of market participants, price trends, predictable behaviour and relationship dynamics over time. 

 

Technical analysis characteristics

Technical analysts prefer to analyze market trends instead of statistical data. Technical analysis is based on three basic principles given below.

1. The market discounts everything - the market price includes all available information about an asset, such as its current micro and macroeconomic situation and industry, regional and political conditions.

2. Prices are subject to trends - the price of a resource in a particular trend (uptrend, downtrend, horizontal trend) will remain in that trend until no clear signals indicate a reversal of that trend.

3. History likes to repeat itself - the collective behaviour of investors in a given resource or market repeats itself according to certain patterns. Therefore, you can make predictions about future prices based on analysis of the past.

 

Technical analysis vs. fundamental analysis

What distinguishes technical analysis (TA - technical analysis) from fundamental analysis (FA - fundamental analysis) is the range of information considered when analyzing the market. When performing FA, the focus is on global, macroeconomic, industrial and regional information on a given stock. Performing TA, on the other hand, helps make investment decisions based on charts showing historical price movements.

You may think that TA and FA are two completely different types of analysis, but a large group of enthusiasts combine the two techniques. Some of the information needed to make an investment decision comes from FA, and some from TA. Fundamental analysis helps answer the question of WHAT assets to buy or sell. Technical analysis, on the other hand, helps answer WHEN is a good time to buy or sell.

In the application of these two methods, the analyzed value of the asset and the time perspective play an important role. Technical analysis is applicable in the short term, while fundamental analysis is used for long-term investments.

 

Pros and cons of technical analysis

Pros of technical analysis, or the arguments of its proponents:

• Ease and simplicity of application - the main advantage of technical analysis is the simplicity of its execution. Most traders begin their trading adventure precisely with technical analysis.

• Sentiment barometer - TA allows you to instantly examine the balance of forces in the market, and determine, for example, what currently has a dominant influence on the price: supply or demand?

• Wide range of markets - TA allows you to access the situation in any market, such as cryptocurrencies, stocks, futures, bonds, commodities, etc.

• A tool for day traders - in the absence of access to an order book, TA is an essential tool in the hands of day traders. It is indispensable for traders who operate on low intervals, such as minute charts.

• Enables quick decision-making - TA allows you to make faster investment decisions without watching a huge amount of incoming data, such as financial reports, macroeconomic releases, etc.