2.09 Fundamental and technical analysis for crypto trading

Trading cryptocurrencies is known to be risky due to the volatile nature of virtual currencies. That is why we always hear “invest what you can afford to lose”. Performing due diligence and planning a trading strategy before you start investing will always help you in the long term. 

The three major order types were explained in the previous article which facilitates effective trade by minimizing the risks. Now, we are going to look at how to analyze a cryptocurrency and make sure it is worth your investment. 

This lesson focuses on explaining how fundamental and technical analysis will help you assess cryptocurrencies. 

Contents

• What is fundamental analysis?
• How to apply fundamental analysis to cryptocurrencies?
• What is technical analysis?
• How to perform the technical analysis?

What is fundamental analysis?

Fundamental analysis will help you determine the value of an asset in general. It takes various internal and external aspects of the asset into consideration to know its inherent value. 

The primary goal is to assess if an asset, stock, or business share is undervalued or overvalued by looking at several factors like the technology, team, growth plan of the project. You can evaluate the price of a stock by looking at the balance sheets, economic trends, and internal mechanisms of a company. However, it is not the case with cryptocurrencies. 

How to apply fundamental analysis to cryptocurrencies?

While applying FA to cryptocurrencies, you need to look at what is the underlying motive for developing a particular digital asset. Digital currencies need to serve a unique purpose in order to thrive in the competitive marketplace. Some of the important considerations to evaluate include:

• Long-term scalability and performance: A cryptocurrency is worth considering if it has the potential to perform well in the long term and can handle a large user base. It involves analyzing the scalability, security, and speed of a coin without compromising its decentralized nature. 
• Adoption and expansion: Cryptocurrencies having widespread adoption are the best options to invest in. You can track the number of unique addresses of coins, market capitalization, and trading volume to get an overview of the coin’s adoption. 
• Company resources and team: Team behind the project plays a vital role. By looking at the people heading the project, their past expertise, resources, and whitepaper, you will be able to get a fair idea of the legitimacy of the coin. 

What is technical analysis?

Technical analysis is studying the price movements of an asset using different charts. It analyzes previous data and measures current trends of the market to estimate the future price. 

Few assumptions are made in the technical analysis like all the information of an asset reflected in its price and human psychology will be repeated over time. Technical analysis helps with estimating the future prices of coins approximately. The price fluctuations are frequent in the crypto industry. So, technical analysis helps you get an idea of future price movements. 

How to perform the technical analysis?

Technical analysis for cryptocurrencies depends mostly on chart patterns and statistical data. The popular charts used to analyze crypto prices are the candlestick charts. Same data will be represented on different charts to draw useful conclusions. Some of the key tools that will help you in technical analysis are discussed below. 

• Candlestick charts: Candlestick charts play a major role in technical analysis. They are drawn with candle-like structures and the body of the candle represents the open and close prices of a coin in a specific time frame. The wick represents the highest and the lowest prices. The color of the body shows whether the price is rising or dipping (green - rising, red - dipping). You need to combine the data of candlestick charts from different time periods to get the complete picture. 

 

Support and resistance levels: Support level means a lot of investors are buying and resistance level means most of them are selling. This helps you perform analysis and make better decisions while buying or selling coins.

 

Trend lines: Trend lines are used to identify the price trends of cryptocurrencies. They are drawn on candlestick charts by tracing the tops and bottoms of candlesticks. You can notice whether a coin follows a bullish or bearish trend and adjust your trading strategy accordingly.

 

Moving averages: This method is easier for analyzing the price changes of a cryptocurrency. Moving average indicators smoothen the volatility of digital currencies and assist you to know the average price of a cryptocurrency in a given period. Simple moving average and exponential moving average are two major types.

 

Both analysis methods have their limitations but they can assist you in minimizing the risks involved while trading cryptocurrencies. Our academy also has a separate course dedicated to teaching the performance of these analysis. In our next lesson, we take you on a roller-coaster ride in the digital assets industry with the bull and bear market.