Technical Analysis for Crypto Trading: Reading the Charts

Technical Analysis is a valuation method that involves statistical analysis of the market. Charts and other tools are used to identify underlying patterns and determine investment decisions.

What is Technical Analysis (TA)?

Technical analysis is the study of market behavior using price charts to estimate the future direction of prices. The technical philosophy is based on the concept that all elements affecting market prices – fundamental knowledge, political events, natural disasters and psychological considerations – are taken promptly into account in market activity. In other words, the impact of these external events will immediately manifest itself in a price movement, either up or down.

Is technical analysis a good long-term investment strategy?

The answer to this question is no. Technical analysts are famous for being quite active in their trades, holding positions for short periods of time in order to profit from market fluctuations, either up or down. Depending on the price movement forecast, a technical analyst can make a long or short position on a coin.

If the price of the coin fails to meet expectations, the technical analyst quickly decides to exit the position and uses stop loss orders to limit losses. While the value investor must be patient and wait for the market to correct the undervalued coin, the technical analyst has a high level of trading dexterity and must be able to move in and out of positions quickly.

Support and Resistance

Support and resistance are two of the most fundamental concepts in technical analysis. They represent levels where analysts predict a coin will begin to rise after a decline (support) or fall after a rise (resistance). Critical levels are used to initiate trades because they indicate the direction in which the coin will bounce. If they believe a support level has been reached, they open long positions, and if they believe a resistance level has been reached, they open short positions.

Basic assumptions in technical analysis

The following three assumptions are the basis of technical analysis theory:

  • Everything in the market is subject to discounting: Analysts believe that the price of a coin already reflects the influence of all variables, from fundamental factors to broader market psychology.
  • Prices move in line with trends: Technical analysts believe that prices will show patterns even in heterogeneous market movements, regardless of the time frame in question.
  • Historical events tend to repeat themselves: Technical experts believe that history always repeats itself. This is due to typically predictable market psychology, which has a consistent effect on price formation.

Fundamental analysis vs. technical analysis

Fundamental analysis and technical analysis are used to analyze and predict future asset price patterns. However, they analyze asset prices using different data. Fundamental analysis is an attempt to determine the intrinsic value of an asset by evaluating its industry, business and general environment. Technical analysis looks only at the price and volume of an asset. According to technical experts, all known elements evaluated in fundamental analysis are included in the price and there is no point in examining them further. In addition, technical analysts do not try to calculate long-term value. They use charts to look for patterns and trends that indicate how the price of an asset will move in the near future.

Limitations of technical analysis

Critics of technical analysis believe that since history does not always repeat itself, assumptions made with technical analysis are inaccurate. Another objection is that technical analysis is only effective in certain situations and that this is because it contains self-fulfilling prophecy. Moreover, technical analysis is limited to the study of market patterns and cannot delve deeply into an instrument or sector to understand its inner workings.

Technical analysis is most useful and informative when the market starts to move in a certain direction.

Related terms