When analyzing cryptocurrencies or any other kind of investment, there are two main ways to perform an analysis – fundamental analysis and technical analysis. The fundamental analysis aims to assess the value of the cryptocurrency by exploring the underlying metrics of the project to determine if it is a good investment. This involves checking the whitepaper, use cases, project roadmap, the team behind it and other variables.
Technical analysis, on the other hand, follows the set of rules and predictions based on the historical price data in order to predict the future price movements. In this article, we are going to present the basics of the technical analysis and help you get into the exciting world of cryptocurrency trading.
Introduction To Technical Analysis
Technical analysis (TA) is a methodology for evaluation of investments which involves a statistical analysis of market activity. TA does not try to measure an underlying value of the project, but rather to use price charts and other indicators to find patterns that can enable you to make educated investment decisions which are less risky than going in blindfolded.
Basically, technical analysis is predicting future price movement by checking the charts and fancy indicators – things you see in the movies with Wall Street bankers.
TA can be done in several different ways. It can rely on charting patterns, statistical indicators, and oscillators, or a hybrid of these two techniques.
Human nature plays a significant part in TA. We often act according to our emotions and tend to follow the group, which over time forms patterns which affect the price. For this reason, in technical analysis, the past is the best predictor of the future. There are three types of tools and techniques used in TA:
- Charting Lines
- Indicators and Oscillators
The main principle of TA is that a cryptocurrency price already reflects all the information needed to know where the price will move next. This may seem a bit complicated, but it all comes down to the analysis of supply and demand in the market which shows where the price trend is headed.
TA is based on three underlying assumptions:
- Price moves in trends
- The market discounts everything
- History tends to repeat itself
Who is Responsible for Technical Analysis?
Technical Analysis was developed by a large number of contributing individuals, mainly by scholars with knowledge and interest in the economy, finance, and mathematics. A lot of successful traders also contributed, as they dissected the markets from every angle imaginable to gain the upper hand and get the indicators that are clear and easy to use.
Here’s one example:
This indicator is called the “Stochastic RSI.” It does not tell us anything that we already cannot see in the charts. However, it synthesizes the data points to provide us with information on whether the recent prices have risen above or below what the prior existing trend dictates. So, this indicator is able to tell us is the coin “overbought” or “oversold.” A quick explanation of these terms:
Indicators: Technical tools based on mathematical formulas of historical prices and volume to assist with future price predictions.
Overbought: A situation where the coin is trading above its true value, without any fundamental reasons. For example, if the coin’s price is rising without any reason (partnerships, improvements, other events) then it would be wise to sell it, as we can expect a pullback towards its true value.
Oversold: A situation where an asset is trading below its true value, typically due to panic selling or market overreaction. This is the best time to invest in the coin, as its current price is below its true value.
So basically, by using this simple indicator, we can easily determine whether is it wise to invest in a specific digital currency.
Naturally, an experienced trader would never rely solely on one indicator when making an investment decision.
So, How Can I Know What to Do?
You probably have a lot of questions by now.
- “How can I learn to use these indicators?”
- “Where to find and use these indicators?”
- “How to know which combination of indicators to use?”
- “How to use chart patterns?”
We get it. Technical analysis is a broad field and can be a bit overwhelming sometimes. That’s why we have decided to go step by step. You will get all the answers in the following articles we aim to publish. Rushing into TA and making investments without proper research is not something we would recommend.
But first, there are some myths we need to address.
The “miracle” algorithm that is going to be 100 percent right all the time does not exist. After all, humans stand behind the investments and we all know how unpredictable can human nature be sometimes. Some people like to ask technical analysts questions like “When is ______ (coin name) going up?” or “Is the right time to invest?” – please remember that TA is a set of tools which value is determined by those who use it. Technical analysis is not a magic crystal ball that will help you see the future, but it will enable you to determine a direction where the coin’s price is headed.
Naturally, no matter how much you read, you need to practice. Apply the analysis you learn to many different coins/tokens/stocks that you can find. And never stop learning. TA is something it takes time to master, so do not expect miracles in just a couple of days. Learn, practice, and follow your results. Start small, and never invest more than you can afford to lose.
Also, a cryptocurrency trader needs to have a cool head. Getting carried away by emotions can lead to great loses.
If you are not sure you can pull it off right away, don’t worry, we got you covered. Gunbot automatically executes the trading strategies of your choosing, and there are 32 different strategies that you can use on several crypto exchanges. You can learn more about it on our FAQ page or by contacting us.
Thank you for reading! Feel free to reach out if you have any questions.