Crypto traders have several tools to assess the cryptocurrency market. One of them is an approach known as Technical Analysis. Using this method, traders can get a better understanding of the market sentiment and isolate significant trends in the market. This data can be used to make more educated predictions and wiser trades.
Tech analysis considers the history of a coin with price charts and trading volumes, no matter what the coin or project does. As opposed to technical analysis, fundamental analysis is more focused on establishing if a coin is over or under valued.
To get a better idea of technical analysis, it is crucial to understand the fundamental ideas of Dow Theory that tech analysis is based on:
- The market considers everything in its pricing. All existing, prior, and upcoming details have already been integrated into current asset prices. With regards to Bitcoin and crypto, this would be comprised of multiple variables like current, past, and future demand, and any regulations that impact the crypto market. The existing price is a response to all the current details, which includes the expectations and knowledge of each coin traded in the market. Technicians interpret what the price is suggesting about market sentiment to make calculated wise predictions about future pricing.
- Prices movement aren’t random. Rather, they often follow trends, which may either be long or short-term. After a trend is formed by a coin, it’s probably going to follow that trend to oppose it. Technicians try to isolate and profit from trends using technical analysis.
- ‘What’ is more important than ‘Why’. Technicians are more focused on the price of a coin than each variable that produces a movement in its price. Although multiple aspects could have influenced the price of a coin to move in a specific direction, Technicians assertively review supply and demand.
- History tends to get repeated. It is possible to predict market psychology. Traders sometimes react the same way when presented with similar stimuli.
Trend lines, or the typical direction that a coin is moving towards, can be most beneficial for traders of crypto. That said, isolating these trends can be easier said than done. Crypto assets might be substantially volatile, and watching a Bitcoin or crypto price movement chart will probably reveal a selection of highs and lows that form a linear pattern. With that in mind, Technicians understand that they can overlook the volatility and find an upward trend upon seeing a series of higher highs, and vice versa – they can identify a downtrend when they see a series of lower lows.
Additionally, there are trends that move sideways, and in these cases, a coin doesn’t move significantly in either direction. Traders should be mindful that trends come in many forms, including intermediate, long and short term trend lines.