Bitcoin & Cryptocurrency Technical Analysis Explained
Technical analysis is basically a form of trading discipline used to appraise investments and classify trading opportunities by analyzing various statistical trends acquired from various trading activities such as price volume and movement. While fundamental analysts try to assess a digital assets intrinsic value, technical analysts evaluate bitcoins weaknesses and strengths by focusing on price movement patterns, trading signals, and other analytical charting tools. Understanding these areas while charting BTC can dramatically increase your understanding of the space!
Technical analysis is often used in securities with historical trading data such as Bitcoin, crypto, futures, currencies, fixed-income, commodities, stocks, and others. In this article, we will mostly be analyzing bitcoin in our examples. However, it is worth noting that you can use most of these concepts on any security or stock. Before moving forward, it is also worth noting that the use of this technique is also quite prevalent in forex and commodities markets where traders tend to place more focus on shorter-term price movements. The best way to look at trading charts, including Bitcoin and cryptocurrencies, is with TradingView (you can find a basic tutorial of TradingView here). It is our favorite area to chart and build a community. You can find charts for Bitcoin price against USD, or other currency pairs pairs (like BTC/EURO) or other cryptocurrencies (such as BTC/ETH). You can choose from a large number of cryptocurrencies and stay up to date with things like Bitcoin news and events.
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Understanding the Difference Between Technical and Fundamental Analysis
-Technical analysis is more of a trading discipline used to identify trading opportunities in patterns seen on charts and price trends and to evaluate investments.
-Professionals who employ technical analysis believe that bitcoins past price changes and trading activity are valuable and reliable indicators of how its price will move in the future.
-The main difference between technical and fundamental analysis lies in the fact that fundamental analysis primarily focuses on an organization’s financials rather than historical trends or price patterns.
Technical Analysis Basics
This type of analysis was introduced to us through the Dow Theory by Charles Dow in the late 1800s. A couple of noteworthy researchers, including Edson Gould, John Magee, Robert Rhea, and William P. Hamilton, further contributed to the theory’s concepts, helping form its basis. As time has gone by, it has evolved to include hundreds of different signals and patterns that have been developed through years of study and research.
To technical analysts, past changes in an asset like bitcoin, cryptoccurency or the stock prices and trading activity are valuable indicators of how its prices might move in the future. Most analysts use technical analysis separate from other forms of research or in combination with various intrinsic value concepts. However, the conviction of most analysts is often solely based on the statistical charts of a stock. The MTA (the Market Technicians Association) is one of the more popular groups that support technical analyst’s investments with the CMT (the Chartered Market Technician) designation is one of the more popular certifications for advanced technical analysts.
Technical Analysis’ Underlying Assumptions
There are two main methods used to make investment decisions and analyze technical and fundamental analysis. Fundamental analysis typically involves studying an organization’s its tech and general mission statements to determine the organization’s fair value. Technical analysis, on the other hand, follows the principle that an altcoins price as it reflects this publicly available trade data and, therefore, places focus on analyzing the Bitcoin price movements. This approach involves trying to understand the sentiment behind price movements by studying market trends and patterns instead of analyzing the fundamental attributes of crypto.
In the 1800s, Charles Dow released several editorials that discussed the theory of technical analysis. His works included two assumptions that are still being used as a framework for technical analysis trading to this day.
Markets tend to be more efficient with values that represent factors that influence the price of a digital asset or cryptocyurrency. However, it is worth noting that the movement of market prices isn’t purely random – price movements follow identifiable trends and patterns that repeat themselves as time passes.
The EMH or the efficient market hypothesis essentially means that a crypto or altcoin market price at any given time will accurately reflect all the available data, and therefore, is representative of the bitcoin fair value. This supposition is based on the notion that market prices are indicative of the knowledge all market participants possess. While this theory is believed to be valid to some extent, it can sometimes be affected by announcements or news about assets with varied long-term or short-term influence on their prices. Technical analysis, therefore, only works best if the markets are efficiently weak.
The second assumption about technical analysis is that price changes aren’t random, which causes many technical analysts to believe that market trends, both long-term and short-term, can be easily identified, making it possible for traders to benefit from their investments based on trend analysis.
Technical Analysis Today is Centered Around Three Main Ideologies:
1. The Markets Discount Everything
There are many experts who disapprove this approach of analyzing because it ignores fundamental factors while only considering the movement of prices. Technical analysts believe that everything from market psychology to broad market factors to a company’s fundamentals is all priced in the security token removing the need to consider each element separately when making investment decisions. The only thing that remains is analyzing price movements, something that technical analysts think to be a product of supply and demand for a specific security token.
2. Bitcoin Price Moves in Trends
According to technical analysts, prices move in long, medium, and short-term trends. In layman’s language, this means that security tokens, crypto currencies, or stock prices will most likely continue following a past trend than start moving erratically. Most strategies, when it comes to technical trading, support this assumption.
3. History Repeats Itself
According to technical analysts, history often repeats itself. The reason why price movements tend to be repetitive is usually credited to market psychology, which is entirely predictable since it is based on emotions like excitement or fear. Technical analysis employs the use of chart patterns to evaluate these emotions and the ensuing movements in the market to understand the trends. While most types of technical analysis have been used in use for over a century, they’re still believed to be relevant today because they demonstrate price movement patterns that continually repeat themselves.
How Bitcoin Technical Analysis Is Employed
Technical analysis tries to forecast how the prices of virtually any tradable instrument subject to the forces of supply and demand, which includes Bitcoin price and cryptocurrency pairs such as ltc/usd or BTC/TUSD ect Some people view technical analysis as the study of the forces that drive supply and demand as reflected in a crypto tokens market price movements. Technical analysis generally only applies to price changes; however, there are analysts who, apart from prices, track numbers such as open interest figures and trading volumes.
There are hundreds of signals and patterns across the industry designed by researchers to provide support to technical analysis trading. Some analysts have also come up with various trading systems that help them predict movements and trade as prices move. Some price movement indicators are primarily focused on identifying current market trends, including resistance areas and support, while others focus on determining a trend’s strength and how likely it is it will continue. Commonly used charting patterns and technical indicators include channels, momentum indicators, trendlines, and moving averages.
Technical analysts generally consider the following types of indicators:
- Chart patterns
- Price trends
- Momentum and volume indicators
- Support and resistance levels
- Moving averages
Technical Vs. Fundamental Analysis
Technical and fundamental analysis, the two leading schools of thought when looking at the markets, are two opposites with each on the end of the spectrum. Both approaches are used for forecasting and researching future security token and cryptocurrency price trends, and like any investment philosophy or strategy, both have their adversaries and advocates.
Fundamental analysis is where investments in bitcoin or crypto are evaluated by trying to measure an assets intrinsic value. Fundamental analysts are the professionals who study everything from industry conditions and overall economy to the management of companies and financial situation. Expenses, earnings, liabilities, and assets are all essential aspects to fundamental analysts.
Technical analysis, on the other hand, is different from fundamental analysis in that asset volume and prices are the only things considered. The core supposition is that all the fundamentals are part of the cost. As such, there’s no need to pay too much attention to them. As a result, technical analysts don’t try to measure the intrinsic value of a security token or cryptocurrency but use charts to detect trends and patterns suggestive of what the digital token or asset will do in future days.
Technical Analysis Limitations
The main obstacle to technical analysis’ legitimacy is the economics principle of the hypothesis of efficient markets. According to the Efficient Market Hypothesis, market prices reflect both past and current information, which means there’s no way to take advantage of mispricings or patterns to earn additional profits. Fundamental analysts and economists who believe in efficient markets don’t think that there is actionable information contained in historical volume data and prices. At the same time, they don’t believe that history does repeat itself when it comes to market trends and that prices only move randomly.
The second vilification of technical analysis lies in the fact that it works in some instances but only because it establishes a self-fulfilling truth. For example, a lot of technical traders will place stop-loss orders below a specific company’s 200-day moving average. If a considerable number of traders do so, and the asset ends up reaching the price, there’ll be a substantial number of sell orders, something that will eventually cause the asset to go down, confirming the price movement the traders expected. When that happens, other traders will note the decrease in price and start selling their positions, which in turn reinforces the trend’s strength. This selling pressure, though short-term, is considered self-fulfilling. However, it is worth noting that it has little bearing on where the price of the asset with be in the coming weeks or months. All in all, if enough traders used the signals, they’d cause the foretold movement, but in the long run, this small group of traders can’t drive prices.
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