What is a technical analysis of the market?
Technical analysis is a method of studying markets and predicting future prices based on historical data on prices and trading volumes. Technical analysts use various tools and indicators, such as trends, support levels and resistance (Eng. support and resistance), oscillators, average movement and numerous others, to identify possible entry and exit prices. Technical analysis can be applied to any type of financial instrument, including cryptocurrencies.
Source: cointelegraph
How does technical analysis work?
Technical analysis works on the basis of several assumptions. The first is that the market price is the result of available information and expectations of market participants. The second is that prices move in trends, which can be ascending, descending or lateral. The third is that history repeats itself, that is, that the market behaves in accordance with established patterns and rules. Technical analysts use graphical representations of prices and trading volumes to visualize market movements and identify trends and patterns. They then apply various mathematical and statistical formulas, such as moving averages, Fibonacci retracement, Bollinger bands, RSI, MACD and others, which we will explain a little later, and they help them estimate the strength, direction and duration of the trend, as well as possible reversal points. Based on these indicators, technical analysts make decisions about buying or selling a financial instrument, such as cryptocurrency, and determine the levels at which they will exit their position.
Source: cointelegraph
Tradingview – application of technical indicators
Tradingview is the most popular website for using technical indicators in the analysis of financial markets, including cryptocurrencies. This website allows users to access different types of charts, and offers a large selection of technical indicators, such as moving averages, RSI, MACD, Bolinger strips and numerous others. Users can apply indicators to charts, adjust their parameters and colors, combine them with other tools and draw on charts. Tradingview also allows users to share their ideas, strategies and analysis with other traders and investors on the platform, is an easy-to-use, fast and reliable tool for technical analysis of cryptocurrencies. At first the interface of this site may seem complicated, but after a brief introduction it becomes easy to use.
Source: cointelegraph
The most popular technical indicators
- Moving Averages (MA): Moving average is a statistical tool that calculates the average price of a financial instrument over a given period of time. Moving averages help smooth price fluctuations and show price trends and directions of price movement. They are often used in combination with other indicators to help determine future price movements. On the example of Bitcoin, if you use a moving average you will see that it always moves upwards in the long run due to the fact that it is stronger relative to other currencies.
- Relative Strength Index (RSI): A relative strength index is an oscillator indicator that measures the speed and intensity of a financial instrument’s price change. The RSI ranges from 0 to 100 and shows whether certain assets are overbought or oversold (oversold). It is generally considered that an asset is overbought when the RSI is above 70 and that it is oversold when the RSI is below 30. RSI can also be used to identify divergence between price and indicator, which can signal potential trend reversals, when a financial instrument is overbought its price is expected to fall, on the other hand if investors sell too much the price is expected to rise upwards.
- Resistance level is the level at which a price is expected to encounter sales pressure, which can stop or reverse its growth. On the other hand, the level of support is the level at which the price is expected to meet purchase demand, which can stop or reverse its decline. Support and resistance levels are often formed around psychologically important numbers, historical highlights and bottoms, trend lines and other technical indicators. Support and resistance levels are dynamic and can change over time. When the price breaks through the resistance level, that level becomes a new level of support. On the other hand when a price breaks through the support level, that level becomes a new level of resistance. This is called role change (roll reversal) and shows a change in the balance between supply and demand in the market. Support and resistance levels are essential for analysts to more easily determine where the price might stop after a bigger rise or fall.
These are just some of the most popular technical indicators used to analyze cryptocurrencies. Of course, there are other indicators that can be useful for different strategies and market situations. It is important to note that no indicator is perfect and there is no guarantee that it will give accurate results. Therefore, it is advisable to use multiple indicators in combination with other tools and factors to get a better picture of the market and make informed investment decisions.
Source: cointelegraph
Shortcomings of technical analysis
Technical analysis is a useful tool for trading and investing in cryptocurrencies, but it also has some drawbacks to consider. Some of the disadvantages of technical analysis are as follows:
- Technical analysis is not without errors and does not provide absolute predictions. Cryptocurrency markets are highly volatile and are subject to the influence of many factors, including news, regulatory changes and external events. These factors can cause unexpected price shifts, which can disrupt or cancel technical signals.
- Technical analysis does not deal with the fundamental values of cryptocurrencies or other observed financial instruments, but only with their historical movements. This means that technical analysis may miss some important information about the quality, innovation, competitiveness and sustainability of projects. Therefore, it is advisable to use fundamental analysis, which deals with the analysis of data obtained from various financial statements, economic reports, users, technology, business, etc.
- Technical analysis is based on the assumption that history repeats itself and that markets are rational. However, this is not always the case, especially in cryptocurrency markets, where emotions, speculation and manipulation are common factors. This can lead to situations where technical indicators give false or contradictory signals, which can mislead investors and traders. That is why it is important to use more indicators in combination with other tools and factors to get a better picture of the market and make informed decisions.
Source: cointelegraph
Conclusion
In this blog, we dealt with the topic of technical analysis, a method that uses historical data on the price and volume of trading of a financial instrument, such as cryptocurrency, to predict future movements and identify possible investment opportunities. Technical analysis is based on the use of various types of graphs, tools and indicators, which help detect trends, directions, momentum, support and resistance in the market. We also mentioned that technical analysis also has some drawbacks, such as unreliability, incompleteness and susceptibility to errors. Therefore, we recommended that technical analysis be used in combination with fundamental analysis, which deals with the analysis of the value and quality of projects. We also briefly introduced Tradingview as the most popular website for using technical indicators in the analysis of financial markets, including cryptocurrencies. We hope you found this blog useful and interesting. If you have any questions or comments, feel free to contact us on our social networks (Twitter, Instagram). Thank you for reading and good luck in your trading and investing!