Like any form of trading, decision making in the crypto market is crucial. It is a game of give-and-take, go-and-stop. Traders who are better at predicting market situations most likely succeed. It is not as simple as “Eeny, Meeny, Miny, Moe.” To come up with good decisions, traders use technical analysis. The term sounds intimidating, but it simply refers to evaluating historical market data to forecast future price fluctuations. Crypto traders predict the future situation of the market to make decisions in the present. They make calculated guesses. In this article, we will focus on understanding the concept of technical analysis concerning crypto trading.
What is Technical Analysis?
Technical analysis focuses on the study of past market performance. It uses previous data to predict future market trends. Some investors argue that technical indicators are too subjective to be useful, but it has remained a tool in investing because of its effectiveness in certain circumstances.
Adam Hayes of Investopedia defines technical analysis as a “trading discipline employed to evaluate investments and identify trading opportunities by analysing statistical trends gathered from trading activity, such as price movement and volume.” He further explained that the technical analysis concept that we know today anchors Charles Dow’s works which posit three guiding principles for the discipline.
First, market pricing takes into account all factors. For cryptocurrency, those factors include the following: supply and demand of cryptos, the value of the existing cryptocurrencies, how media presents cryptocurrency to the public, its popularity, its unity with the current systems such as online payment, the major events such as economic challenges, the integrity of its security mechanisms, regulation changes, and a lot more. Technical analysts in crypto trading can interpret market actors’ sentiment by analysing price movements. And when traders know the market sentiment, they will adjust their next moves regarding buying and selling cryptocurrency.
Secondly, price moves in trends. Technical analysts believe that regardless of the time range, one can notice a trend or pattern in the market even if it moves randomly. In essence, crypto price tends to stick to a previous trend rather than to zigzag. Many crypto experts and enthusiasts based their trading decisions on this premise. The patterns that they extract from analytic charting tools allow them to see if the crypto value in a specific period is at a vantage point or not. That knowledge guides traders as to when and where to buy and sell crypto, leading them to crypto trading platforms like the Immediate Edge website.
Lastly, history tends to repeat itself. Most technical analysts agree that price movements are repetitive and often associated with the psychology of market actors who tend to be affected by emotions such as fear and excitement. In analysing these emotions and the trend of subsequent market movements, crypto traders utilise chart patterns. This process increases their chance of creating more accurate decisions regarding the future situation of the crypto market. As a result, they can make good decisions as to when and where to invest. Trading experts continue to use traditional forms of technical analysis because they believe those are still relevant as it demonstrates patterns in price movements that often repeat.
An example of a dramatic price movement in cryptocurrency caused by market actors’ emotions is the situation in May 2021 described in the report of Katie Shepherd for The Washington Post. The top billionaire Elon Musk tweeted that Tesla would not accept bitcoin making the value of Bitcoin suddenly dipped. It sapped as much as $365.85 billion from the cryptocurrency market. The dip caused many people to worry and sell their bitcoins.
Another price movement happened after the electric vehicle manufacturer announced “Tesla is most likely to start accepting Bitcoin as payment again” in July 2021, based on the BBC report. Bitcoin jumped past $30,000. Two emotions triggered the market actors because of these events: excitement and fear, causing cryptocurrency prices to move too.
Following this approach, crypto traders utilise market actors’ emotions and deep understanding of the industry to make good decisions in cryptocurrency trading. For instance, when they knew that electric car manufacturer Tesla is about to accept bitcoin in July 2021, they “jumped out” after buying bitcoins at $18,000-$20,000 for three months before so they could benefit from the rapidly-increasing price movement around $30,000 within 6 weeks since early June 2021. The traders then chose to either hold the bitcoins for awhile before selling at $45,000 or sell them right away.
The main reason why technical analysis works is because of its simplicity and ability to produce patterns that repeat themselves. However, there are many pitfalls in using this approach as it could be obsolete depending on one’s view of the market. For example, what worked best years ago may not work anymore today because of changes brought by innovation. An analyst must understand that technology evolves every day but human emotions remain relatively unchanged over time which affects trends and price movements in crypto trading. Other reasons are volatility in cryptocurrency value, price divergences among different market actors due to their varying objectives or risk tolerance levels, lack of transaction costs for cryptocurrencies, and the lack of historical data on various cryptocurrencies.
The bottom line is that technical analysis has its limits in analysing cryptocurrency prices because it only looks at history but does not predict what will happen in the future. Eventually, it can never be proven to work with certainty; however, traders still use it in their decision making process based on experience. On the other hand, financial analysts say that technological innovation is always changing which makes technical analysis less effective than before both for crypto trading and traditional financial markets.
Until now there are no reliable ways to predict or forecast future price movements in the cryptocurrency market or how different factors would affect them based on the many reasons illustrated above. Therefore, it is important for investors to understand that technology is constantly changing and what worked best for cryptocurrencies years ago may not work anymore today.
To sum it up
The goal of technical analysis is to identify the best course of action in a given situation. It assumes that market pricing is inclusive, has a pattern, and tends to recur. Since the crypto market is volatile, many trading platforms extended their technical analysis expertise for beginners. They back up the decision of traders and help reduce trading risks. The good news for crypto traders nowadays is that they can choose not to do technical analysis alone; instead, they can seek help from experts.