What is Technical Analysis?
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
The main evidence for using technical analysis is that, theoretically, all current market information is reflected in price trends and patterns seen on chart enabling you to evaluate investments and identify trading opportunities.
Now, have you ever heard the old adage, “History tends to repeat itself“?
Well, that’s basically what technical analysis is all about! If a price level held as a key support or resistance in the past, traders will keep an eye out for it and base their trades around that historical price level. Technical analysts look for similar patterns that have formed in the past, and will form trade ideas believing that price will act the same way that it did before. In the world of cryptocurrency trading, when someone says technical analysis, the first thing that comes to mind is a chart. Technical analysts use charts because they are the easiest way to visualize historical data! You can look at past data to help you spot trends and patterns which could help you find some great trading opportunities. What’s more is that with all the traders who rely on technical analysis out there, these price patterns and indicator signals tend to become self-fulfilling. As more and more traders look for certain price levels and chart patterns, the more likely that these patterns will manifest themselves in the markets.
You should know though that technical analysis is VERY subjective.
Today, technical analysis is based on three main assumptions:
1: The market discounts everything
Many experts criticize technical analysis because it only considers price movements and ignores fundamental factors. Technical analysts believe that everything from a company’s fundamentals to broad market factors to market psychology are already priced. This removes the need to consider the factors separately before making an investment decision. The only thing remaining is the analysis of price movements, which technical analysts view as the product of supply and demand for a particular cryptocurrency in the market.
2: Price moves in trends
Technical analysts believe that prices move in short-, medium-, and long-term trend. In other words, a cryptocurrency price is more likely to continue a past trend than move erratically. Most technical trading strategies are based on this assumption.
3: History tends to repeat itself
Technical analysts believe that history tends to repeat itself. The repetitive nature of price movements is often attributed to market psychology, which tends to be very predictable based on emotions like fear or excitement. Technical analysis uses chart patterns to analyze these emotions and subsequent market movements to understand trends. While many forms of technical analysis have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.