A Complete Guide to Technical Analysis for Crypto Traders

A Complete Guide to Technical Analysis for Crypto Traders

We never saw the Covid-19 pandemic coming, nor did anyone predict that traditional financial markets all over the world would take this bad a hit, causing a severe global economic crisis. However, one thing investors and traders across the globe have realized in 2020 - cryptocurrencies like Bitcoin, which have previously been ignored as an alternative investment by the majority of the general populace, have served as a mostly stable investment option even amidst a global pandemic. This is why since March 2020, we have seen an increasing number of investors putting their money on cryptocurrencies instead of just relying on fiat finance.

However, despite the relative stability and rises in values many cryptocurrencies have experienced in 2020, the markets are still exceptionally unpredictable and volatile much like any other financial market. This is why traders and investors must have concrete trading strategies before they go putting their money behind particular crypto or enter a crypto trade.

Whether you’re a newcomer to the crypto space or have been trading for a while now, you need to know about crypto technical analysis, a tool that can help you formulate robust trading strategies. In this post, we give you everything you need to know about technical analysis, and how to use it.

What Is Technical Analysis?

To put it simply, technical analysis or TA is the process of documenting historical movements of a cryptocurrency in the market, and collecting and analyzing previous information such as price volatility and volume so as to forecast regarding the future price movements of that crypto, or the state of the market in general.

You can trace the method of technical analysis back to 17th century Amsterdam, and then Japan in the 18th century. TA as we know it now can be accredited, however, to Charles Dow, a prominent journalist of his time in America. You might also know him as the founding figure of the Wall Street Journal. Dow was among the very first people to figure out that certain market trends that keep repeating themselves can be monitored to have an idea of what the future of the market looks like. The Dow Theory on stock price movement is necessarily a kind of TA; it was derived much later from his works.  

The Dow Theory says that all available data counts when it comes to predicting the market condition in the future. The technical analysis method was initially deployed in traditional financial markets to forecast the futures of different stocks, as well as some other kinds of assets. It’s only recently that it has been used to predict the future of the crypto markets, and the method seems to have proven successful.

Following the same rule of using all available market data for technical analysis in crypto trading, a crypto trader using TA would have to gather information such as market demands (past and current), market sentiment, the broad trader experience with a cryptocurrency, and also trader expectations.

With technical analysis, by analyzing historical information regarding specific cryptocurrencies and the general market, crypto investors and traders can deduce in advance when and how they should enter a cryptocurrency trade and what sort of position they should assume (long or short).

Technical Analysis vs. Fundamental Analysis:

Now, there are actually two primary ways for you to perform crypto trading analysis: fundamental analysis or the FA, and technical analysis or the TA. When it comes to fundamental analysis, it’s all about projecting on a specific cryptocurrency’s future price in particular. But as we know, for technical analysis, we scrutinize historical data to find out about a crypto or the overall market’s future, and also the best entry and exit spots for a trader.

It’s true that FA in crypto trading can cover a wide range, because with it you can speculate on a certain crypto's potential, and figure out if it is undervalued or overvalued. On the flip side, technical analysis can help you map out the strengths and weaknesses of a cryptocurrency. Fundamental analysis focuses only on the qualitative components of a crypto, but technical analysis goes through all the basic elements of a cryptocurrency, since it sorts through market price data.

Finally, in fundamental analysis, there’s always guesswork involved at least to some extent. However, in the case of TA, every prediction is backed by facts. That is why, as an individual trader, technical analysis just might prove to be the better option when it comes to developing crypto trading strategies to make the best of a deal.

Technical Signals and Indicators: How Do You Use Technical Analysis?

This is the basic thing you need to know and believe when using technical analysis: history always repeats itself when it comes to crypto price trends. So, when you notice a price movement for a certain crypto, there’s a good chance it’s not random, but pretty similar to a price trend seen at some point in the past for that same crypto. Also, when a crypto follows a historical trend, it will also definitely follow the exact opposite trend in the future. So, as a trader using TA, what you have to do is figure out which trend your chosen crypto is following or will follow at some point in the future, and make your trading strategies based on your analysis.  

And how exactly do you accomplish the figuring out the price trend part? You use a range of instruments that can analyze data like a crypto’s volume, market sentiment, market demand, supplies, etc. for you, and give you a notion of when you should enter the market for a profitable trade. These instruments are known as technical indicators and signals; traders are also known to call them charting tools.                          

Some popular crypto technical indicators include the Ichimoku Cloud, the Bollinger Bands, the Fibonacci Retracement, the Moving Average, and the Relative Strength Index. To find out more about trading signals and indicators, you can give our post on the topic a read!

If you are a crypto trader who likes to make your trading decisions for yourself, technical analysis is definitely a good tool for you. For the best results, you can use a combination of several indicators and signals to root out the best strategy for your trades!
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