How to Analyze Cryptocurrency?
Technical Analysis (TA), often referred to as a chart, is a type of analysis that aims to predict future market behavior based on previous price movements and volume data. The technical analysis approach is heavily applied to stocks and other assets in traditional financial markets, but is also an integral part of trading cryptocurrencies in the cryptocurrency market.
Unlike fundamental analysis (FA), which takes into account many factors around the price of an asset, technical analysis focuses strictly on price action in the past. As such, it is used as a tool to study price fluctuations and volume data of an asset, and many traders use it to spot trends and favorable trading opportunities.
How Technical Analysis Works - How To Perform Crypto Currency Analysis
Technical analysis is basically a study of the current and previous prices of an asset. The main assumption underlying technical analysis is that fluctuations in an asset's price are not random and will often translate into identifiable trends over time.
At its core, technical analysis is an analysis of supply-demand market forces that are a representation of overall market sentiment. In other words, the price of an asset is a reflection of the opposing selling and buying forces. These forces are closely related to the emotions of traders and investors (mainly fear and greed).
Remarkably, technical analysis is considered to be more reliable and effective, operating under normal conditions, with high volume and liquidity. High volume markets are less susceptible to price manipulation, anomalous external influences that could create false signals and render technical analysis useless.
To examine prices and ultimately identify favorable opportunities, traders use various charting tools known as indicators. Technical analysis indicators can help traders identify current trends and also provide insight into trends that may arise in the future. Because technical analysis indicators can be misleading, some traders use multiple indicators to reduce risks.
What Are Technical Analysis Indicators?
Typically using technical analysis, traders use a variety of different indicators and measurements based on charts and historical price action to detect market trends. Among the many technical analysis indicators, simple moving averages (SMA) are one of the most used and well-known examples. As the name suggests, SMA is calculated based on an asset's closing prices over a specified period of time. The exponential moving average (EMA) is a modified version of the SMA that weighs the last closing prices more than the previous ones.
Another commonly used indicator is the relative strength index (RSI), which is part of a class of indicators known as oscillators. Unlike simple moving averages that simply track price changes over time, oscillators apply mathematical formulas to pricing data. It then generates values that fall within pre-defined ranges. In the RSI, these ranges are between 0 and 100.
The Bollinger Bands (BB) indicator is another type of oscillator that is very popular with traders. The BB indicator consists of two sidebands running around a moving average line. It is used to detect potential overbought and oversold market conditions and to measure market volatility.
Besides simpler technical analysis tools, there are some indicators that rely on other indicators to generate data. For example, Stochastic RSI is calculated by applying a mathematical formula to normal RSI. Another popular example is the moving average convergence / divergence (MACD) indicator. The MACD is generated by subtracting two EMAs to form the baseline (MACD line). The first line is then used to generate another EMA and results in a second line (known as the signal line). Additionally, there is a MACD histogram calculated based on the differences between these two lines.
How To Analyze Cryptocurrency - Trading Signals?
While indicators are useful for identifying general trends, they can also be used to give insight into potential entry and exit points (buy or sell signals). These signals can be generated when certain events occur on an indicator's graph. For example, when the RSI produces a reading of 70 or more, it can be inferred that the market is under buying conditions. The same logic applies when the RSI drops to 30 or below. This is generally seen as a signal for oversold market conditions.
The trading signals provided by technical analysis are not always accurate, and there is also a significant amount of noise (false signals) generated by technical analysis indicators. This is particularly relevant to the cryptocurrency market, which is much smaller than traditional ones and therefore more volatile.