What is Technical Analysis — and How Can it Be Applied to Cryptocurrency Trading?
If you’re a somewhat experienced cryptocurrency trader, you’ve likely heard or read about technical analysis, a trading tool used to help identify developing market opportunities.
With its mix of charts, graphs and trading jargon, learning the basics of technical analysis can seem a bit daunting at first. Yet the core concepts behind it are fairly simple and can be understood by almost anyone. And once you’re equipped with this knowledge, you’ll have a more informed view of market conditions, which will ultimately lead to better investment and trading decisions.
With that in mind, let’s take a closer look at the essentials of technical analysis and how this technique is applied in cryptocurrency trading.
Technical Analysis Explained
Traders need to evaluate assets in order to make sound decisions. There are two popular frameworks used to evaluate assets: fundamental analysis and technical analysis.
Fundamental analysis is used to assess an asset’s intrinsic value. This is accomplished by analyzing earnings, products, assets, competition, specific industry conditions and other variables. Technical analysis, on the other hand, concerns itself only with the statistical analysis of price action and assumes that an asset’s price already reflects all available information.
This means that technical analysis isn’t meant to measure an asset’s fundamental value, but instead measure the direction in which price trends are moving. It accomplishes this largely through the study of past market data, focusing mainly on price and volume. Various charts and technical indicators are used to identify trading opportunities.
Technical analysts use charts, for example, to visually identify market patterns. Some of the most common chart formations include the “head and shoulders”, the “double top” and the “double bottom”. A head and shoulders pattern may indicate a price reversal is at hand, while a double top may show that demand has risen above supply, leading to a price increase. Other frequently charted patterns include flags, pennants, and cup and handle formations.
Along with chart formations, technical indicators are also used to identify possible opportunities. These include moving averages, which chart average price over time, and oscillating indicators such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators. These indicators and others like them (such as Bollinger Bands) can help traders identify when assets are overbought or oversold and help identify developing trends.
How Technical Analysis is Used in Cryptocurrency
Technical analysis is used in the cryptocurrency market much in the same way it’s used in the equities market. The principles of technical trading are applied to help traders make informed decisions about upcoming price action. For example, a cryptocurrency trader may use Bollinger Bands to identify whether Bitcoin is overbought or oversold, getting a buy or sell signal in the process.
Cryptocurrency traders can also take advantage of powerful new tools that harness the power of machine learning and other advanced computing processes to facilitate even more effective technical analysis. One example is Bitvo’s new Technical Analysis Score system, which aggregates hundreds of leading technical indicators and uses artificial intelligence to generate an overall qualitative score that reflects the strength of individual digital currencies.
This approach allows traders to benefit from powerful algorithmic analysis while also making technical analysis available to almost anyone, as the scores generated by the model are simple to understand.
Technical analysis can play a key role in helping traders identify market opportunities as they develop. By merging technical and fundamental analysis — and using cutting edge tools like Bitvo’s new technical analysis score system — cryptocurrency traders are positioned to make the most informed moves possible.