Technical analysis illustration

What is Technical Analysis (TA)?


A trend is considered bullish because it takes on a bull's act of charging upward with its horns. A bearish trend takes a bear's attribute; it sets downward with its paws on its prey. There could, however, also be a sideways trend, which is when forces of demand and supply are equal, and the value of the asset stays relatively the same.

As it is well known, the cryptocurrency market is highly volatile and there is rarely a sideways trend. This is why you need a trading strategy to help you maximise profit. One of the tools traders use to get market insights is Technical Analysis.

What is technical analysis?

Technical analysis (TA) is based on the belief that there is a pattern to everything and history tends to repeat itself; understanding this pattern is useful in making the best decisions while trading.

With Technical Analysis, past data of a cryptocurrency, its volume and movement are taken into account to determine when the right time is to enter and exit the market. This is because Technical Analysts believe that by analysing the price movement of crypto over a period of time, you can gain real insights into its value and how to interact with it.

Technical Analysis vs. Fundamental Analysis

Fundamental analysis is also a tool used in analysing a crypto asset when trading. It, however, focuses on a broader perspective such as the intrinsic value of a cryptocurrency and its historical statistics to determine its value and predict its growth. For instance, an investor in bitcoin using fundamental analysis would consider the value of the coin in real-world applications to determine if its market value matches its actual value. This investor isn’t just focused on the current price but its real value to society.

Fundamental analysis considers intrinsic factor such as the strength of a crypto’s community, its use cases, and the team behind it, as well as extrinsic factors like the impact of social, political and economic factors surrounding the existence of the crypto. The point of all this is to determine if an asset is overvalued or undervalued at a particular point, which will consequently inform your trading decisions.

Fundamental analysis focuses more on qualitative data, while technical analysis focuses more on quantitative data: price fluctuation and trade volume. However, the most successful crypto traders have formulated a strategy that involves both technical and fundamental analysis.

How Technical Analysis works

In essence, technical analysis works under the conception that price fluctuations aren’t random, and observation would reveal a pattern used to predict the market. It involves the study of supply and demand, which reflects the market sentiment of a cryptocurrency. It analyses how the market sentiment of fear and greed influence the buying and selling forces.

Technical analysis indicators

  1. Simple Moving Average (SMA)/ Exponential Moving Average (EMA)

Simple Moving Average is one of the most frequent indicators used in technical analysis. SMA is a type of Moving Average that can be derived from calculating the average of a digital currency's closing price over a certain period. Exponential Moving Average (EMA) is a set up to SMA and focuses more on recent prices than older price fluctuations.

  1. Relative Strength Index (RSI)

Relative Strength Index (RSI) falls into a category of indicators referred to as oscillators. Oscillators don’t just track price changes but integrate mathematical data in the analysis of pricing data. Therefore, the readings produced from these analysis falls into a range of 0 to 100.

  1. Bollinger Bands (BB)

This indicator also falls within the oscillator category. It is used in measuring the volatility of digital currencies to identify cryptocurrencies that may have been overbought or overbought under certain market conditions.

Other statistical indicators used in conjunction with these indicators include Stochastic RSI, Moving Average Convergence Divergence (MACD). Technical analysis involves the use of indicators, oscillators, and charting patterns in making predictions. These technical analysis tools can be used in conjunction with each other.

Criticisms of Technical Analysis

Technical analysis centres on quantitative data of price history over the years. However, critics argue that technical analysis may be influenced by personal bias. This is because a trader may, due to their subjectivity, decide to read the data in a certain way or manipulate the tools to a particular conclusion to support preconceived bias. Often this may happen without the trader’s conscious knowledge and may result in a loss.

Apart from this, during specific periods, it may be challenging to identify a trend or a clear pattern in the market. This would make it almost impossible to utilise technical analysis in the study of the market.  However, more consensuses in the use of specific indicators, charts, oscillators may increase their effectiveness but traders have distinct trading strategies, so reaching a definitive consensus would be difficult.

In conclusion...

Technical analysis focuses on using the past to explain the present and using the overall information to predict the future. It centres on the historical data of price movements and trade volumes, focusing on the demand and supply of a particular period.

Technical analysis would provide crypto traders insight into the value of a cryptocurrency and the potential benefits of investing in them. Fortunately, there are indicators that aid in performing technical analysis. However, a good thumb rule is to use these indicators and strategies in combination to attain the best result.

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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