For many traders and investors, Technical Analysis, sometimes referred to as TA, is the holy grail of cryptocurrency investing. It’s a method of analysis where the past prices of a particular cryptoasset are weighed against that cryptoasset’s historical volumes.
It is a tool used to help investors and traders find market trends and make wiser investment decisions.
The information provided here is for informational purposes only and should not be seen as investing advice. Our opinions on this site are only that, if you are considering an investment into cryptocurrency or anything we speak about on this site, please advise a trusted financial professional first, before doing so.
The Core Concept
Technical Analysis is based on the following assumptions:
- Past performance can be replicated in the future. Traders then use Technical Analysis to calculate the odds of this happening.
- Human behavior in markets is predictable in aggregate.
- Analyzing past prices and volumes against the current price and volume can help predict future price.
- Price and volume trends can be plotted in charts to give a simple and quick visual of potential price paths.
Tools Used in Crypto Technical Analysis
There are two main tools used for crypto Technical Analysis: chart patterns and indicators. Chart patterns are formations created by the price movements of a crypto-asset over time.
Indicators create momentum signals of a crypto-asset, helping a trader know whether the price is breaking up or down in a new trend.
Key technical indicators include: volume, moving averages, Stochastic, Moving Averages Convergent Divergent and Ichimokus.
The best TA combines information from a number of indicators and timeframes to predict price. In order to test your analysis, using new indicators is also a very good idea.
To get started with technical indicators, you’ll need lots of analytical tools that will help you draw your charts easily and quickly.
There are many websites that provide graphs and charting services. TradingView is one such website. It’s mostly free, although it has a paid feature for the seasoned trader.
Coinigy is another company providing graph and charting services. It has a comprehensive service for most cryptoassets and exchanges.
The third service is CoinAnalyze, a great website for identifying patterns of major cryptoassets.
Other Types of Analysis
Even though Technical Analysis is a popular method of filtering the trends of cryptocurrencies to predict their future prices, it’s not the only method.
Some investors use the Fundamental Analysis to get insights into a particular crypto-asset.
Unlike Technical analysis, Fundamental Analysis tends to look at the general fundamentals of a crypto-asset by analyzing technology used, transaction fees, speed, mining profitability, market capitalization among other metrics. Each has its pros and cons.
Technical Analysis Pros
Gives traders a trend based on the general direction that the price of a crypto-asset is taking. It’s also beneficial because it gives entry and exit recommendations for short-term and long-term trading.
Takes less time to compile as they need less data.
Technical Analysis Cons
The existence of many indicators can give mixed and confusing signals. Some will point a trader to a buy signal and others might be inclined towards a sell signal.
Different technical analysts tend to give different results for the same crypto-asset. This happens because they use different indicators to forecast the prices.
Technical Analysis & Market Psychology
Within any market, analysis of any type is subject to human behaviour and psychology. Buyers who believe a crypto-asset will yield positive returns tend to buy as much as they possibly can.
For them to get a hold of the asset, they will need sellers who are willing to sell. These are market participants who probably believe that the asset won’t increase in price or are partially selling like we do.
Suggested reading: HODL vs Taking Profits
For example, we’ll assume the price of a coin is $2 USD. Sellers will want to sell at a higher price and buyers will consider the prevailing price of $2 a steal as they see a greater future for it. Long term and especially short term.
Let’s say the two parties then meet halfway and agree on a price of $3, which is the equilibrium price.
So what happens after buyers get the coin at equilibrium price?
Here’s where market psychology comes in.
Once the price starts to go up, there's:
1. Greater demand for the cryptoasset
Higher demand for the asset means that there is a shift in the market and more people are willing to buy the coin at the equilibrium price of $3.
It also means that few sellers are willing to sell and the only remaining sellers are asking for a higher price as demand kicks in.
People also start paying more attention when a project moves upward quickly, so euphoria is on your side if you're going long.
2. Sellers sitting back
The price is rising because sellers are reconsidering their sell positions and are instead holding onto their crypto.
With more willing buyers and few sellers, the price of the asset naturally rises.
Every investor wants to join the party, and this further adds fuel to the Bull Run.
Let’s assume that the price has climbed to $20 during this run...
At this price, it becomes too expensive for new investors to join the party. They will feel that the price of the coin is too high, having climbed from $2, and a market shift will occur.
And it often does very quickly.
Recent investors who have just bought the cryptoasset at $20 will the realize that no one is interested in buying at $21 or even $20 and will start to panic.
Early investors will be looking to sell at $20 to cash out their profits.
Here’s where the cascading effect kicks in to end the Bull Run.
For most buyers, that the price of the cryptoasset dwindling is reason enough to avoid it, so the number of buyers keeps on decreasing.
This essentially demonstrates how the price of a cryptocurrency is affected by the market feeling at a given time.
The Importance of Technical Analysis
Whether TA is effective or not largely depends on the type of indicator used. It’s also important to remember that technical analysis is made by humans and tends to be based on human instincts and psychology.
This explains why many times two analysts can create a contradictory analysis of the same cryptoasset.
Unfortunately, the best type of TA happens when you look through multiple time frames and crypto is such a new asset class that there rarely is more timeframes than a couple years - which is mostly for the legacy projects like BTC and ETH.
Use TA for making your entries perfect but use fundamentals to guide your overall investment thesis.