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Part 1 of 4: Introduction to TA

Feb 05, 2023
byNDAX Labs

Traders in every financial market have two main strategy choices: technical analysis (TA) and fundamental analysis. While a fundamental approach concentrates on balance sheets and economic data, technical traders rely on price action and math-powered indicators to illustrate and interpret the market.

Cryptocurrency markets are infamous for their volatility, but the prices often move in distinct trends and patterns. These traits make markets like Bitcoin (BTC), Ether (ETH), and Chainlink (LINK) ideal targets for TA techniques.

You might think that TA is something for beautiful mind-type geniuses and statistical savants. This impression is completely incorrect. Cryptocurrency technical analysis interprets the data with charts and graphs, putting the focus on pattern recognition and visual analysis rather than complex number-crunching. Because everything is visualized, you do not need to know math or financial analysis concepts to use technical analysis tools.

This guide explores the world of crypto technical analysis and how to use charts and price action to navigate digital currency markets.

What Is Technical Analysis?

Technical analysis is an approach to trading that involves using past and current market data to inform trading decisions. You might look at today’s advanced charting tools and cloud-based data streams and think that TA is a relatively recent methodology. If this is your impression, you are very wrong.

Candlestick patterns date back to around 1850 when a Japanese rice merchant named Homma Munehisa invented the method of visualizing price data. Early Wall Street traders like Charles Dow developed technical analysis, using ticker tapes and point-and-figure charts drawn with pencils to create the strategies traders still use today.

Technical analysis in cryptocurrency sounds like a cutting-edge concept, but it is as time-tested as fundamental analysis. If your goal is feeling smug and bragging about knowing the latest techniques on social media, crypto technical analysis probably isn’t for you. However, if you want a straightforward, visual approach to making informed trading decisions in BTC, ETH and other crypto markets, TA is a great way to go.

Who Uses Technical Analysis?

This article focuses on cryptocurrency technical analysis, but traders use the same tools and strategies in all types of markets. Charts and indicators guide decisions about buying and selling, but traders also use them to enhance risk management, position sizing, and timing.

Technical approaches are common in forex and futures markets, and traders adopt them for stocks, ETFs, commodities, and, of course, cryptocurrencies.

Why does TA work for all these different markets? It relies on each financial asset's historical tendencies and patterns to inform future decisions. The driving idea is that trends and price actions repeat themselves. If specific patterns appear in historical data from a particular cryptocurrency market, technical analysts believe it is likely to repeat in similar circumstances in the future. When you see conditions and patterns repeating, you can expect that the market will usually (but not always) follow the same historical movements again.

Timeframes for Cryptocurrency Technical Analysis

TA strategies are often used in short-term trading, such as day trading. Day traders look at price action, volume, and momentum indicators to make decisions about when to enter and exit trades.  They may aim to make quick profits with short-term trades, such as scalping, or seek to capitalize on price reversals or breaks through resistance levels.

Long-term traders, like those who buy and hold stocks or ETFs for several months or years, can also rely on technical analysis. Their decision to open a position may involve fundamental factors, but they may use technical analysis to time their entry and exit.

Regardless of one’s investment timeframe, TA can serve as a risk management system regardless of the strategy used to open a position.

Technical Analysis vs Fundamental Analysis

Some traders may use both fundamental analysis (in crypto, also Tokenomics) and TA. Others have an almost religious-like belief in one system and consider the other flawed or irrelevant when it comes to providing any useful insight into the market.

Technical Analysis (TA) and Fundamental Analysis (FA) are two different approaches used to evaluate the market.

Whereas Technical Analysis uses objective statistics generated by market behaviour, such as past price action and volume, Fundamental Analysis, on the other hand, uses underlying economic, financial, and other qualitative and quantitative factors. TA traders believe that historical performance can help predictfuture performance. (They use charts and other tools to identify patterns and trends that can indicate buy or sell signals…) Whereas FA proponents believe that the true value of an asset can only be determined by analyzing the underlying fundamentals of a company, commodity, or economy to which it is subject. (They use financial statements, economic indicators, and other data to make investment decisions.)

Both Technical and Fundamental Analysis have their own advantages and disadvantages, and many traders use some combination of both.

Here are the key differences:

  • Different research tools.
  • Fundamental analysis focuses on balance sheets, financial reports, earnings, economic data, and pricing information. It might also include news reports about major changes and economic policy announcements.
  • Technical analysis focuses on charts, historical prices, market depth, and indicators. Except for market depth data, these tools are all visual rather than numerical.
  • Different guiding philosophies.
  • Fundamental analysis/ Tokenomics seeks to define the intrinsic value of an asset. The goal is often to find undervalued assets or those with growth potential.

Technical analysis uses statistical, visual tools to assess the market. The idea is that all fundamental factors are reflected in technical data, including anything you might have missed during fundamental analysis. For crypto assets, one may be unsure of how to perform fundamental analysis (or which information to include in one’s research, as rumours are widespread, and reports are sometimes inaccurate): These pitfalls are why crypto technical analysis is the default for most traders.

Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.