Technical Analysis (TA) is used by many traders not only to predict the price changes of stocks, indices, futures, and other traditional market instruments but also to determine the expected quotes of cryptocurrencies. Some investors question the effectiveness of this method. Experts have shared their opinions on how effective technical analysis is and whether it provides real benefits in the realm of cryptocurrencies.
From this article you will learn:
- The cryptocurrency market operates 24/7 without breaks, making technical analysis crucial for monitoring continuous price movements.
- TA for cryptocurrencies requires platform-specific data due to differences in local trade prices and volumes, affecting indicator patterns.
- While effective, technical analysis should be complemented with other methods like cluster analysis and order book review for more reliable predictions.
The Essence of Technical Analysis
The goal of TA is to forecast the price changes of an asset based on data from past periods, considering factors that accompany the rise or fall in value. Indicators, candlestick patterns, support and resistance levels are taken into account. The procedure for conducting TA involves two stages:
- Gathering information. The trader assesses the current situation.
- Studying historical data. The investor checks whether similar situations have occurred in the past and how they concluded.
In practice, traders often do not need to study historical price charts themselves. This work is frequently done by other market participants who have previously identified patterns, created indicators, and established the concept of support and resistance levels.
If the technical analysis concludes that an indicator has reached an n-value, it implies a potential reversal in the trend’s trajectory. This suggests that the indicator’s creator has noticed a pattern where the market behaves a certain way when the trend line reverses, and the indicator reaches value n. Thus, technical analysis is essentially a statistical identification of circumstances under which the price of an asset changes towards a certain value n.
Tools for Conducting Technical Analysis
Technical analysis utilizes price charts, primarily candlestick and bar charts, which display the opening and closing prices. Trend lines, indicators, and support and resistance zones are analyzed. Line charts are used less frequently because they contain less information compared to candlestick and bar charts.
Special trading and analytical platforms are used to draw trend trajectories, support, and resistance lines.
Info: A trend represents the direction in which the price moves. A rising price indicates a bullish trend, while a falling price indicates a bearish trend. Within a trend, the price can fluctuate, taking different directions in sequence. However, most candlesticks align with the trend. There may be fewer of them, but their length is greater than the others.
When it is difficult to determine the trend direction visually, lines are used. Straight segments connect the peak price points. If the resulting line slopes from the bottom left to the top right, it indicates a rising trend, and vice versa.
Indicators are data charts processed through mathematical formulas. Their purpose is to present information in a convenient and understandable way to track signals. Indicators do not predict imminent price changes but can inform about the current and past market situations. They can signal traders about the feasibility of selling or buying an asset.
Patterns are shapes that appear on charts during specific situations. They are used similarly to indicators. Conducting TA is impossible without the skills to recognize patterns and indicators. These skills can be acquired through self-study or specialized courses offered by brokers and thematic platforms.
Features of Technical Analysis in Cryptocurrencies
TA for cryptocurrencies is conducted using standard methods. However, due to the unique trading rules of this asset, the evaluation of information may differ, impacting the decisions made by traders.
Unlike stock exchanges, the crypto market operates continuously without breaks. There are no weekends or pauses. As a result, typical spikes in activity, such as those in the morning or on the first and last days of the week, which lead to gaps and are characteristic of the stock market, are absent or less pronounced. In the cryptocurrency market, significant jumps are primarily seen in assets with low liquidity.
Data from one trading platform cannot be used to analyze the situation on another platform, as spot prices of assets are determined during local trades. They eventually align, but the indicator patterns differ at different moments on various platforms.
For example, consider a situation where a cryptocurrency is traded at $25,000 on one exchange and at $25,400 on another. Trading volumes and the demand-to-supply ratio can also differ. In these conditions, the same indicator can have different values on two platforms at the same time. Depending on the volumes, a cryptocurrency may lead in trading on one exchange and have little demand on another. Consequently, volume indicators will also differ.
Does Technical Analysis Work in the Crypto Market?
Many traditional finance investors consider it impossible to earn profits by tracking the trajectory of lines derived through mathematical methods. However, technical analysis is actively used by traders in the Bitcoin market. According to Binance, this strategy is the second most frequently used after high-frequency trading. Joe DiPasquale believes that TA prevents the frenzy that often leads to excessively high or low asset prices.
Cryptocurrency is a relatively new financial instrument, and determining its fundamental value is currently challenging. In the future, it could be used as money, a digital form of gold, or for hedging inflation. Additionally, cryptocurrency might perform all these functions simultaneously. Today, its future remains uncertain. In the absence of fundamental news, traders rely on charts, quotes, and trading volumes. Therefore, technical analysis holds more significance in the cryptocurrency market than in the traditional stock market, as noted by Greg Cipolaro.
It is worth mentioning that even long-term Bitcoin investors, who do not base their decisions on technical analysis, prefer to monitor charts and observe support and resistance levels. David Martin stated that understanding the actions of other market participants allows investors to gain a deeper insight into trading nuances.
Nicholas Merten does not consider this method effective for short-term trading, except for using support and resistance levels. He believes that indicators are only suitable for analyzing weekly charts. Momentum is easier to evaluate over a longer period than an hour or a day. In this case, the MACD can predict the minimum and maximum expected prices.
According to most experts, TA is a universal method suitable for working with most markets and investment instruments. With experience in applying this method to stocks and futures, traders can use it for cryptocurrencies as well. However, relying solely on technical analysis is still risky. It is recommended to confirm the obtained data with other information. For this, cluster analysis, order book, and trade tape analysis can be used.