Technical analysis is among the most useful tools for traders, which especially comes in handy when day trading crypto.
For that reason, incorporating technical analysis into your crypto trading strategies is an excellent way to increase your chances for profits on the digital asset market.
In this article, we will explain what technical analysis is, how it is different from fundamental analysis, and what are the advantages and downsides of using it to discover crypto trading signals.
Let’s dive in!
What Is Technical Analysis And How Is it Different From Fundamental Analysis?
Technical analysis refers to the practice of evaluating investments and identifying trading signals by studying trends related to trading activity (e.g., price movement).
Simply put, it helps traders predict future price movements as well as decide whether to enter a position, when and for how long.
Technical analysis usually involves using multiple charting tools and indicators – such as the Relative Strength Index (RSI), the Money Flow Index (MFI), and the Moving Average Convergence Divergence (MACD) – to spot as well as interpret market trends and signals.
Fundamental analysis focuses on identifying an asset’s true value by analyzing its financial data (e.g., sales and earnings), the industry’s condition, and even general statistics about the economy.
On the other hand, technical analysis aims to find how the supply and demand on the market impact an instrument’s price, volume, and volatility.
Also, while fundamental analysis is best used for mid-to-long-term investments, technical analysis can be incorporated into day trading strategies.
Below, you can find the three fundamental principles of technical analysis in trading:
- The market prices everything: From a company’s financial data to market sentiment, everything is priced into an asset, according to technical analysts. The only exception is price movements, which are the products of supply and demand for a certain asset.
- Prices move in trends: Technical analysts believe that the market rarely moves erratically. Instead, no matter the timeframe used, they assume that prices exhibit trends.
- History often repeats itself: Based on market psychology, price movements regularly repeat themselves throughout time due to emotions like fear, excitement, and greed. Technical analysis evaluates these emotions via chart patterns to understand trends and predict future price movements.
What Are the Pros and Cons of Technical Analysis in Crypto?
Technical analysis has been widely popular among traders in the crypto industry. And for a very good reason.
While fundamental analysis works great for general market assets like stocks and bonds, it’s very hard to determine the intrinsic value of cryptocurrencies.
For that reason, technical analysis is a better choice to identify crypto trading signals, especially if we take the high volatility of the asset class into account, which makes it an excellent option for day traders.
Furthermore, technical analysis allows traders to identify and respond to market changes quickly.
With hundreds of indicators to choose from, traders can customize their crypto trading strategies to fit their preferences by leveraging technical analysis.
Combining trading knowledge, practice, and the right tools allows traders to accurately predict future digital asset price movements in most of their trades.
As with every trading practice, technical analysis has its own limitations.
One of its main downsides is related to market behavior, which can be unpredicted on certain occasions. For that reason, technical analysis can’t provide 100% accurate crypto trading signals for users.
Moreover, with so many tools to choose from, it’s hard for beginners to learn the ropes and select the indicators that best fit their crypto trading strategies. Also, some technical analysis tools are more reliable and precise than others.
Along with fundamental analysis, technical analysis is among the most popular practices to evaluate financial decisions.
While the prior evaluates data to calculate the true value of assets to spot the ones trading at a discount, technical analysis is based on an asset’s price charts, identifying patterns to predict future price movements using historical market data and statistics.
However, while it’s nearly impossible to determine the intrinsic value of digital assets, technical analysis tends to work better for crypto traders.
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