What is Technical Analysis and How Does it Work?

Analysis is an integral part of crypto trading. Without proper analysis, traders and even investors are likely to make avoidable mistakes in their investing. 

There are two major analysis types in crypto, namely technical and fundamental analysis. Both analyses are important in making investment or trading decisions, but in this guide, we’ll discuss technical analysis.

Technical analysis is a type of analysis that tries to predict future market behavior based on present and previous price movements. Because it heavily depends on charts, it is often referred to as charting. 

Technical analysis assumes that price movements are not arbitrary and follow a particular pattern. Figuring out this pattern can help traders and investors make informed decisions on a crypto asset. 

The changes in prices of assets also depends on the behavior of investors which is influenced by fear and greed. All of these factors help the analyst to determine when to enter or exit an asset.

Indicators Used in Technical Analysis

Since technical analysis depends heavily on charts, it also uses lots of major indicators to analyze the suitability of assets for investing or trading. The following are some of the top indicators used in technical analysis of crypto assets.

Moving Averages 

Moving averages are an integral part of technical analysis. As a result, they are very commonly used in technical analysis. A simple moving average (SMA) for instance is represented by a single line plotted from the average closing prices of an asset within a set period of time. 

For a 30-day moving average, it is the average closing price of the asset for the last 30 days. Another variation of the SMA is the exponential moving average (EMA) which is also the average closing price over a period of time, but it gives priority to more recent prices. 

Moving averages are usually used in pairs, and can be used to determine when an asset may be moving into a bullish or bearish phase.

Relative Strength Index (RSI)

This is another commonly used indicator that tells if an asset’s current market sentiment is about to change. It is rated on a scale of 0-100, with 0 suggesting an oversold market and 100 showing an overbought market.

However in practice, an RSI of 70 shows the asset may be overbought already and 30 suggests the market is oversold. These numbers may also be exceeded by far in times of strong market momentums though, so they are not absolutes.

Bollinger Bands 

Bollinger Bands is a popular oscillator type indicator used to determine the direction of an asset’s price. The indicator consists of two lateral bands with a moving average in the middle. 

It is primarily used to measure market volatility, but can also be used to measure overbought and oversold conditions of an asset. If the bands mover towards the moving average, it means the volatility is reducing and when they move away from the moving average, it means the volatility is on the increase

Pros of Technical Analysis

Technical analysis is an important part of a trader or investor’s decision making process because it uses past and present market behavior to predict future behavior.

In most cases, this can be a reliable basis for entering or exiting an asset, although critics say that it is overhyped. 

It also takes care of critical aspects of an asset’s behavior that fundamental analysis ignores, making it easier to predict market direction.

Cons of Technical Analysis

Though technical analysis can help to complement fundamental analysis, it is not very reliable on its own. Since it only relies on price behavior in the past to predict future behavior, this can change and be affected by many factors that technical analysis doesn’t consider.

Closing Thoughts

Technical analysis remains an indispensable aspect of cryptanalysis. However, it must be used in conjunction with fundamental analysis for you to fully benefit from it and increase your chances of winning in trades. 

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