Technical analysis in crypto trading explained - why is it important?
There are many different considerations to make when trading cryptocurrencies. Many traders are already familiar with fundamental analysis, where you judge an investment based on the merits of the project.
However, there is another type of analysis that seems to be much harder for those who are new to crypto trading to grasp. This is called technical analysis. While it does take some work to master, the basics are not difficult, and it can be very useful to learn. In this article, we’ll go over what you need to know to get started.
What is a cryptocurrency technical analysis?
TA focuses on the current and past chart activity of a crypto coin. Technical analysis doesn’t even necessarily care what a token or cryptocurrency does or even what their plans for the future are. The only question that TA wants to answer is how the market will react to this asset based on patterns.
How does technical analysis work?
In TA, investors carefully analyze the charts of their chosen cryptocurrency. They are looking at the big picture here, and they may go back months or even years in the chart data to try to identify patterns.
These aren’t random patterns, and they’re actually looking for known indicators and shapes which repeat themselves that will allow them to make a guess as to what way the market will be moving. Many people use this strategy successfully to decide when to buy or sell their cryptocurrencies.
Is it effective in cryptocurrency trading?
This depends on who you ask. Some people swear by technical analysis, but others think it’s not applicable to cryptocurrencies at all. The truth likely lies somewhere in the middle. That means that while TA can be effective when trying to trade crypto assets, it should not be the only thing you take into account. It’s also wise to do fundamentals analysis of your investments.
There are of course outliers which TA is not good at predicting. These could include massive price movements caused by market disturbing news, these are unusual situations and they could throw a wrench into your TA plans. In other words, don’t try to use technical analysis on margin if you don’t know what you’re doing or you’re going to have a very bad day.
How to learn technical analysis for crypto trading?
The best way to learn how to trade using TA is to follow people who already are doing it. There’s tons of video tutorials out there and a number of others sites where cryptocurrency traders share their technical analysis which you can learn from. Look at these patterns and learn how to identify them for yourself in your own charts and trades.
What are the technical analysis main indicators?
There are many different patterns and indicators which are used for technical analysis. However, if you are just getting started, it’s best not to get overwhelmed. Instead, focus on learning to use these first. Learning the basics will allow you to better understand how TA works before diving too deep and getting information overload.
Trend Lines - A trend line is a line that follows the path in the way a cryptocurrency is currently trading. While TA experts make it look easy to just draw a line on the chart, this can be easier said than done. It is, however, an important indicator to learn.
Resistance and Support levels - Support levels are the price at which the coin or token has found support. This refers to whether there is a healthy buying activity that will keep the price afloat, or if there is significant selling activity which will drive the price down.
Moving averages - Another trend line to help you to identify trends. This trend is based on the average price of a coin or token over a certain period of time. You can use this to identify potential support levels or to mark opportunities where the assets hit lows and highs.
Trading Volume - It’s very important to watch trading volume because it can play a big part in trend recognition. If the volume has been continually decreasing, then the favorable prices which investors have experienced are likely to end soon.
Why technical analysis is important?
TA allows you to view a crypto investment objectively. It can allow you to separate yourself from how much you love a certain project and see the real market at work behind it. It can also be an important tool for learning when you’re about to lose a ton of money on your longs or making some fast money in shorts.
Why technical analysis may fail?
TA identifies trends. One time catastrophic events can’t really be seen in trends, and if something like this happens, then your TA could fail spectacularly. This is why you should always have a backup plan and never wrap up all of your capital in one trade.
Technical analysis tools for cryptocurrency trading
Bitsgap offers investors access to a wide array of advanced trading tools which can be used for technical analysis. The trading platform allows you to trade on multiple exchanges so you can see the big picture, and the dashboard can be as simple or as complicated as you need it to be, allowing you to learn at your own pace.
By using Bitsgap as your trading platform of choice you’ll be able to practice drawing trend lines right in the exchange, and you can use Bitsgap’s demo trading features to test how good your TA skills are without actually losing any real money.
Technical analysis versus fundamental analysis
While technical analysis is more concerned with identifying trends and market patterns, fundamentals analysis is more concerned with whether an asset is over or undervalued.
Someone performing a FA would likely want to look deeply into the project and identify how strong it is. An investor practicing only TA would not likely care about this, and they would only be interested in what the chart is telling them.