Technical Analysis (TA) – what is it in cryptocurrencies?
Technical Analysis in Trading
Technical analysis has a history of more than a century. Market players have always attempted to find patterns that can lead to profitable trades. Prominent mathematicians of their time have written entire books on technical analysis. The methods used in technical analysis apply to both traditional exchange assets and younger cryptocurrencies that have been present on exchanges for about a decade.
Understanding Technical Analysis
Technical analysis is the process of forecasting the price of an asset based on its past behavior through the study of charts and the application of various mathematical models. In simple terms, analysis involves identifying patterns, various indicators, and key levels by analyzing historical data. It allows traders to identify important price levels based on past data.
Key Principles of Technical Analysis
Over time, traders have developed certain principles of technical analysis:
- All factors affecting the price of an asset are already reflected in its price. The current price value reflects the sentiment of market participants and provides guidance for traders.
- The price of an asset follows a certain trend. It can be upward, downward, or move sideways.
- Price history is cyclical. People tend to behave similarly, so certain segments of a price chart often repeat patterns from the past.
In addition to mathematics, a trader needs to have a good understanding of human psychology to better comprehend the various motives driving other market participants.
Methods Used in Technical Analysis
Traders use the following methods for conducting technical analysis:
- Plotting linear or candlestick price charts: This method visualizes price movements and allows for quick analysis of asset prices.
- Indicator analysis: Traders use moving averages, Bollinger Bands, various oscillators, and other tools to predict future asset prices.
- Pattern analysis: Price charts form various patterns, and knowledge of these patterns helps achieve trading objectives.
- Candlestick analysis: The body of a candlestick often indicates significant future price changes.
- Fibonacci levels: This method is based on the Fibonacci sequence and is used to identify potential support and resistance levels.
Overall, technical analysis serves as a risk management tool for traders, allowing them to work more effectively in the speculative cryptocurrency market.