Probably you have heard of moving averages, support and resistance lines or Fibonacci retracements, but don’t know what is it all about. If the above terms sound like double Dutch to you, then it’s time to learn what is Technical Analysis, which are its main tools and how you can you take advantage of them to make money in cryptocurrencies.
Simply put, Technical Analysis focuses on the study of the effect that factors, such as fundamentals or psychology, exert on prices, which may affect to the supply/demand equation in order to predict the future trend of prices. By using different analytical techniques, the technical analyst tries to find a solution to the problem of choosing the right moment to buy or sell a cryptocurrency (or any other asset).
The main idea behind Technical Analysis is that assets prices move in trends, which are the result of the changing attitude of traders and investors towards the socio-economic and political environment, as well as their own perception of the market. Therefore, the most important thing for the technical analyst will be to identify the trend in its early stages and maintain the investment until there are signs of change in its direction. Behind all this process, there is the assumption that human nature is constant over time and reacts equally to similar situations.
The Foundations of Technical Analysis
There are three premises on which the technical analysis approach is based:
1. Market action discounts everything
Technical Analysis assumes that, in addition to the fundamental criteria that may partly explain the variations of the supply/demand equation, there are many other factors (economic, political, social, psychological, etc.) that are constantly influencing prices. Prices not only reflect the different assessment that different analysts can establish but also reflect the hopes, fears, assumptions and criteria, whether rational or irrational, of thousands of potential buyers and sellers. This set of factors, on which a statistic cannot be established, are synthesized, weighed, and finally expressed in a final number: the price at which a transaction is closed. In short, Technical Analysis takes as its starting point the assumption that the establishment of a price includes in itself all the fundamental information available and, in addition, many other aspects of equal or greater importance.
2. Prices move in trends
The concept of a trend is one of the basic pillars of Technical Analysis theory. Starting from the most elementary definition of a trend as the direction in which prices move, the technical analyst assumes that markets move in trends, and that these “tend” to continue until changes are produced that can induce imbalances in the supply/demand equation, being able to detect those changes analyzing the market action. The adequate identification of the trend from its early stages with the intention of operating following its direction and the early detection of its exhaustion to reverse or close the position, constitute in sum the final objectives pursued by the technical analyst.
3. History repeats itself
This apparently simple statement, and even questionable in certain aspects, takes on a special dimension when it is verified that certain patterns of behavior that have been cataloged in the past, continue to repeat nowadays in financial markets. This repetitiveness, whose origin is none other than the very nature of human psychology, makes it possible to establish that the future movements of the market will be very similar to those that occurred in the past and that, consequently, the implications derived in the past from the different chart patterns are absolutely applicable to similar formations. In this way, given that the cryptocurrency charts are a true reflection of the market action, that is, of the activity of the group of investors participating in it, it is easy to understand that if their psychology remains basically unaltered, the chart patterns that shape the evolution of prices will continue to repeat themselves and maintain their validity over the years.
Price action, as a result of human decision making, can be thus considered as being purposeful. Although some people believe that price movement is completely random and unpredictable, technical analysts are always prone to identify and quantify those behavior patterns by examining past markets. While markets are unpredictable in essence, market participants are typically considered to adhere to certain habits, which are rarely broken. As a trader, your goal is to make use of this information in order to gain a slight advantage over the eventual unpredictability of the market.
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