When it comes to analyzing cryptocurrencies (or any kinds of investments for that matter), there are 2 main ways that you can perform your analysis; namely fundamental analysis and technical analysis. Fundamental analysis assesses the value of a cryptocurrency by looking at underlying variables and metrics of the project to evaluate if it’s a good investment. Technical analysis, on the other hand, looks at historical price data to predict the future price movements of a particular cryptocurrency. This guide will form an introductory into the exciting world of technical analysis.
Introduction To Technical Analysis
Technical analysis represents a methodology for evaluating investments which involves a statistical analysis of market activity. It does not attempt to measure a security’s underlying value, but rather, utilize price charts and other indicators to identify patterns that can be used as a basis for investment decisions.
Technical analysis can be performed in various ways, which include relying on charting patterns, statistical indicators and oscillators, and a hybrid of the two. The main differentiating feature of technical analysis as compared to fundamental analysis is its exclusive use of historical volume and price data. Technical analysis is concerned with the future, and the best predictor of future price movements is past trading information and data. There are 3 types of tools and techniques used in technical analysis:
- Charting: Drawing lines to discover where prices tend to react.
- Patterns: Identifying major chart patterns that predicts where prices will be headed.
- Indicators: Using statistical tools to indentify buy or sell signals.
The overarching principle of technical analysis is that a security’s price already reflects all available information and instead focuses on the statistical analysis of price movements. It may seem complicated on the surface, but it boils down to an analysis of supply and demand in the market to determine where the price trend is headed.
Technical analysis is based on three underlying assumptions:
- The market discounts everything.
- Price moves in trends.
- History tends to repeat itself.
How Will I Know What to Do?
So, you probably have a lot of questions, like:
- ‘How Do I Learn How to Use These Indicators?’
- ‘Where Do I Find These Indicators to Use Anyway?’
- ‘How Will I Know Which Combination of Indicators to Use?’
- ‘What’s a ‘Signal’?’
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