Technical analysis is a type of analysis that is looking at the supply and demand in the market to determine where the price trend is headed. This involves a statistical analysis of the market activity, such as price and trading volume.
There are 2 main types of market activity, generally speaking:
- bear market – this is where we have more people selling than people buying, which will drive down the price of a particular coin as more and more people are getting rid of it and less people are looking to invest in it;
- bull market – this is where we have more people buying than people selling, which will drive the price of a coin up as more and more people are trying to get hold of the coin, which makes it more valuable;
There are 3 main assumptions that technical analysis relies on:
1. The market discounts everything
What this means is that technical analysts consider that all the other aspects concerning the trading of a coin / asset, such as fundamentals of the company, broad market factors, market psychology are already priced into the value of that particular asset / coin and therefore the only thing left to look at is the analysis of the price movement.
2. The price moves in trends
In technical analysis, prices move in short-term trends, medium-term trends and long-term trends. What this means is that the behaviour of a coin / asset is more likely to continue one of its past trends than behaving erratically.
3. History tends to repeat itself
Technical analysts believe that price movements have a repetitive pattern, which is often attributed to market psychology as buyers and sellers react emotionally to market movements.
How do I use Technical Analysis?
There are 2 main websites which offer high quality technical analysis: Coinigy (you get 1 month free trial) and TradingView . These 2 platforms offer a wide variety of tools and resources needed for TA.
The use of Trend
One of the core concepts of technical analysis is the trend. This represents the general direction in which a particular asset is headed. Identifying a trend can sometimes be difficult, as illustrated in the chart below, where you can see that it is difficult to establish a general direction in which the trend is headed:
However, what we are interested in technical analysis (TA), is the overall direction of these highs and lows and this is what constitutes a trend. There are 3 main types of trends:
1. Uptrends – this is a series of higher highs (every high is higher than the previous high) and higher lows (every low is higher than the previous low).
2. Downtrends – this is a series of lower highs (every high is lower than the previous high) and lower lows (every low is lower than the previous low).
3. Sideways / horizontal trend – this occurs when there is little change between the peaks and the troughs of a trend. This could be interpreted as the absence of any well-defined uptrend or downtrend.
Trends are a good way of evaluating the long-term potential of your coin. You can choose a bottom point on your trend and then evaluate how the asset will do over days, weeks or months depending on where you establish the points of contact.
If the price goes off your trend prediction, you will probably need to set up a different trend line. However, these trends can be particularly useful for short periods of time.
How to establish a trend?
In order to establish a trend line, we need at least 3 points of contact.