The Beginner’s Guide
Technical analysis (TA) is a type of analysis that aims to predict future market movements based on historical price action and volume data. Technical analysis is broadly applied to stocks and other assets in all financial markets in general. It is an important component of trading in cryptocurrency markets. In this article, we will explain TA, which is one of the methods that cryptocurrency users are curious about and that analysts frequently use.
Besides fundamental analysis based on many factors around the price of any asset, technical analysis focuses on a historical price action. For this reason, Technical analysis is used to investigate price fluctuations and volume data of any asset. This analysis is aided by traders to identify opportunities and trends.
When we look at the history of Technical Analysis, we see that it dates back to the 17th century. It originated as a primitive variety in Amsterdam in the 17th century. It was seen in Japan, one of the East Asian countries, in the 18th century. Charles Dow is of great importance in the transition from primitiveness to modernity. Charles Dow, founder of The Wall Street Journal, was the first to discover that markets and assets tend to be fragmented. As a result of his work, the Dow theory emerged and led to advances in technical analysis.
Although it was calculated manually in the past, with the development of technology, technical analysis has become widespread. It has become an essential tool for many traders.
How does technical analysis work?
The working principle of technical analysis, as mentioned above, takes place by examining the current price and previous prices of an asset. Technical analysis is in the form of analysis of market forces in supply and demand as well as representation of the prevailing sentiments in the market. These feelings are closely related to feelings of fear and gaining more.
It is considered safe and more effective in technical analysis, liquidity and high volume normal conditions. Markets with high volume are much more resistant to price manipulation and external factors that can create reversible signals. And so it puts technical analysis in a situation of no benefit.
In order to examine prices and find suitable opportunities, traders use various charting tools called indicators. Some traders get support from more than one indicator, as technical analysis indicators can be inaccurate in some cases.
Technical Analysis Indicators
When conducting TA, traders use different indicators and metrics to use in the markets. Among these indicators, simple moving averages (SMA) are one of the most preferred and recognized examples. For detailed information, you can take a look at our article “3 Indicators Used in Technical Analysis”.
Simple moving averages (SMA) are calculated according to the closing prices of any asset within a certain period of time. Exponential moving average (EMA) is a modified variant of the SMA that focuses on the ratios of last closing prices and old pricing.
Another widely used indicator is the Relative Strength Index (RSI). Unlike moving averages, RSI produces mathematical formulas and data within predefined ranges. The relative strength index is between 0 and 100 in terms of value range.
The Bollinger Bands (BB) indicator is formed by two lateral bands around the moving average line. It is used to determine market volatility and oversold conditions.
What is the Difference from Fundamental Analysis?
The basis of TA is that market prices reflect all fundamental factors within a given asset. Fundamental Analysis, which focuses on historical price data and volumes in addition to the TA approach, places more emphasis on qualitative factors.
In summary Fundamental analysis thinks that the future performance of any asset depends on factors other than just historical data. Fundamental analysis is used to estimate the intrinsic value of a business or asset, such as market competition, growth rates, company reputation and management.
One of the important advantages of TA is that it is based on quantitative data, which is a research method. Therefore, it provides a solid basis for an objective investigation of price history. And it removes some of the predictions made by qualitative approaches in fundamental analysis.
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