In the cryptocurrency community, you may often see that some of the more professional investors will share their analytical experiences and often include proper nouns and concepts like K-charts, MA, MACD, Bollinger bands, resistance levels, etc. Have you ever wondered what all these terms mean? And how do professional investors perform technical analysis based on this data?
What is Technical Analysis
Technical analysis is a method that uses the historical price and volume of the market as the object of study to find out the inner pattern, then predict the market trend, and finally buy or sell according to the trend. Technical analysis is based on the belief that "history repeats itself" and tries to predict future market trends by using a large amount of statistical data.
The principles of technical analysis are derived from traders' observations of the behavior of traditional financial markets over the last hundred years. One of the oldest known examples of technical analysis is a trading method used by Japanese traders in the 18th century, which evolved into the K-line and has become one of the leading analytical charting tools today. The Dow Theory, on the other hand, is a theory developed primarily from synoptic papers edited by Charles Dow, co-founder of Dow Jones, and inspired the use and development of modern technical analysis after the end of the 19th century. Modern technical analysis considers Dow Theory as its originator.
Principles of Technical Analysis
One of the assumptions in technical analysis is that asset prices do not fluctuate randomly, but rather show a traceable trend over time, hence the phenomenon of "history repeating itself".
However, it is important to note that technical analysis is generally more reliable and valid in a market environment with high trading volume and liquidity. This is because markets with high volume and liquidity are less susceptible to price manipulation or external anomalies. When volume and prices are subject to external manipulation, technical analysis can give false signals, which can lead to results that are not necessarily valid.
Purpose of Technical Analysis
Judging the Market Trend
A prerequisite for profitable investment trading is that the expected direction of opening a position is the same as the direction of the market trend, which simply means that the market rises after buying and falls after selling. Therefore, one of the main purposes of technical analysis is to determine the market trend, and then adjust the corresponding trading strategy to improve the win rate and profit/loss ratio.
Discovering Prices for Buying and Selling
After confirming the direction of the market trend, it is necessary to find out the buy points to enter the market and sell points to exit the market. By combining a variety of indicators, using daily and weekly lines to determine the direction of the trend, and then combining 4-hour, 1-hour or even shorter timelines to identify opportunities, and then determine the buy point to enter the market. The same can be used to identify sell points.
Predicting Prices for Stop-loss and Take-profit
Due to the unpredictability and randomness of the market, black swan time can occur at any time, causing the market to fluctuate dramatically in a short period of time. If you do not do a good job of risk control related to the opening of a position, it is easy to cause losses in a short period of time. Therefore it is a good habit for a good trader to set a good stop-loss and take-profit when opening a position. By setting a stop-loss, you can settle the profit part in advance and avoid the subsequent drastic changes in the market that may cause the profit to decrease or even turn into a loss. Setting a stop loss will stop bleeding early when losses occur and keep the risk within tolerable limits.
Technical Analysis in the Cryptocurrency Market
Technical analysis in traditional financial markets would be done with broad market indices, or price and volume changes of specific stocks and bonds. However, since the cryptocurrency market has only been around for more than a decade, and despite the large number of cryptocurrencies, the main ones that can actually have sufficient trading volume and liquidity are the head ones, including Bitcoin, Ether, etc. Therefore, in the cryptocurrency market, technical analysis often revolves around crypto assets represented by BTC and ETH. Traders usually analyze the changes in price, trading volume and other factors of these mainstream popular coins statistically, and then predict the possible trend direction of the market next, and then decide to buy or sell.
Summary
Technical analysis in the traditional financial market has been around for a hundred years and has formed a complete and systematic methodological system, while technical analysis in the cryptocurrency market is relatively new.
It is very important for novice traders to understand and learn the classic technical analysis systems and grasp the logic behind them. It is also important to remember that while indicators can show data to predict trends, these predictions are very subjective and can be influenced by personal biases and emotions. What may be an immediate buy or sell signal for one trader may be market noise for another.
Disclaimer
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Crypto investment involves significant risks. Please proceed with caution. The course shall not be considered investment or financial advice.