By DxOne Exchange on The Capital
Since the rise of cryptocurrencies as a new asset class in 2017, many consider it to be an incredible investment opportunity. As the trust in fiat currencies declines with time, and investors look for alternatives to make investments, the crypto economy will expand.
In this article, we explore one of the two primary methods used to make investment decisions i.e, technical trading, and how it can be applied to the rapidly changing crypto market?
What is Technical Trading?
The method of Technical Trading or technical analysis is more focused on price figures, charts, and graphs. It is basically a quantitative research-based technique that predicts the future price movements of assets from the study of statistical trends, collected from historical price and volume data.
Technical traders watch lines on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals rather than the reasons behind this convergence or divergence.
Since statistics is the cornerstone of Technical Trading, therefore identifying trading opportunities in the market is based on the actions of market participants.
This technique involves visualizing actions of market participants over a stock chart. As these charts form patterns over time, technical analysts identify these patterns and the message that each of these patterns conveys.
Technical Trading doesn’t require you to know whether a stock is undervalued or overvalued, rather the only thing that matters is the stocks past trading data (price and volume) and the information that this data can provide about the future movement in the security.
What Are The Assumptions Made While Trading Using Technical Trading Indicators?
The technical analysis of assets helps traders and investors navigate the gap between intrinsic value and market price by leveraging techniques like statistical analysis and behavioral economics, but in order to be successful, it is based on a few key assumptions about the securities.
- Price moves in trend: This assumption tells us that all major moves in the market are an outcome of a trend. This is the very foundation of Technical trading, it believes that the market participants consistently react to price movements in a remarkably similar way, each and every time the price moves in a certain direction.
- Artificial Price Changes Affect the Analysis: Even if there is no difference in the value of the investment, factors like splits, dividends, and distributions can drastically affect the price chart, making technical analysis difficult to apply. Technical traders address this kind of price influence from outside sources by adjusting the historical data prior to the price change.
- Liquidity Matters: While using techniques of Technical trading, heavily-traded stocks allow investors to trade quickly and easily, without dramatically changing the price of the stock. On the other hand, thinly-traded stocks make it difficult as there aren’t many buyers or sellers at any given time. Moreover, these low liquidity stocks are often very low-priced, which makes them susceptible to easy manipulation by individual investors.
- ‘How’ is More Important Than ‘Why’: For a technical analyst, the price of the stock is the battle between the forces of supply and demand for the company’s stock. Therefore, they are only concerned with what and how questions about the price of the stock and not with why the price is what it is. In cases of extreme news like a sudden change of management, death of CEO, etc. the analyst needs to wait patiently until the chart settles down and reflects the “new normal” that results from such news.
- Market Discounts Everything: The latest stock price reflects all known and unknown information in the public domain. It is actually the reflection of the sum knowledge of all participants involved, including traders, investors, portfolio managers, buy-side analysts, sell-side analysts, market strategists, technical analysts, fundamental analysts, and many others. Therefore, the price of the asset is used to interpret what the market is saying with the purpose of forming a view on the future.
Technical Trading for Cryptocurrencies
Probably one of the biggest advantages of Technical Trading is its versatility, once you learn it, you can apply the concept of Technical Trading on any asset class — equities, commodities, foreign exchange, fixed income, and Cryptocurrencies!
Honestly, Technical Trading is more important to cryptocurrencies than any other asset class as in the crypto economy, many traders and bots trade based on technical analysis.
There exists a slight difference between technical analysis in traditional finance and cryptocurrency because of the volatility of the crypto market. Because of this, the traders often use log graphs to mitigate the volatility and detect trends.
How to Perform Technical Analysis for Trading?
Technical Trading has three major components which help investors to anticipate what is “likely” to happen to prices over time —
- Charting lines,
- Patterns, and
- Indicators & Oscillators
Technical analysis in traditional finance employs a top-down approach that begins with broad-based macro analysis.
Though the principles of technical analysis are universally applicable, you need to study seriously with dedication and an open mind, in order to succeed.
Technical Trading in traditional markets involves mainly three steps:
Step 1: Detailed analysis of the market through the major indices such as the NASDAQ, S&P 500, NYSE Composite, and Dow Industries.
Step 2: Identify the strongest and weakest groups within the broader market by performing sector analysis.
Step 3: Now identify the strongest and weakest stocks within select groups by using individual stock analysis method.
How To Perform Technical Analysis of Cryptocurrencies?
Step 1: The first you need to do as an investor is to carefully analyze the charts of your chosen cryptocurrency.
Step 2: The charts would present you with the big picture, and you might go back months or even years in the chart data to try to identify patterns.
Step 3: Remember that the patterns are not random but represent known indicators and shapes which repeat themselves that will allow you to make a guess as to what way the market will be moving.
When it comes to technical trading, analysts consider the market to be 80% psychological and 20% logical, thus technical analysis allows investors to view a crypto investment objectively.
All that you need to do is identify different patterns and indicators, as it allows you to separate yourself from how much you love a certain project and see the real market at work behind it.
How To Trade Cryptocurrencies Using Technical Trading Indicators: Part I [An Overview] was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.