Crypto Trading 101: What Is Technical Analysis?

Buy low, sell high. How hard can it be?

Technical analysis (TA) is a collection of techniques traders use to attempt to forecast the future price movement of financial assets, including cryptocurrencies. It involves analyzing historical price and volume data to identify patterns, trends, and market behavior that might point to coming price rises or falls, and key market levels to watch.

TA can seem like superstition, akin to reading tea leaves (you'll have seen those charts with a spider webs of lines drawn on them), but ultimately it comes down to market psychology. Traders make collective decisions out of fear and optimism, as well as rational analysis, and these are all aggregated by the market and reflected in the price patterns displayed on the charts.

Technical analysts use various tools and techniques to analyze price data, including:

1. Charts: Price movements over time are visualized on different types of charts, including the popular "candlestick" charts.
2. Indicators: Technical indicators such as moving averages and momentum indicators use mathematical formulae based on price and volume data. These give signals and insights about the market, including whether the asset can be considered overbought or oversold, the strength and momentum of a trend, and so on.
3. Patterns: Different patterns on the charts (head and shoulders, rising/falling wedge, etc) can indicate areas of particular interest in terms of risk/return potential, and can signal how price action is most likely to develop.
4. Support and resistance levels: Certain price levels are associated with particularly high buying or selling activity, and can act as barriers to further declines or rises—meaning they can also be turning points for an asset.
5. Trend analysis: Markets can trend up, down, or sideways, on any given time frame. Technical tools can be used to indicate how a market is trending, and whether the overall trend may be changing.

Markets are inherently unpredictable, and any forecast price move can only be assigned a probability. Technical analysis aims to maximize the chances of profiting, given the probability of one or other outcome.

Technical Vs Fundamental Analysis

Technical analysis can provide insights into how a market might develop, but it's only a starting point. In addition, you'll need good risk management: Preserving capital, knowing when and how to minimize losses if the market goes against you, and maximizing profits before getting out of a trade before it turns in the wrong direction.

"I made my money by selling too soon."
Bernard Baruch, American financier and statesman

Technical analysis can complement fundamental analysis, a means of evaluating the intrinsic value of a financial asset, and whether it is under- or over-valued at the current price. In the TradFi industry, this includes factors such as company financial statements, industry trends, the track record of the management team, and economic indicators. In the crypto world, it can include various on-chain measures of strength or weakness, use cases and user numbers, and evolving trends. We'll explore these further in another article.

Subscribe to our newsletter and follow us on Twitter.