On the 29th of April, 2020, when Bitcoin soared past the $8000 mark for the first time in two months, many traders and financial investors navigated to the news to understand what was going on. Of course, by way of fundamentals, it made all the sense in the world. The coronavirus had hit China's economy with full force. The Yen was falling fast. The Pound and the Euro had taken major hits as well. The greenback, usually a safe haven in times of pandemic outbreaks, unfortunately, held little comfort. Investors needed a much surer store for their value. While gold held some strength, it was clear that major investors were tilting towards cryptocurrencies, a much secure option for their transactions and investments. Hence the increase in the demand for Bitcoin instigated the rise in cryptocurrency prices.
But while fundamentals are great ways to predict the rise and fall of currencies across the globe, there is another way to ascertain these movements before they happen without the need for number crunching or sitting in front of the news 24 hours a day.
Surely, you must have heard about technical analysis at one point or the other. However, if you don't know so much about it, then here's your chance to begin understanding it and applying it in your trading. Chart technical analysis is very useful and by far one of the most reliable tools for money market trades (forex, stocks, cryptocurrency, etc.). This tool's effectiveness is a hotly debated topic amongst traders, but it has lasted long enough to prove that it is an often effective trading tool.
As you now know, there are two primary methods of analyzing market trends; technical analysis, which uses historical facts and past movements to predict future positions, and fundamental analysis, which deals with the cumulative economic and financial effects like news, events, and other factors on market trends. In this article, we will be discussing in-depth the meaning and approaches to technical analysis.
What is Technical Analysis?
Technical analysis is essentially studying past and current market trends to predict the market's future movement. It uses charts to determine a good deal about price and several technical aspects that may affect trading. The analysis of charts is subtly based on the fact that human behavior is predictable with market trends.
Technical analysis helps determine entry and exit points for traders, which points to a high probability of profit. Behind the charts running haphazardly and the market trends are people making rational and irrational decisions. Human behaviour is a primary mover of the cryptocurrency market. We cannot precisely tell how humans will behave all the time, but most of the time, you can be confident that people will react to a specific situation in the same manner.
If a coin price rises for days or weeks, we expect people to take cash in on their profit. This explains why we often see a price dip right after the pump like you will have when a new coin is listed for exchange or with a major IPO in stocks.
When prices dip, we know that investors are waiting to get at the low prices, resulting in a response rally. The price begins to rise again, and the cycle is activated. Technical analysis helps to predict market trends of this simple human behaviour by identifying price peaks or troughs.
Brief History of Technical Analysis
Technical analysis originated in the Dutch market in the early 17th century. Its records appeared in the account of Joseph de la Vega, an Amsterdam-based merchant. The method was said to have been developed in Asia by Homma Munehisa. Homma Muhenisa created the technique that evolved into candlesticks, which remain a charting tool today. Technical analysis was a necessary tool for trading stocks, and it underwent several improvements from experts in the 19th century.
Experts like William Peter Hamilton, Ralph Nelson Elliot, Richard Wyckoff, and Charles Dow contributed immensely to modern technical analysis development. The advent of specially designed computer software has enhanced the tools and techniques in recent centuries. it has made learning and practices much more effortless.
Technical analysis was created to provide data in trading stocks, but it should not be surprising that it works for cryptocurrency. Most of the logic and psychology that controls the stock market applies to the crypto market. The crypto market is just more volatile and livelier than the rest of the trading markets.