Technical analysis, analyzes prices by analyzing digital asset market activity using existing price data to predict future digital asset price movements. Technical analysis requires supply and demand data, opening and closing prices, highs and lows along with trading volume. Traders who use this analysis think about past price movements that will repeat themselves.
Fundamental analysis will evaluate the inherent value of crypto assets. As opposed to fundamental analysis, on the contrary, technical analysis looks at patterns and analytical chart tools to see the strengths and weaknesses of crypto, keeping them in mind for future patterns. Traders of more traditional assets, including stocks, commodities, currencies, futures, and forex also use technical analysis.
Basic Idea of Technical Analysis
There are a number of ideas that are part of Dow Theory and provide a background that offers a basis for technical analysis. The theory suggests that pricing in the market includes all considerations.
For crypto assets, that “everything” includes current, future, and past demand, regulations, trader expectations, trader knowledge of crypto assets, and more. With technical analysis, traders analyze prices to see what they suggest about market sentiment.
Technical analysis works on the principle that history repeats itself when it comes to crypto prices or trends.
Based on these facts, technical analysts aim to make predictions regarding the psychology of the market and crypto assets.
Technical analysis also relies on the idea that movements in pricing are never random. Instead, these price movements follow either a short-term or a long-term trend.
In most cases, when a crypto asset follows one trend, it will eventually follow the opposite trend as well. Technical analysis traders will try to isolate this trend to make a profit.
Overall, technical analysis is more concerned about what happened than why it happened. The focus is on supply and demand rather than worrying about the dozens of variables that affect price movements.