Cryptocurrency Technical Analysis Basics
Even in Japan, rice traders noticed that the price of rice is not formed by chance, its formation is natural and these patterns are repeated from year to year. The same events equally affect the price at different times. For example, in the case of hurricanes and natural disasters, the price of rice behaves in a similar way regardless of the year in which the hurricane occurred. And merchants began to collect and record these patterns in order to predict the price of goods in advance.
Later, at the beginning of the 20th century, the American journalist Charles Dow wrote a series of articles in which he substantiated how certain events affect the price of exchanges. Subsequently, his assumptions were carefully studied and substantiated. The scope of application of these patterns was also expanded, and the patterns themselves became larger. All historical trading experience was collected and analyzed. Fortunately, since the appearance of the first exchange in 1409, experience has been accumulated very much and there were enough materials for analysis and conclusions. Also, based on the collected material, it was possible to verify the fidelity of certain theories.
The advent of computers has given a new impetus to the development of technical analysis. If earlier all the data had to be recorded in journals and carefully rechecked and counted, then computers greatly facilitated the process of mathematical analysis and already independently began to identify patterns from the history of trading on different exchanges. Also, computers began to check how often these patterns are repeated, under what conditions.
The Internet has given a new impetus to the development of technical analysis. Thanks to the Internet, it has become possible to collect current data from all the world’s stock exchanges and analyze them in real time. This provided new material for the analysis of market patterns taking into account the characteristics of different countries.
Unlike the classic stock market, which is already 609 years old, the cryptocurrency market is extremely young. The first Bitcoin cryptocurrency appeared in 2009. Therefore, the cryptocurrency market has not yet accumulated enough analytical and historical material to form clear historical patterns of price behavior under certain conditions.
Since there is no analytical and historical material, traders try to apply the laws of the stock market to cryptocurrency. Fortunately, the stock market of historical material has accumulated enough for 609 years of trading history.
At the same time, one cannot just automatically transfer the laws of the stock market to cryptocurrency, since cryptocurrency has its own distinctive features.
- Low capitalization and trading volumes on the exchange. In the world there are about 250 stock exchanges and 13,700 cryptocurrency. There is simply not enough data to form a technical analysis due to low trading volumes even on leading exchanges. Therefore, more or less accurate analyzes can be done only in relation to Bitcoin and several other cryptocurrencies with a large capitalization and a large trading volume and only on leading exchanges.
- Monopolization of the market. In the field of cryptocurrencies, there are a fairly large number of large players with large reserves of cryptocurrencies, the so-called whales. Their actions are difficult to predict.
- A huge number of cryptocurrencies with low capitalization. At the moment, according to https://coinmarketcap.com/, there are more than 1900 cryptocurrencies in the world. Trading with most of the cryptocurrencies is not subject to technical analysis due to the lack of trading themselves.
What is technical analysis in cryptocurrency trading
Classical technical analysis in the stock market is based on the following rules:
- There are no accidents. Each change in price is caused by legitimate reasons that need to be studied.
- History repeats itself.
- Patterns work. The price is determined by the trend, only this trend needs to be determined and understood what pattern works in this case.
There is also a hypothesis in the classical stock market that economic motives drive the market. Therefore, all political news is secondary, the economy forms the market behavior.
Unfortunately, not all of these rules work in the cryptosphere. So in the field of cryptocurrencies, there are a huge number of accidents that are not justified by anything.
The fact is that the cryptocurrency market is highly monopolized. Moreover, it is monopolized twice, or rather, on both sides. On the one hand, whales are holders of large cryptocurrency states whose actions are difficult to predict. Cryptocurrency exchanges, on the other hand. Here the monopoly is even stronger and worse.
There are 13,700 cryptocurrency exchanges in the world. But the main trading is focused on the top ten cryptocurrency exchanges. For comparison, the volume of trading on the Binance Exchange No. 1 is 1.2 billion dollars a day, the volume of trading on the Exchange No. 10 is $ 175 million per day, and on the Exchange No. 100, it is $ 2 million. Any negative event with a exchange of the first hundred has a negative impact on the cryptocurrency market, and hacking of the TOP 10 exchange can bring down the cryptocurrency market for a long time and the consequences of this event will long affect investor sentiment.
History repeats itself
For history to repeat itself, it must be. Cryptocurrencies appeared only in 2009, gained universal popularity only in 2017. Prior to this, cryptocurrencies were the destiny of the elect and were in the hands of individual traders – large cryptocurrency holders.
What story can we talk about? It does not physically exist.
The same thing with patterns. We can speak about some patterns only in relation to Bitcoin.
A feature of cryptocurrencies is the high Bitcoin dominance index. There are more than 1900 cryptocurrencies in the world. At the same time, the Bitcoin dominance index is more than 50%. At the moment, it is 55%. Thus, we can talk about another monopoly – the monopoly of Bitcoin. Usually, all cryptocurrencies follow the Bitcoin exchange rate. If the price of Bitcoin rises, then the price of other cryptocurrencies rises, if the price of Bitcoin falls, then other cryptocurrencies also fall.
Technical analysis of cryptocurrency trading. Advantages and disadvantages
For cryptocurrencies, technical analysis only works for very short periods of time. All long-term forecasts of even the largest and most respected experts rarely come true.
For short periods of time, the technical analysis is quite accurate.
But at the same time, the following two factors must be taken into account:
- Trading statistics should be taken only from large exchanges
- Even large exchanges often wind statistics.
Thus, initially having wound data, it is very difficult to talk about the accuracy of the result. Here’s how lucky.
Technical analysis allows you to keep statistics in real time.
Technical analysis works on the same principle with all cryptocurrencies. Although in relation to little-known assets, often there is simply no information for analysis. We have to think over the situation. Usually, if the Bitcoin exchange rate grows, then all other cryptocurrencies also grow, if Bitcoin falls, then all altcoins will definitely fall.
Therefore, you can safely trade other cryptocurrencies on the Bitcoin trend.
The main drawback of technical analysis is the intervention of obscure factors that could not be foreseen.
The fact is that the situation on the market is often controlled by “whales”, and their actions are not always amenable to technical analysis. In addition, various tactics of market manipulation and artificial inflation of rates that are prohibited on the classical stock market flourish on the exchanges.
The basics of technical analysis were developed for the stock market, which is carefully regulated and controlled. There are no rules and laws on the cryptocurrency market. Allowed to do everything, even what is forbidden in any other place.
To recognize a trend on the exchange, there must be a large volume of trading. The fact is that there are more than 13,700 cryptocurrency exchanges. Small exchanges have such low trading volumes that you simply don’t have the baseline data to recognize the trend.
Therefore, for analysis it is better to take the largest exchange with a large trading volume and high liquidity. Only on such an exchange can you make at least some forecasts. Also need a cryptocurrency, which is very popular. Bitcoin is best suited.
In order to recognize the trend, in addition to the charts themselves, it is necessary to study glasses to see all orders and trading volumes.
Trading volume role
To determine the trend, you need to know the trading volumes. The number of orders for the purchase and sale of cryptocurrency, the order execution price, and also the trading volumes are important. Based on these data, a short-term forecast is made.
The peculiarity of cryptocurrencies is that cryptocurrency rates are extremely volatile and change rapidly. What happens on the classic market for weeks and even months on the cryptocurrency market takes several hours. Therefore, traders should be prepared for such a rapid development of events.
Critique of Technical Analysis
Technical analysis does not take into account news, it does not take into account politics, statements of public figures, psychological behavior of people.
The basis of technical analysis is the assumption that politics, news, psychology do not matter. Only finance and money matters. In any circumstances, people will act with maximum benefit for themselves.
Therefore, technical analysis has many critics. Whatever experienced traders are, they are not machines. Not always an experienced trader acts with maximum benefit for himself. He may get tired, afraid of the consequences, or just get sick.
A person may have a headache – so he will take the wrong decision.
On the other hand, 100 people cannot have a headache at the same time. Therefore, most decisions will be correct. But this rule only works in the absence of monopolies.
The cryptocurrency market is extremely monopolized. Most cryptocurrencies are concentrated in the hands of large holders. And if by chance a “whale” has a headache, then a technical analysis will not predict this.
To gain access to the classic market, a broker must have special licenses, have an education and vast experience. The chance that he will be mistaken is not great. Therefore, technical analysis works. A person acts like a machine, with maximum benefit for himself.
In the field of cryptocurrencies, everyone can trade. It is not necessary to study at universities for many years, to gain experience, to obtain licenses. A beginner behaves unpredictably and certainly often not with the maximum benefit for himself.
Therefore, in the field of cryptocurrencies, there are no basic principles of technical analysis. People act emotionally, and how the crowd will behave is generally difficult to predict.
Strategies Based on Technical Analysis
To understand how appropriate it is to apply technical analysis, you should also understand what percentage of traders use it and how large the volume of trades of these traders is.
To access classic exchanges, a broker must have the education and license. He owns all methods of technical analysis. And even despite this, in the same situation, different traders behave differently and understand the same chart in different ways.
There are no professionals in the field of cryptocurrencies. It’s just that nobody is being taught this yet. There are no universities for professional cryptocurrency trading. Even if a trader uses technical analysis, no one knows how he understands it.
Therefore, in the same situation, different traders will behave differently. There is no single strategy.
Is it worth it for beginners to conduct technical analysis in trading
If a person wants to engage in professional trading, then you need to be able to carry out technical analysis. In the world there are patterns, they have all been studied in detail, described and help in trade.
How effective the technical analysis in the field of cryptocurrencies depends on the situation. Cryptocurrency traders are driven by emotions. If professionals work in the classic stock market, the role of emotions and erroneous decisions is minimized. That in the field of cryptocurrencies there are emotions.
However, the cryptocurrency market is changing. Beginners leave, having lost money. Those who remain gain experience and become professionals.
It all goes to the point that the cryptocurrency market will become more predictable and regulated, like the stock market. Therefore, in any case, you need to study and study the basics of technical analysis if you want to engage in professional trading.