DeutschTechnical Analysis (TA) is an approach to analysis for evaluating price trends and is also known as chart analysis. Based on historical data on price movements and sales of cryptocurrencies and other assets, TA is intended to enable statements about the probable future development of prices and thus provide indications of the right time for favorable purchases and sales.
What is Technical Analysis?
Technical analysis is a form of financial analysis used to predict price movements and trends in financial markets. The main goal of technical analysis is to determine a suitable buying or selling time for an asset based on trading volumes and chart patterns.
Technical analysis is a popular analysis method in the stock and crypto market. Technical analysis is particularly interesting for the analysis of chart patterns of cryptocurrencies, as there is a high level of volatility, especially in the case of cryptocurrencies. Technical analysis can help to identify entry points for a trade even in the event of strong price fluctuations.
Basic Assumptions of Technical Analysis
First of all, technical analysis assumes that the price of an asset already contains all price-relevant information and news in the price. This includes company data or macroeconomic factors. Furthermore, technical analysis assumes that prices move in “trends”.
A trend exists when the price of a cryptocurrency or other asset tends to develop in a certain direction despite price fluctuations. An analyst tries to recognize these trends early on with technical analysis in order to make corresponding purchase or sale decisions.
Another assumption of technical analysis is that the past repeats itself. The market is determined by people who place buy or sell orders. And people generally tend to behave comparably in similar situations, which leads to the basic assumption that certain price patterns from the past will also be repeated in the future.
Technical Indicators and Chart Patterns
There are many instruments and indicators that can be used in technical analysis. The most commonly used indicators include moving averages, trend lines, Bollinger bands, and the Relative Strength Index (RSI). Each of these indicators can be used to identify patterns in the price history and determine potential entry or exit points. These indicators are calculated based on past price data. So-called chart patterns are also important indicators for a trader, as they are directly visible in the chart. These include, for example, the “Head & Shoulders”-, the “Rising/Falling Wedge”-, or the “Double Top/Double Bottom-Pattern”.
A very frequently used technique in the technical analysis of cryptocurrencies are so-called “Supports” and “Resistances”, also supports and resistances. This technique is quite easy to understand, but also difficult to master. Here, price levels are identified at which the price has reacted in the past either by a reversal, or at least by a slowdown of the trend.
Based on this, it can be implied that the price will behave similarly again when such a price level is reached again.
Challenges of Technical Analysis
One of the biggest challenges of technical analysis is that it is not always reliable. Because there are many factors that can influence the price. It is therefore impossible to take all of them into account. In addition, patterns and signals of technical analysis – if they only refer to a very short period of time (for example, in day trading) – can be misleading. It is therefore important to be aware that technical analysis is only a tool.
In order to achieve maximum chances of success in trading, technical analysis should never be the sole influence on buying / or selling decisions. Instead, traders should use technical analysis in combination with other analysis methods such as fundamental analysis, or the analysis of on-chain data. This gives them a more comprehensive view of the current market.
Before traders apply technical analysis, they should familiarize themselves with the various instruments and indicators and learn how to interpret them correctly. There are many resources that can help traders, such as books, online courses and training courses. A practice depot with virtual “play money” is also recommended. Here you are able to familiarize yourself intensively with the technical analysis. However, since no real money is used, there is no real loss in the event of errors – which can occur quickly, especially at the beginning.
Trading decisions should always be made only on the basis of a clear risk management plan. Good risk management helps traders to limit losses and be successful in the long term. Technical analysis can help to identify potential entry and exit points, but it is important that traders always keep an eye on their risk appetite and their trading capital.
Conclusion on Technical Analysis
Technical analysis is a useful tool for traders to analyze the market and identify potential trading opportunities. However, it should not be used as the sole basis for trading decisions and it is important to also consider other analysis methods and factors that can influence the price.
