Technical and fundamental analysis comprise the backbone of investment research. To determine an asset’s value, fundamental analysts look at macro and microeconomic trends, industry conditions, and the competitive landscape. Technical analysts, on the other hand, aim to understand market sentiment by looking for patterns and trends and to predict price movements by examining historical data like price and volume. We have posted about fundamental analysis in the previous article.
Technical analysis involves using mathematical indicators based on previous price action data to try to predict future trends. The basic idea is that markets behave according to certain patterns and that once established, trends heading in a certain direction often continue along the same course for some time.
Broadly speaking, investors want to buy when markets are low so they can sell higher at some point in the future, and thus make a profit. Conducting technical analysis before entering a position is one way to try to identify price levels that might be considered low. There’s no single, all-encompassing method for crypto technical analysis. Each trader will prefer to use different indicators and will likely interpret them slightly differently. It should also be noted that no technical analysis is anywhere near 100% predictive.
Technical analysis is the study of price movements through the use of charts. Traders use technical analysis to make profit from price changes, even when a cryptocurrency goes down.
– All information is reflected in the price.
– Human psychology tends to repeat over time.
– Statistical analysis can help uncover what the price may do next.
Technical analysis usually relies on charting patterns, statistical indicators, or both. The most commonly used charts are candlestick, bar, and line charts. Each can be created with similar data but presents the information in different and useful ways. Some of the most common technical indicators are:
– Average directional index: A technical analysis indicator that helps determine the strength of a trend.
– Bollinger bands: A tool used to help determine whether asset prices are high or low on a relative basis.
– Relative strength index (RSI): A momentum indicator used to determine the magnitude of recent price changes
– Standard deviation: A concept applied to an investment’s annual rate of return; provides insight into that investment’s historical volatility.
Technical analysis is basic economics wrapped in fancy terms. Basically, it’s the study of supply and demand and the way to best anticipate trends. For novice crypto investors, these tools might seem complicated—and sometimes they are. But cryptocurrency technical analysis can provide a window into price movements that could help you make better investments.
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