What is Technical Analysis (TA) in Crypto?
Traders and investors in the crypto space bet on what the market is likely to do at any point in time. It is on the basis of this bet that they put in money or decide to place or exit a trade. To make such bets or decisions, they need something to depend on for assurance. This involves doing some form of analysis to get an idea of what is likely to happen.
One of the ways they get this assurance is through a process called technical analysis. Now, you may have heard this term used a lot, but you wonder what it means. This article tries to explain what it is, its relevance in investing as well as trading in cryptocurrencies.
What is technical analysis (TA)?
Simply put, technical analysis (TA) is the analysis of assets using technical indicators. It is a way of looking at the market using specially designed tools which are the indicators. Through this process, investors and traders identify opportunities for investment or trading as the case may be. Technical analysis is usually based on previous data of an asset such as price, volume etc, which reveal patterns that can be used to predict what is likely to happen.
Technical analysis is used for any asset, currency or stock and can be very helpful in helping traders and investors to make decisions. This is not to be confused with fundamental analysis which relies on the current situation of the asset rather than previous data. Factors such as financial performance of the company, recent collaborations etc are used in fundamental analysis rather than data.
How technical analysis is done
Now that we know what technical analysis is, the next question is, how is it done? Technical analysis is done using data of an asset as earlier stated. It uses an array of tools called technical indicators, which are best suited for different scenarios during the analysis. These indicators are mostly used with one or two others in order to get a good picture of the market and make the best possible investment or trading decisions.
Technical indicators are grouped into 2 major categories, namely leading and lagging. Under this, there are 5 smaller categories to which all the others belong. We will look at each one of them separately in this article so that you will get a good grasp of what they are. The following are the categories of technical indicators.
Leading indicators are those used to predict what the price of an asset is likely to do before the change happens. It usually signals future events which traders or investors can leverage to profit. There are three other categories that fall under leading indicators. These are:
Relative strength indicators or Oscillators
These two indicators measure the changes in buying and selling pressures. They tell you if the buyers or sellers are in control and what is bound to happen next based on whether an asset is overbought or oversold. An example of a relative strength indicator is the Relative Strength Index (RSI).
These are used to see how fast prices are changing over time. By analyzing the rate of price change over a period of time, they can quantify the momentum of the asset in a certain direction. Examples of momentum indicators are Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD).
While leading indicators signal what the price of an asset is about to do, lagging indicators explain why the price behaves the way it does at any given time using trends in the past. They help the technical analyst to understand why things are the way they are currently. The following are categories of lagging indicators.
Mean Reversion indicators
The price of any asset changes direction after going in a certain direction for some time. For instance if the price of an asset rises, it will get to a point and the trend is reversed so that the price drops and vice versa. Mean Reversion indicators tell you how far the price will go in one direction before the move is reversed. An example is the Bollinger Imbalance Oscillator which is used solely for this purpose.
Also called trend following indicators, these indicators measure the direction of a market by following the trends (past behavior). Examples include moving averages and On-Balance Volume (OBV).
These can be both leading and lagging. As the name implies, they add up the volume (buying against selling) in order to tell if the buyers or sellers are dominating the market. Examples of these indicators are On Balance Volume (OBV) and Klinger Oscillator.
Advantages of technical analysis
Technical analysis has a number of advantages to its use. First, it can be used to analyse any asset including currencies, stocks, securities etc. It can also be used in any timeframe be it short or long, making it a very flexible method of analyzing assets. As a result, they can be used to analyse for long term trading or investment as well as short term.
Disadvantages of TA
Several tools as discussed above are used in technical analysis. However, using any of them in isolation hardly yields the desired results. They are therefore commonly used with one or two others, which is quite demanding.
Also, with TA you’re indicating the chance that something will happen in the future based on these indicators. So, there’s also a chance that the price will go the other way.