What is Technical Analysis in Cryptocurrency trading?

Technical analysis is a method of determining how and when to trade an asset and to predict its possible price movements by studying past market data. Technical analysis does not try to determine the actual price of an asset like fundamental analysis, but is based on the history of the asset’s price movements.

The Dow Theory

Technical analysis is based on Dow Theory which consists of six fundamental ideas:

1. The market discounts everything. The price of an asset already incorporates all the information about it, including market sentiment and traders’ expectations.

2. There are three types of market trends. Price movement moves in trends, there are primary trends that last from several months to more than a year and within these are secondary trends, which are usually corrections and last several weeks. There are also short trends that last less than one or two weeks.

3. Primary trends have three consecutive phases:

– Accumulation, where experienced traders start buying or selling an asset. Since there are not many of them, the price hardly changes.

– Public participation. As more traders begin to notice a new trend and follow it, the price begins to change rapidly.

– Distribution. Experienced traders begin to distribute their holdings during speculation.

4. Indices must confirm each other. The signals of one index should confirm the signals of another. This principle can be seen in the correlation between the movements of cryptocurrency pairs.

5. Volume should confirm the trend. If the price movement is accompanied by an increase in volume, it means that the price is moving in the direction of the trend. If the volume decreases, the price moves against the trend.

6. A trend holds until it gives clear signs of its reversal. It is more likely that the price will maintain the current trend rather than change it.

In conclusion, technical analysis consists of a series of indicators that are based on various statistics such as price and volume and are presented visually (lines, histograms, candlestick charts…). Indicators are designed as tools to help traders detect buy or sell signals.