Technical analysis (TA), commonly known as charting, is an analysis designed to predict future market behavior based on previous price and volume data. It is also an integral part of digital currency transactions in the cryptocurrency market.
Unlike fundamental analysis (FA), which examines many factors related to asset prices, TA only focuses on historical price developments. Therefore, it is used as a tool to study price fluctuations and asset volume data, and many traders use it to discover favorable trading trends and opportunities.
Although the original form of technical analysis appeared in Amsterdam in Japan in the 17th and 18th centuries, modern OT can often be traced back to the work of financial journalist and Wall Street Journal founder Charles Doe. Dow was one of the first companies to notice that individual assets and markets often change based on trends that can be subdivided and studied. His work later led to the emergence of Dow Theory, which stimulated new developments in technical analysis.
In the early days, the basic methods of technical analysis were based on manual spreadsheets and manual calculations, but with the advancement of technology and modern computers, technical analysis has become popular and has now become an indispensable tool for many investors and traders.
How does technical analysis work?
As mentioned earlier, TA is basically a study of the current and previous prices of assets. The main assumption of technical analysis is that the fluctuation of asset prices is not random, and usually moves in the direction of a discernible trend over time.
Basically, TA is an analysis of supply and demand market forces that reflect general market sentiment. In other words, the price of an asset reflects the opposing forces of buying and selling, and these forces are closely related to the emotions of traders and investors (actually fear and greed).
It should be noted that in a market that operates under normal conditions of high trading volume and high liquidity, AT is considered more reliable and effective.
In order to study prices and ultimately identify opportunities, traders use various charting tools called indicators. Technical analysis indicators can help traders identify existing trends and provide detailed information about possible future trends. Some traders use multiple indicators to reduce risk.
Common TA indicators
TA traders usually use many different indicators and indicators to identify market trends based on charts and historical price behavior. Among the many indicators of technical analysis, the Simple Moving Average (SMA) is one of the most widely used and well-known indicators. As the name suggests, SMA is calculated based on the closing price of the asset over a period of time. The Exponential Moving Average (EMA) is a modified version of SMA, which weights the last closing price more heavily than the previous closing price.
Another widely used indicator is the Relative Strength Index (RSI), which belongs to a class of indicators called oscillators. Unlike simple moving averages, which simply track price changes over time, oscillators apply mathematical formulas to price data and then return values that are within a predefined range, which in the case of RSI is between 0 and 100 .
The Bollinger Bands (BB) indicator is another type of volatility that is very popular with traders. The BB indicator consists of two sidebands flowing around the moving average. It is used to identify possible overbought and oversold conditions in the market and to measure market volatility.
In addition to the increasingly simple TA tools, there are some indicators that rely on other indicators to generate data. For example, random RSI is calculated by applying mathematical formulas to regular RSI. Another popular example is moving average convergence divergence (MACD). MACD is generated by subtracting two EMAs to create the mainline (MACD line). The first line is used to generate another EMA, thereby generating the second line (called the signal line). There is a MACD histogram calculated based on the difference between these two lines.
Although indicators are useful for spotting general trends, they can also be used to provide information about potential entry and exit points (buy or sell signals). These signals can be generated when certain events occur on the indicator chart, for example, when the RSI display value is 70 or higher, this may indicate that the market is overbought. If the RSI drops to 30 or below, the same logic applies, which is usually seen as a sign of oversold market conditions.
As mentioned above, the trading signals provided by technical analysis are not always accurate, and the TA indicator will generate a lot of noise (false signals), which is especially true in the cryptocurrency market, which is much smaller than the traditional market. Therefore, it is more unstable.
Although technical assistance is common in all types of markets, many people believe that technical assistance is controversial and unreliable, and is often referred to as a "self-fulfilling prophecy." This term is used to describe events that occur only due to the expectation of a large number of people.
Critics believe that in the context of financial markets when a large number of traders and investors rely on the same types of indicators (such as support or resistance), the likelihood that these indicators will work will increase.
Many TA supporters, on the other hand, believe that each chart expert has a unique way of analyzing charts and utilizing the many available indicators, making it nearly impossible for a large number of traders to use the same specific strategy.
Fundamental analysis vs. technical analysis
The core premise of technical analysis is that the market price has already reflected all the fundamental data related to a given asset. However, unlike the TA method, which mainly focuses on historical price and volume data (market charts), fundamental analysis (FA) shows more Before extensive research. A strategy that pays more attention to quality factors.
Fundamental analysis assumes that the future performance of assets is determined by factors other than historical data. FA is essentially a technology that estimates the intrinsic value of a company, business, or asset-based on various micro and macroeconomic conditions. For example, the leadership and reputation of the company, market competition, growth rate, and industry conditions.
Therefore, we can assume that FA is different from TA. TA is mainly used as a tool to predict price changes and market behavior. It is a method of determining asset overvaluation based on the background and potential of the asset. Fund managers and long-term investors prefer the fundamental analysis of short-term traders.
A significant advantage of technical analysis is that it is based on quantitative data, so it provides a basis for objective research on price development, thereby eliminating some guesses related to more qualitative fundamental analysis methods.
However, despite the use of empirical data, TA is still affected by personal bias and subjectivity. For example, traders who are very inclined to draw certain conclusions about assets are likely to be able to manipulate their TA tools to maintain their bias and reflect their bias, and in many cases do so without their knowledge. In addition, when there is no clear pattern or trend in the market, technical analysis may cause interruptions.
In addition to long-term criticism and controversial debates about which method is better, many people believe that the combination of TA and FP is a more reasonable choice. This is useful for both traders and investors (for example, when looking for cheap entry and exit points).