Technical analysis is a tool used to understand and evaluate evaluate a security’s strength or weakness and forecast future price changes by analysing statistics such as historical price movement and trading volumes.
The underlying assumption of Technical Analysis is that the market price of a security at any given point of time or over a period of time factors in all available information and therefore can form a basis for future price projections of a security.
Over the past several years of research, analysts have developed multiple indicators all with the purpose of accurately forecasting the future price movements. Some of these indicators focus primarily on identifying the current market trend, including support and resistance areas, while others focus on determining the strength of a trend and the likelihood of its continuation. Very commonly used technical indicators include trend lines, moving averages and momentum indicators such as the moving average convergence divergence (MACD) indicator.
Technical Indicators & Crypto Markets
While Technical indicators can be very useful to find the entry and exit points in more regulated & efficient stock markets for which they were primarily designed, they could fail miserably in Crypto markets. Reason being:
- Price movements are quite predictable in traditional stocks because of the impact of more intrinsic events such as quarterly results or extrinsic events such as key monetary policy changes by government. However, this is not the case in crypto world where there are unexplained wild upswings and downswings with completely unregulated exchanges and insider trading. Don’t forget the Pump n Dump groups openly in action without a SEC check.
- Large institutional investors hold majority stake in the companies and the stocks are bought and sold by officially designated brokerage firms who would carefully go long and short avoiding market swings. In crypto markets, so called ‘Whales’ still control the market movements and can dump their holdings without caring for the resulting market sentiments. Crypto investors by and large are young college students and professionals with low to almost NIL trading experience and cannot be blamed for having weak hands who will dump on any kind of sell sign without understanding the real reasons.
- Traditional markets are regulated and have matured over a period of time with more learned investors so we can use Technical Indicators like SMA, MACD, Bollinger Bands to predict movement within a reasonable degree of confidence. However, with a market filled with unskilled investors, fraudsters & scammers who are always on the lookout to steal private keys and Ponzi schemes, applying technical analysis would only lead to inaccurate results and huge losses.
Technical analysis can be helpful to predict pricing movements in a more regulated and efficient environment, however, in the crypto world all it takes for a cryptocurrency to moon is a tweet from John McAfee or a CEO of a Ponzi scheme to show up on a paid Blockchain event with his team and talk about how they plan to use blockchain to change this world.
If you are attempting to trade short-term based on indicative price movements, it is nothing but pure gambling. You could end up risking all your capital and get stuck in a bad trade for a long long time. In my honest opinion, you can start applying Technical Analysis to get a long-term trend confirmation after a couple of years but definitely not now.
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