Analyzing the market is so confusing! How do traders know what to do?
It’s all about knowing the right type of analysis to use — and when.
If you’ve ever read our price analysis articles, you would have noticed that they feature graphs that show how major cryptocurrencies have performed against fiat currencies, such as the United States dollar, over time. At first glance, they look like meaningless lines going up and down, but the data tells a story about how recent events in the crypto market have affected prices — and what might happen next.
Analysis is crucial for traders. It helps them make informed decisions on when is best to buy, sell or hold crypto. There are three main types of analysis in the industry — and although technology has made them more accessible and easier to conduct, they have been staples of the financial world for decades. Indeed, the earliest forms of analysis emerged way back in 18th century Asia, when it was used to plot changes in the price of rice.
Technical analysis involves detecting statistical trends based on historical activity — examining price movements and other vital indicators, such as trading volume. These analysts generally have the philosophy that prices follow trends and history repeats itself, and they use their data to predict whether the price will go up or down in the immediate future. That said, it’s like forecasting the weather, you may not be absolutely right.
Fundamental analysis takes a different approach. Instead of looking where prices are going, they look at the factors that drive the numbers — such as the economy or how a company is being managed — to determine an asset’s value. It strips out emotion from the process and follows the philosophy that the market may have underestimated or overestimated a cryptocurrency’s value, and a correction will eventually occur.
Sentimental analysis sees traders effectively take the pulse of key players in the market: journalists, influencers and everyday consumers among them. Here, the philosophy is that data doesn’t always tell the full story — and trends such as panic selling or a purchasing spree can be picked up beforehand based on public perceptions and expectations.
So are charts a form of technical analysis? Help! I don’t have a clue how to read them!
Don’t worry — it’s a lot simpler than you think. The charts you’ll commonly see in our price analyses, as well as on crypto exchanges, are known as candlesticks.
There is method behind the madness here. When performing technical analysis, you’ll want to see how prices have evolved over a period of days, weeks or months, but seeing an average value for each 24-hour period won’t tell the full story.
Candlesticks enable you to see the full details of how the price of a crypto asset fluctuated over the course of one trading session and make comparisons that span a longer period of time.
This is achieved down to their shape, and you’ll notice that each candlestick has two thin lines with a thicker rectangle in the middle. It almost looks like a vertical rolling pin.
When prices have gone up over the course of the day, the candlestick will be green. The thin line at the bottom shows the lowest price that was recorded for the crypto asset during the trading session, while the thin line at the top shows the highest price that was reached. The bottom of the thicker section shows how much the asset was trading for when markets opened, while the top of that rectangle illustrates the price upon closing.
Meanwhile, when prices take a tumble, the candlestick turns red. The principle for reading the chart is the same, but everything is inverted. Now, the thin line at the top shows the highest price for the day, and the thin line at the bottom shows the low. The trading session illustrated by the thick red line, from top to bottom, illustrates where prices stood when the markets opened and closed.
It’s a beautiful invention that’s been tried and tested for centuries — and given how prices in the crypto world can be so volatile, it’s common to see charts that provide a candlestick for every hour over the course of the day.
Okay, so how do I act on what the charts tell me?
Certain shapes in candlestick charts can unlock opportunities for traders.
For example, a hammer candlestick usually features a long line at the bottom, which indicates that prices have fallen steeply before recovering to close higher. Usually, this can be interpreted to mean crypto assets were being sold extensively during the trading session, but buyers applied enough pressure to help prices rise again.
This pattern can also be inverted, meaning that the long line shoots out from the top of the body. Oftentimes, this can indicate that prices have been in decline but could be about to turn around and rise again.
Shooting star candlesticks look quite similar to inverted hammers but occur in a different context. These are typically seen after price advances and signal that an asset could be about to embark on a downward trend.
Hanging man candlesticks are also useful for assessing when markets might be about to start weakening. These candlesticks arise after a period when prices have been trending upward, with that long lower shadow we were talking about before indicating that selling pressure means the increases of recent sessions may come to an end.
When reading candlestick charts, it is crucial to get a short-term view as well as a long-term view — and take measures to protect yourself in case of volatility in the market. This is usually achieved using a stop-loss or stop-limit, which involves automatically selling an asset when it reaches a predetermined high or low point.
What are the most popular techniques used for technical analysis?
Most analysts are trying to uncover trends that reveal where the market is going.
One popular method is known as trend lines. This tries to disregard anomalies and extreme outliers in a cryptocurrency’s price to detect an upward trend when assets carry on hitting new highs in their price — or lows, if prices are falling over consecutive days. This, combined with analyzing the shape of candlestick charts, can help reveal whether a trend is likely to continue or come crashing to an end, enabling traders to make considered decisions on what their short-term strategy should be.
A similar strategy involves something called a moving average. This involves tracking the typical prices of a crypto asset over a set period of time — and whether it’s a week, 10 days, 30 days or more is up to you. Comparing moving averages over a shorter time frame with a longer one can uncover new trends and enable you to pick up on significant levels of recent growth and decline that a more long-term statistical breakdown wouldn’t reflect too clearly.
Should I rely on technical analysis alone?
Although it’s arguably the most common form of analysis in the crypto world, it’s important to take other factors into account.
Always remember that technical analysis won’t tell you the fundamental factors that are affecting the market and causing prices to head up or down. Hacking attacks, regulatory rulings, significant news stories, landmark agreements and new product launches can all help you to stay ahead — and give an idea of where the candlestick will fall before it does so. Relying on just one form of analysis is kind of like trying to eat steak with just a fork. You need a knife too.
Are there any tools that make analyzing market movements simpler?
If staring at charts all day isn’t your scene, there are alternatives.
As we mentioned earlier, our regular price analysis feature prepares charts for you and provides written context about what might have caused these movements. Of course, data can be interpreted in different ways, and no two analysts are the same, meaning each will pick up on trends based on their own research. Therefore, it’s a good idea to stay plugged into as much crypto news as possible to guarantee that you’re getting the bigger picture.
Charts and articles can also make it difficult to see what’s happening across the whole crypto market at a glance. Websites like Coin360 help to visualize where the industry is right now in a simple and accessible way. The size of a cryptocurrency on Coin360 offers an indication of its volume or its market capitalization, while green and red colors help indicate whether the asset has seen price rises or price falls. Along with the current prices, percentage changes for the past hour, day, week or month are provided — and users can hover over each cryptocurrency for a chart illustrating how prices have fluctuated over a period of time. Users can also download historical information on demand.
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