Now is the time to introduce the “apprentice” to his “tools”. Yes, this article is all about understanding how and what moves a market, and then what you have to do to take advantage of the movements that you observe. There have been books written on both fundamental and technical analysis, and the Internet is filled with detailed training guides devoted to this subject matter alone. You can go into as much depth as you wish in the future, but for now, we want to provide you with a basic level of understanding. Your demo account will allow for hands-on practice and a greater learning experience.
The movement of cryptocurrency prices is determined by the sum total of buying and selling forces in the market generated by institutional traders (i.e., hedge funds and banks), automated trading software, and traders just like yourself. If you recall from your basic physics classes, forces tend to create waves as they ebb and flow, searching for equilibrium. When you look at a pricing chart, you will observe that prices never move in straight lines. They always move in zig-zag patterns resembling waves, representing the buying and selling pressures that created their movement in the first place.
Based on many studies over the years, it has been determined that these waves tend to move in patterns. Imagine pitching a stone in a pond. The resulting initial wave is larger than the ones that follow, and believe it or not, there are natural laws that can predict with some consistency the various wave patterns that occur until the energy dissipates across the water. The release of fundamental economic data by government agencies has the same impact on the cryptocurrency market, as does the “rock” when thrown into the pond. Fundamentals move the market, and technical analysis gives you a basis to predict how the waves will move and change over time.
Fundamental analysis is the analysis of economic, financial, political, and crisis-related information with the objective of determining the reasons that will shape future movements in a financial market. Cryptocurrency prices tend to react radically to any news regarding growth, regulatory actions, adoption across markets, and even to good news about blockchain technologies as if each one were a crisis. Low liquidity can immediately translate into high volatility, a difficult arena for even the most seasoned traders amongst us. Technical Analysis, or “TA” for short, can be of great assistance.
Technical Analysis is a discipline that studies charts of past pricing behaviour for a given trading product in order to forecast future price performance. It is one of the most significant tools available for projecting predictable price direction in the financial markets. Due to the above average volatility of cryptocurrencies, however, the effectiveness of this tool can be diminished. Experience on your demo system will help you adapt to this reality. TA posits that price is the ultimate result of all market forces, and that momentum can cause trends to last for a period of time before buying and selling forces are able to balance out and reshape the price level.
Your broker’s trading platform will provide numerous indicators for detecting momentum, trends, support and resistance levels, and patterns in pricing behaviour. A Trending Market is one where prices are moving in a single direction, either up or down, but not sideways, and typically forming a series of higher highs or lower lows. Consistent traders know when to jump upon a trend and ride it for all that it is worth. They also know when to cut their losses. Once again, you must invest the time to learn about and become familiar with these “tools”, both their benefits and their shortcomings, via your broker’s demo system.
It is important to remember that technical tools are not perfect in predicting the best time to enter and exit a market position, but they can provide the necessary “edge” over time to win more than lose in the market. Always remember that “The trend is your friend!”