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As Predicted: Technical Analysis Explained

Posted 08 August 2017 As Predicted: Technical Analysis Explained
Written by Jon Gulson
Our previous blogs have addressed the new fundamentals cryptocurrency is introducing to the world of finance; but like any other tradeable asset, it is not just fundamentals which investors look at when making decisions. There is another data set to also be considered: technical analysis.

The Trend is Your Friend

Technical analysis differs from fundamental analysis as it doesn’t consider underlying or intrinsic value. It is not concerned with factors like scarcity or how many coins have been mined, regulatory approaches or merchant adoption. Rather it is looking to predict future performance by statistically analysing previous price behaviour.

Technical analysis works on the basis that prices move in trends and patterns which tend to repeat themselves over time.  It involves interpreting information contained in charts, indicators and oscillators to find overbought or oversold trading opportunities based on high probability of how these trends will occur and when.

This gives rise to an arcane language you will encounter on any ‘bitcoin price’ Google search – including moving averages, stochastic oscillators and Fibonacci retracements. Reference will be made to charts, support and resistance levels – from which, a price prediction is extrapolated.

Does Technical Analysis Work?

To the uninitiated, the language of technical analysis can appear baffling. Which is why there are plenty of people selling training packages or their own trading method to those who wish to make sense of it all.

Fib curve

Herein lies the problem: there is no comprehensive definition of what technical analysis actually is, even amongst seasoned market professionals. The colourful nature of charts and the names of emerging patterns and ‘market speak’ sold as real knowledge gives rise to ‘get rich quick’ schemes which rarely work (if at all) as a shortcut to riches.

The contradiction in technical analysis is this: statistical methods continually beating the market, will be kept closely guarded secrets; but the more people following a specific technical approach can create a self-fulfilling prophecy (if enough participants move in the same direction).

And the difficulty in technical analysts consistently making winning calls will often lead them to hedge their bets by citing different outcomes for different reasons. So at any outcome reached, they can then say ‘as predicted!’

The truth is, most traders will combine fundamental analysis with previous price behaviour (when making investment decisions). With the cryptocurrency markets - especially bitcoin - the decision making is best biased to fundamentals which are longer term. This is because the shorter the trading horizons, the greater the risks; there will always be unforeseen events and volatility in the cryptocurrency markets which not even the best technical trader can predict.

Written by Jon Gulson
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