How does technical analysis work? Why do most people in the encryption market use technical analysis?

Dec 24,2022
How does technical analysis work? Why do most people in the encryption market use technical analysis?

Earlier, I have introduced to you what technical analysis is. Technical analysis, commonly referred to as chart, is a type of analysis that aims to predict future market behavior based on previous price behavior and trading volume data. However, some novice investors asked, how does technical analysis work? Why do most people in the encryption market use technical analysis? Next, let's have a look.

How does technical analysis work?

TA is basically a study of the current and previous prices of property. The important basic assumption of technical analysis is that the fluctuation of asset prices is not random and will generally change into an identifiable trend over time.

The core of TA is the analysis of supply and demand market forces, which is a model of overall market sentiment. In other words, asset prices reflect the opposite buying and selling energy, which is generated by the mentality of traders and investors. The first line is then applied to generate another EMA, which in turn generates the second line (called the power line). In addition, there is also a MACD bar chart, which is calculated based on the difference between the two traces.

Why do most people in the encryption market use technical analysis?

1. Less public information in the encryption market

The emergence of the cryptocurrency market is only ten years old, and the development of individual stocks has been more than three hundred years, so there will be very little public information in the market.

Nowadays, even the market sometimes does not know how basic information is useful to judge the "real value" of digital currency.

In addition, the current fundamental analysis method of digital currency is not as perfect as that of individual stocks or bond markets. Many information must be studied on English websites or there is no consensus.

Naturally, the fundamental analysis of digital currency still has its place, and may evolve over time, and the history of digital currency is slowly continuous, and more and more progress.

In the future, digital currency and blockchain will have more specific applications. At that time, it is expected that there will be a more mature fundamental analysis method to gain consensus, and it will be combined with technical analysis.

2. The encryption market is prone to transaction signals

Because technical analysis is applicable to short and medium term transactions, and the volatility of cryptocurrency market is greater than that of general assets, the advantages of technical analysis are reflected.

That is, "violent fluctuations may bring more opportunities to make money". In this environment, applied technology analysis will be more convenient and effective than fundamental analysis.

3. The encryption market is dominated by retail investors

As we all know, the knowledge threshold of general fundamental analysis is high (also known as stock investment in the stock market), so most retail investors prefer to use technical analysis as an important investment strategy.

When everyone in the market has a consensus on a certain trading strategy to set the same buying and selling price, it is easy for technical analysts to judge the future trend of the market.

In other words: "Once you know what other people think is the support line and resistance level, you can notice the attitude of others towards the market and further deepen your trading countermeasures."

Speaking of this, I believe you have a certain understanding of how technical analysis works and why most people in the encryption market use technical analysis. In general, technical analysis is a very good learning tool for trading investors. Before entering the cryptocurrency market, you can learn more about digital currency through technical analysis to avoid blind investment.