ExMasters Degree: Technical Analysis or Fundamental Analysis in Trading Cryptocurrencies?

A trader without a strategy for trading is like a ship sailing without direction or exact destination. It is possible to trade on a hunch, but that way you can become an easy lunch for market makers or institutional traders who understand herd mentality and always trade against the crowd.

Markets are volatile, change quite often, and intuition is not enough to be profitable. Preparation is necessary. You need to have an outlook about the market and how you are going to analyze it before applying a specific strategy.

Those who trade in financial markets rely on two types of analysis: fundamental and technical. There is a big debate about which one is better. It depends on a trading style and personality, but our concern is primarily with how to trade cryptocurrencies, and that will help us find which one works better in the market of cryptos. But first things first, what is fundamental and technical analysis?

Fundamental analysis

The main focus of fundamental analysis is the economic, financial, and political (geopolitical) factors that affect a given tradable instrument that a trader wants to use. Those factors can be: interest rates set by Central Banks, GDP data, increase/decrease in the number of jobs, inflation (CPI or PPI), quarterly or annual earnings (if you analyze stocks), supply and demand, troublesome news (explosion of oil factory, a terror act, droughts et.) and many more.

For example, the EUR/USD pair may rise if the president of the ECB (European Central Bank) announces that they are going to raise interest rates regularly in twelve months. Or you can see from the chart below how Crude Oil sharply rose when traders found out that drones attacked oil factories in Saudi Arabia on the 14th of September, 2019.

Source: https://www.tradingview.com/x/41nQraYL/

Technical analysis

The main focus of technical analysis is analyzing price action on a chart to figure out where the market is headed, what its current state is, and how to trade a specific technical pattern, or which technical trading strategy to use.

This includes analyzing price patterns, highs, and lows of the price (whether they held or were broken), support and resistance areas, candle patterns (a doji, engulfing, inside candles, reversal candles, etc.).

Traders also use various technical indicators such as moving averages, stochastics, relative strength index, or MACD to see whether the market is trending or is range-bound. Below is an example of a market in a range with support and resistance levels, a Doji candle, and an RSI indicator that is typically used to decide whether a given market is overbought or oversold.

Source: https://www.tradingview.com/x/8FTD7FY4/

Can we use a fundamental analysis to analyze the crypto market?

The market of cryptocurrencies is a decentralized system. It is challenging to find a set of fundamental data that can be used to analyze any crypto pair or the whole market fundamentally. It may change at some point in time, for example, when cryptocurrencies become adopted by the mainstream and are regulated by some financial authorities. Still, one will better stay away from trying to use fundamental analysis in the crypto market for the time being. How about technical analysis?

Cryptocurrencies display clear technical patterns and can be easily analyzed technically.

That’s right. Even though it is next to impossible to use a fundamental analysis in the market, cryptocurrencies do not move randomly. They resemble price action of globally traded instruments such as stock indexes, precious metals, currencies, etc. and can be analyzed technically. Any technical pattern can be traded in cryptos, and you can use any technical indicator (moving average, RSI, or any other) in your analysis of crypto pairs.

For example, after the COVID19 global lockdown, markets crashed and bottomed out between 16th-23rd of March. Giant bullish candles on daily charts indicated that there is a tremendous demand and buying power that lifted the markets. Just look at the gold chart (you can see the same pattern in individual stocks, precious metals, indexes, and currency pairs such as EUR/USD or GBP/USD).

Source: https://www.tradingview.com/x/wCZwHIbe/

How about crypto pairs? The same pattern! Most popular cryptocurrencies bottomed out on the 13th of March, earlier than any other tradable digital asset. This can be spotted on a daily chart where bullish candles formed across the most popular cryptos. For any technical analyst, this is a bullish sign and an alert to get ready to start buying crypto pairs and HODLE them for a more extended period. You can look at any famous crypto pair to see the same price action. Refer to the chart of the BTC/USD pair below to see for yourselves.

Source: https://www.tradingview.com/x/v9cWg6zz/

Institutional investors, aka smart money, leave a trail on charts, which can be easily spotted.

It was evident that retail traders (individual traders) that comprise the largest number of any market, including the crypto market, do not have enormous resources and cannot move markets. Institutional traders (smart money) operate in millions, billions, and some even trillions of dollars, and that type of volume of funds can move the markets and create trends. The good news is that when institutional money enters the markets, they leave the trail on the charts. You can spot the trail by doing technical analysis. Despite being a small trader, you can take advantage of what you see in a chart and trade it profitably.

You can play the crypto market on both buy and sell sides.

When you are well trained in technical analysis, you can start playing the crypto markets from both long and short sides. You can buy crypto pairs in the bull market and sell them short in bear markets.

Explanation about buying and selling short: in a crypto pair, you buy the base cryptocurrency (the first cryptocurrency in the pair against the quote cryptocurrency (the second cryptocurrency in the pair), and if you sell short, you sell the base pair against the quoted pair. For example, in the ETH/BTC pair, ETH is the base cryptocurrency, and BTC is the quote cryptocurrency. So, when you buy the pair, you buy ETH and sell BTC, and when you short-sell the pair, you sell ETH and purchase BTC.

A lot of traders tend only to buy cryptocurrencies expecting that they will always go up. This kind of attitude got them burned in 2018, and they learnt that cryptocurrencies can also go down when the entire crypto market crumbled down. An avid technical trader saw the turning signs on the charts. When a financial instrument starts going vertically like a rocket flying into space in a bull market, it is usually the last stage of the bull market. What usually follows after is a sharp reversal, which can be seen on the daily charts in the form of substantial bearish candles (reversal candles). That’s a sign to close buy positions and prepare to trade on the sell-side. Refer to the BTC/USD chart below to see the pair’s meteoric rise in the last stage of the bull market and then huge bearish candle indicating that the bullish trend is over and the bearish trend is on its way.

Source: https://www.tradingview.com/x/HUwrLC93/

Using technical analysis, you can spot the signs when you should take profits on your buy position, when to reverse your trade and start selling, and when to take profits on your sell positions and start buying again.

Conclusion

Technical analysis is a much better way to analyze and trade crypto markets as the market is decentralized. It is challenging to implement fundamental data or indicators to analyze cryptocurrencies. It is also easier, as institutional money that moves the markets always leaves technical footprints on the charts that can be seen implementing various technical criteria such as candle patterns, support, resistance, moving averages, highs, and lows, etc.

This was an introductory article on technical analysis. We are preparing a series of articles on various trading strategies (technical) that can be easily implemented in your trading. Stay tuned, prepare to learn, and get ready to trade like institutional pro traders.

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ABOUT THE AUTHOR

ExMarkets is a digital asset exchange platform powered by the state-of-the-art trading engine developed in-house. On the exchange, ExMarkets users can trade the most popular cryptocurrencies as well as gain the chance to participate in the token sales of the most promising blockchain and crypto projects through ExMarkets Initial Exchange Offering (IEO) LaunchPad.

ExMarkets has obtained granted 2 operational licenses for crypto-fiat gateway and custodian service provision by the Estonian regulator making it one of a few certified players in the market.

It takes only a few minutes to set up your account and users are allowed to make deposits in Bitcoin, Ethereum, other supported cryptocurrencies, tokens, and most importantly Euros.

To top it all off, ExMarkets is a part of the CoinStruction liquidity framework which is aggregating order-books from the most well-known cryptocurrency exchanges guaranteeing 24/7 crypto liquidity — a feature which can seldom be seen in the current market.

All IT solutions and technology of ExMarkets and CoinStruction’s services are developed in-house guaranteeing that all security threats and third-party associated risks are kept at minimum levels throughout all stages of product deployment.

Trade. Master. Profit. ExMarkets.

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