Technical vs. fundamental analysis in trading

The debate over relative merits of fundamental & technical analysis is contentious. Learn how both investment analysis methods can be combined effectively.

When approaching investment in the stock market there are two very common methodologies used, fundamental analysis and technical analysis.

Some claim that technical analysis of charts actually works and helps traders to make profits. Others compare these practices to astrology and fortune telling. Indeed, most of the concepts of technical analysis are quite blurred. So, should it be used by crypto investors on a daily basis?

Technical vs. fundamental analysis: what is the difference?

Here is a typical post with predictions based on technical analysis, which was published by the trader Satoshi Flipper. He has almost 50 000 followers on Twitter, so a huge number of people listen to him.

“Very bullish daily close for $LINK today. Not only because of the candle, but we closed above an important 23k sat level and now there is nothing between here and the next big resistance st 29k sats.”

Candle? Resistance? What kind of weird names are these anyway?

Flipper speaks a so-called technical analysis language, a discipline unrecognized by many, whose supporters believe that the price of an asset in the future can be predicted by its past behavior. Analysts often like to scatter terms like triangle shapes or Fibonacci levels. In this case, the description of these phenomena can be placed in a very long course of articles.

Technical analysis is fundamentally different from fundamental analysis. In the latter, the future behavior of an investment asset is judged by the news background around it. In the case of shares, the news background is formed by information about the company’s profit and innovations inside it. However, from the point of view of technical analysis, the news is already “priced in”, so the ideal prediction of its future can only be achieved by studying the chart.

Those who operate with the principles of technical analysis believe that the asset cannot be too cheap or too expensive. The market simply moves its course, and traders can only adjust to the behavior of charts. However, in the hands of a novice trader this tool can turn into a “worship of pseudoscience”.

Who make crypto horoscopes?

Almost all renowned crypto fund managers are squeamish “guessing on charts”. They are responsible for millions of dollars of their clients and invest for a long time. In their opinion, if technical analysis works, it is only on the scale of one short-term transaction.

Nick Carter from Castle Capital Ventures believes that a trader can only benefit from completely new events. According to him, the charts show past events that no longer have any weight in opening a potentially profitable trading position.

“How can you criticize technical analysis?! I have just made three dollars on one trade with the “cup and handle!”

The “cup and handle” is the name of the next formation on the chart, if anything. And yes, the method of technical analysis of charts has its own ardent admirers who are ready to defend their point of view to the last, completely ignoring any logical arguments.

The analyst Jenny Kool has one such argument — technical analysis works only in some cases. However, there is no correlation between predictions and the real price of Bitcoin, so all forecasts can be compared to the same flip of a coin. If you’ve had an eagle flip five times in a row, there’s no guarantee that the next time no tails will fall out.

Bitcoin price predictions

In one interesting article published by the CCN, experts found a “falling wedge” figure on the Bitcoin chart. According to them, it should certainly cause a sharp rise in the price of cryptocurrency. Below the figure is highlighted by two black lines. Judging by the forecast, the chart should have broken through above the upper line and rushed up.

The price spike really did happen. But in the opposite direction. Almost a day after the publication of the article, Bitcoin fell in price by $1000, a couple of weeks later its price fell to almost $3000. And how after such to believe the technical analysis?

And examples of such cases are full among other famous publications. Some traders even use CNBC news to open profitable trading positions.

As it turned out, in 95% of cases, the news portal publishes wrong predictions, and in reality Bitcoin’s chart behaves quite differently.

How to utilize your analysis properly?

Even good predictions are of little use if you can’t trade. The skill means understanding when it is worthwhile and not worth opening deals, as well as how much of your capital can be allocated to a certain trading strategy. The whole problem of beginner traders is that they pay absolutely no attention to elementary rules of risk management.

What does an inexperienced trader do? He calculates an approximate amount of money, which he is ready to lose on a potentially losing trade and immediately presses the button to open a trading position. He has already drawn a profit in his head and may even get it. True, in this situation, he is almost no different from a gambler in the casino. And gambling houses, as you know, never let their customers win.

Yes, technical analysis gives you a choice of several of the most likely scenarios. To apply it successfully, you need to combine data with the rules of risk management.

You can profit from a certain trading strategy in 70% of transactions. The problem is that the trader does not know which 70 out of 100 deals will be profitable. The first 30 positions may well prove to be losing. If a trader does not use risk management rules, his deposit will simply “not live” to the strip of successful deals.

The easiest thing you can do is not to risk more than 2% of your capital in one trading position and never give in to emotions. If a deal brings you a loss, do not try to “win back” — close it as soon as possible.

Conclusion

Fundamental analysis can work perfectly in traditional markets. Companies that issue shares are constantly in the news center of financial publications. And what about cryptocurrencies? There is no visible news background for every day in this industry, and most of the time nothing happens to the crypto.

In this case, with the help of competent technical analysis you can not only predict, but also independently create the future price of Bitcoin. In fact, nobody knows what the “fair” price of the cryptocurrency is. Since most traders prefer to use technical analysis, why not play by their rules?

Example: the price of an asset breaks through upwards after the formation of a piece called a falling wedge. Traders are purchased in the cryptocurrency, waiting for further price increases. And then the market fails everyone again — Bitcoin suddenly becomes cheaper. It is very likely to fall even lower, as most traders will have to sell BTC in order to close the losing trading positions. That’s where you can take profit when playing it down.

There are hundreds of such examples. If knowledge of technical analysis can bring you profit in at least several cases out of ten, then why not use them?

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