Does technical analysis work for the crypto market?

How great would it be if you had enough insight into how the crypto market will behave so you can profit from it?

Technically, you can (no pun intended).

You can use technical analysis, a mainstay in the traditional stock market that’s been used for decades. Yet, cryptocurrency is a completely different beast, and what works on Wall Street might not really translate well to the blockchain.

So can technical analysis help you predict crypto prices and does it even work for the crypto market?

Let’s find out!

Definition time: what is technical analysis?

Technical analysis is a way to understand market sentiments that influence price trends by analyzing patterns to predict future prices.

By studying stats collected from historical prices and looking at patterns of price movements and trading signals, you can get a better idea of the strength of a particular asset.

In traditional stock markets, technical analysis is used along with fundamental analysis, which relates to analyzing the financial statements of companies to determine the value of a business.

However, while this approach works for trading stocks, the crypto market can be understood a lot easier without even bothering with fundamental analysis.

For example, if you’re trading General Motors stocks, there are many outside factors to consider such as product announcements and recalls, employee layoffs, changes in management, and so on — all of which can affect the stock price, so technical analysis alone doesn’t cut it.

But when it comes to crypto trading, it’s a different story.

Since crypto traders rely strictly on price charts, doing tech analysis allows you to understand what your fellow traders are doing. In turn, you can understand the trade a lot better than simply winging it and hoping for the best.

Because let’s face it, not every token and the project behind it is carefully vetted. Not every token is bound to succeed, especially when there is no utility behind it. This is the main reason for LitBit Finance Incubation utility, the elite ecosystem where we promote projects on strict criteria that can ensure a project’s success.

Until we’re in full gear, technical analysis is the only thing we have, and that’s why you should take advantage of it.

Does it work and why?

Technical analysis operates on three principles:

• All relevant information is already reflected in the price of an asset (crypto or a stock)
• Prices move in trends
• History repeats itself

In short, all of the three key principles lead us to the conclusion that technical analysis boils down to uncovering patterns.

All crypto assets have a trend line. By considering how this line moves over a certain time period, you can get an idea of the patterns that will inevitably emerge.

Thus, technical analysis is perfect for understanding how market factors can affect the price of a digital asset. You can also use it to better predict how a market might react to certain situations.

Why exactly does it work, though?

There is a psychological reason why technical analysis works — your past decisions usually influence how you behave in the future. This is especially true when talking about the dread of losing money.

Let’s say you bought Dogecoin. You’re going to remember how much it was worth at the time of your purchase. If it experiences a heavy decline, you will most likely wait for it to go back to the price at which you originally bought it before selling it in order to break even.

At the same time, since most traders are trying to identify the common price chart patterns, they’ll either buy or sell the moment a pattern emerges. Once enough people follow suit, the price chart will reflect the expected outcome. The trend of growth or decline will likely continue as more and more people hop on this trend.

Bonus tip: Pay attention to the news

World events are another thing that can influence the prices on the crypto market. This is a great example of technical analysis in action helping you avoid a catastrophe.

Historically, we know how much media and everyday developments can influence the prices of crypto. Look no further than how much prices dipped after the start of the Russia-Ukraine conflict earlier this year.

The same can be said about the opposite trend. For example, when Elon Musk changed his Twitter profile picture to a picture of a Bored Ape NFT. As a result, the project’s token ApeCoin went up by 19% in a span of a single hour.

However, this spike was temporary as ApeCoin quickly started dipping way under what the initial value was before the spike (actually, it’s been falling ever since). Remember to trust your intuition and your analysis so you can trade with confidence.

Once you’re confident in the analysis you did, and understand that the price might spike or dip because of a certain event, you can sell high and buy low without worrying about crypto’s inherent volatility.

Taking the guesswork out of crypto

Technical analysis is an essential tool in the arsenal of every crypto trader. To be successful at this game and roll with the big boys, you need to master it.

While it’s not 100% foolproof, it’s still the only science-based approach to trading crypto assets. Yes, prices are unpredictable — there’s no helping that. Still, technical analysis lets you understand how the market operates and how you can make successful trades.

Take the ApeCoin situation and imagine you were one of the original token holders. Anticipating the spike in the price due to an unprecedented event would be easy if you followed what’s happening in the charts. Afterward, you’d also be one of the traders who sold high before the inevitable dip occurred.

This is why you need technical analysis: not only to make serious monetary gains but also to avoid losing your hard-earned investments.

You can thank us later!

This is not in anyways meant to be financial advice and you must always make the best decision you can by Doing your Own Research.