# What is Technical Analysis in crypto & how does it work

What is Technical Analysis (TA)? How does it work? Is Technical Analysis better or worse than Fundamental Analysis? In this article, we will answer all of these questions and more. We will start by explaining what Technical Analysis is and then move on to cover the most important technical indicators in TA. After that, we will explore the flaws of Technical Analysis and compare it to Fundamental Analysis. Finally, we will give a conclusion on Technical Analysis and whether or not it is a good method for trading cryptocurrencies.

# What is Technical Analysis (TA)?

Technical Analysis is a method of evaluating assets by analyzing the statistical data of past market behavior. Technical analysts believe that the collective actions of all the participants in the market, including buyers and sellers, are reflected in price movements. Technical analysis is used to identify trends and patterns in price movements in order to make predictions about future prices.

There are many different Technical Analysis indicators, but some of the most common ones are Moving Averages, Bollinger Bands, and Relative Strength Index (RSI). We will cover each of these indicators in more detail later on.

# How does Technical Analysis work?

Technical analysis works by using past price data to identify patterns and trends. Technical analysts believe that market participants’ collective actions are reflected in price movements, so they use this data to make predictions about future prices. Technical analysis is based on the idea that prices move in trends.

## Understanding the price action

The most important part of Technical Analysis is identifying the trend. Once the trend has been identified, Technical Analysts will use various indicators to try to predict where prices are headed next. There are three main types of trends:

- Uptrend: Prices are increasing over time.

- Downtrend: Prices are decreasing over time.

- Sideways/Consolidation: Prices are neither increasing nor decreasing but are instead “consolidating” in a narrow range.

## Interpreting candlesticks

One of the most popular ways to Technical Analyze price data is by using candlesticks. Candlesticks are charts that show the high, low, open, and close prices for a given period of time. Each candlestick represents one period of time, such as one day or one hour.

The body of the candlestick is the part between the open and close prices. If the candlestick is green, it means that prices increased from the open to the close and vice versa for red candlesticks. The wicks of the candlesticks show the high and low prices for the period of time represented by the candlestick.

## Identifying trends and momentum

Once you know how to read candlesticks, you can begin to identify trends. An uptrend is defined as a series of higher highs and higher lows. A downtrend is defined as a series of lower highs and lower lows. A sideways or consolidation trend is defined as a series of candlesticks with small bodies and wicks, where prices are neither increasing nor decreasing.

You can also use Technical Analysis to identify momentum. Momentum is the rate of change in price, and it can be used to identify whether a trend is likely to continue or reverse. There are two types of momentum: positive and negative. Positive momentum occurs when prices are increasing at a faster rate than usual, and negative momentum occurs when prices are decreasing at a faster rate than usual.

## Reading technical indicators

There are many different Technical Analysis indicators, but some of the most common ones are Moving Averages, Bollinger Bands, and Relative Strength Index (RSI). We will cover each of these indicators in more detail later on.

# What are the most important technical indicators in TA?

## Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a Technical Analysis indicator that measures the strength of a price movement. It is used to identify overbought and oversold conditions in the market.

The RSI is calculated using the following formula:

RSI = 100 — [100 / (Uptrend Average / Downtrend Average)]

The RSI ranges from 0 to 100. A reading of 0 means that the price is oversold, and a reading of 100 means that the price is overbought.

## Bollinger Bands

Bollinger Bands are Technical Analysis tools used to measure volatility in the market. They are created by using a simple moving average and adding and subtracting two standard deviations. Bollinger Bands can be used to identify overbought and oversold conditions in the market and predict future price movements.

The formula for Bollinger Bands is as follows:

Bollinger Band = Simple Moving Average + (Standard Deviation x Number of Standard Deviations)

The default number of standard deviations used is two, but this can be changed depending on your needs.

## Moving Averages (MA)

Moving Averages are Technical Analysis indicators that show the average price of a security over a given period of time. They are used to smooth out price data and to identify trends. Moving Averages can be calculated using different methods, such as the Simple Moving Average, Exponential Moving Average, or Weighted Moving Average.

The Simple Moving Average is the most common type of moving average, and it is calculated by taking the sum of all prices over a given period of time and dividing it by the number of prices in that period.

The Exponential Moving Average is a type of moving average that gives more weight to recent prices. It is calculated by taking the exponent of the ratio of the current price to the previous price and then multiplying it by the previous exponential moving average.

The Weighted Moving Average is a type of moving average that gives more weight to recent prices. It is calculated by multiplying the current price by weight and then adding the previous weighted moving average.

## Pivots and Fibonacci

Pivots are Technical Analysis tools used to identify potential support and resistance levels in the market. A pivot is formed when the price of a security reaches a new high or low, and then reverses direction. Pivots can be used to identify trends and predict future price movements.

Fibonacci retracements are Technical Analysis tools used to identify potential support and resistance levels in the market. Fibonacci retracements are created by drawing a line from the high of an uptrend to the low of that same uptrend, or from the low of a downtrend to the high of that same downtrend. The most common Fibonacci retracements are 23.

# What is the difference between Fundamental Analysis and Technical Analysis?

Technical analysis and fundamental analysis are two different approaches to analyzing the cryptocurrency market. Technical analysis focuses on price data, while fundamental analysis focuses on news and events that could impact the price of a security. Technical analysis is more short-term focused, while fundamental analysis is more long-term focused. Technical analysis is also more reliant on charts and Technical indicators, while fundamental analysis is more reliant on news and events.

Both technical analysis and fundamental analysis have their strengths and weaknesses. Technical analysis is good for identifying trends and making short-term predictions, but it can be less reliable in the long term. Fundamental analysis is good for making long-term predictions, but it can be less reliable in the short term.

Ultimately, the best approach is to use both technical analysis and fundamental analysis when making investment decisions. By using both approaches, you can get a complete picture of the market and make more informed investment decisions.

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*Originally published at **https://ladynakamoto.com** on May 12, 2022.*