Technical Analysis/Trend Analysis (TA)

An evaluation method involving statistical analyses of the market, such as price and volume. Charts and other tools are used to identify patterns to underpin and drive investment decisions.

An evaluation method involving statistical analyses of the market, such as price and volume. Charts and other tools are used to identify patterns to underpin and drive investment decisions.

What Is Technical Analysis/Trend Analysis (TA)?

Technical analysis is the study of market behavior using price charts to estimate future price direction. The concept that all elements that impact market price – fundamental knowledge, political events, natural catastrophes, and psychological considerations–are promptly discounted in market activity is the cornerstone of technical philosophy. To put it another way, the influence of these external events will immediately manifest itself in price movement, either upward or downward.

Is Technical Analysis a Good Long-Term Investment Strategy?

The answer to the question is no. Certainly not. Technical analysts are known for being quite active in their trades, maintaining positions for short periods of time in order to profit from market swings, both up and down. A technical analyst may go long or short on a coin depending on the data’s prediction of price movement.

If a coin fails to perform as expected, an analyst makes a rapid decision to leave their position and use stop-loss orders to limit losses. While a value investor must be patient and wait for the market to correct its undervaluation of a coin, a technical analyst must have a high level of trading agility and be able to quickly enter and exit positions.

Support and Resistance

Support and resistance are two of the most fundamental ideas in technical analysis. These are the levels at which analysts predict a coin to begin climbing after a decrease (support) or decreasing after a gain (resistance). These critical levels are used to initiate trades because they suggest the direction in which a coin will bounce. If they believe a support level has been reached, they will go long, and if they believe a resistance level has been reached, they will go short.

Basic Assumptions in Technical Analysis 

The following three assumptions underpin technical analysis theory:

Everything is discounted on the market: Analysts feel that the coin price already reflects the influence of all variables, from fundamentals to broader market psychology.
Price moves in trends: Technical analysts believe that prices will show patterns even in non-uniform market movements, regardless of the time frame in question.
History tends to repeat itself: Technical experts believe that history always repeats itself. This is due to the typically predictable market psychology, which has a consistent impact on pricing.

Fundamental Analysis vs Technical Analysis

Both fundamental analysis and technical analysis are used to analyze and forecast future asset price patterns. They do, however, analyze asset prices using different data. Fundamental analysis attempts to determine an asset’s inherent worth by evaluating its industry, business, and general environment. Only the asset’s price and volume are considered in technical analysis. All of the known elements evaluated in fundamental analysis, according to technical experts, are included in the price, and there is no use in examining them further. In addition, technical analysts do not attempt to calculate long-term worth. They employ graphs to look for patterns and trends that indicate how an asset’s price will move in the near future. 

Limitations of Technical Analysis

Technical analysis critics claim that because history does not always repeat itself, the assumption made using technical analysis is inaccurate. Another objection is that technical analysis only works in certain situations and that this is because it contains a self-fulfilling prophecy. Furthermore, technical analysis is restricted to the study of market patterns and lacks the capacity to delve deeply into an instrument or sector to comprehend its inner workings.

When the market has started to move in a given direction, technical analysis is most useful and informative, rather than anticipating the movement, which requires fundamental background study.