5 min reading
How fundamental and technical analysis can be applied to the crypto-currency market.
Fundamental vs Technical analysis
Specifics of the crypto market
The crypto-currency market is quite young and volatile. Predicting market trends and possible price movements is not easy for both beginners and experienced traders. The right instrument and strategy are the most important factors for successful trading and investment.
Moreover, trading such volatile assets as crypto-currencies requires special skills and knowledge. You will learn how to choose the strategy, how to use fundamental and technical analysis by putting your theoretical knowledge into practice. In the article, we will explain what fundamental and technical analysis is and how they can be applied to the crypto-currency market.
The principles of technical analysis originate from the study of financial market data over a hundreds of years. In the 17th century, parts of technical analysis appeared in the writings of Joseph de la Vega, an entrepreneur in Amsterdam who dealt with the financial markets in the Netherlands. In Asia, technical analysis is said to have been developed by Homma Munehisa in the early 18th century and turned into an application of candlestick techniques and a means for charting technical analysis today. Journalist Charles Dow (1851-1902) summarised and carefully studied the data of the American stock market and published part of his recommendations in an editorial for The Wall Street Journal. According to him, it was possible to find patterns and economic cycles in the data, later to be called ‘Dow Theory’. Nevertheless, he never advocated the application of his ideas as a stock trading strategy.
In the 1920s and 1930s Richard W. Shabaker published several books in which he continued the work of Charles Dow and William Peter Hamilton in their books “Theory and Practice of the Stock Market” and “Technical Analysis of the Market”. In 1948, Robert D. Edwards and John Magee published Technical Analysis of Stock Trends, widely considered one of the fundamental works on the subject. This book is all about trend analysis and chart patterns and remains relevant today. In the early days, technical analysis was almost entirely chart analysis, as the power of computers was not available for statistical analysis in its modern sense. Charles Dow is known to have laid the foundation for chart analysis in the form of points and figures. With the formation of financial behaviour studies as an independent academic discipline in economics, Paul W. Azzopardi combines technical data analysis with financial behavioural research and introduces the term ‘behavioural technical analysis’.
What is fundamental analysis
First of all, there are a lot of factors that can have a significant impact on the crypto-currency market and asset prices. For any trader or investor, it is important to analyze these factors and make predictions about possible trends. Thus, fundamental analysis of the crypto-currency market presupposes a deep dive into the information available about a financial asset. This means that you can assess the possible availability of the coin’s application, its total capitalization, analyze the history of the project, or certain facts about the company.
Why is it needed?
The main task of fundamental analysis is to determine whether an asset is overvalued or undervalued and whether it is worth investing in it based on your own perception of the project represented by this coin. Then you have to decide to open positions based on the information you have. At first, you may be confused, but by trying to analyze the economic and political situation, you can come to the conclusion that crypto-currency rates largely depend on how governments regulate or accept cryptocurrencies and digital assets. Or even the statement of a famous person can affect the rates.
This is what notably happened to Dogecoin in 2021 when Elon Musk posted several publications on his Twitter account, and Dogecoin price rates increased by 50% in less than 24 hours.
What is technical analysis
Technical analysis is based on the assumption that price fluctuations in the market are not random and are caused by recurring trends, which can be used for making forecasts. Unlike analyzing fundamental factors, technical analysis provides much precise information and gives signals for trading any crypto-assets, including bitcoin. Moreover, the technical analysis reflects the psychology of traders’ behavior, which was formed at the beginning of the 20th century, when the first exchange services appeared.
Can we use both?
Besides, advanced traders combine several different techniques for better results. This method is much reliable for trading on the cryptocurrency market. There are some technical analysis tools like RSI, Dow, Fibonacci and Nuage Ichimoku theory that you can successfully apply on bit4you platform. Using them, you can predict the possible price movements and improve your strategy according to the results.
If you are planning to switch on bit4you from traditional financial market to cryptocurrency market, you can use the same trading strategies, charts and indicators. The range of methods used by technical analysis is very wide. We divide them into four types:
- Trade statistics;
- Support and resistance level;
- Technical Indicators;
- Candlestick Analysis.
Nevertheless, it is not enough to choose the right trading strategy. It is also very important to use fundamental and technical analysis. The main task of fundamental analysis is to identify key events and activities that may affect the price rates of the asset in the near future. If you analyze fundamental factors properly, you will discover much useful information. Of course, technical analysis can tell us something that fundamental analysis cannot predict. Therefore, many traders combine them in order to increase chances for profit.