What is Technical Analysis (TA)?
This article focuses on technical analysis. What is technical analysis and how do you apply it? Is it wise to use technical analysis or are there easier ways? In this article we provide the necessary clarity on this subject.
What is technical analysis?
So, what is technical analysis (TA)? Technical analysis is a way of making targeted future market predictions based on past price developments. Technical analysis is widely used in traditional markets such as the markets of stocks and other assets, but technical analysis can also be applied in the market of cryptocurrencies.
As mentioned before, technical analysis useses past price developments. The most important aspect here is that a technical analysis assumes that the fluctuations in a given asset are not random, but that there are recognizable trends that are recurring.
The trends recognized by a technical analysis are a combination of supply and demand of a particular asset in variety with traders’ emotions.
Indicators for Technical Analysis
Traders use a variety of indicators to identify price patterns. Technical analysis indicators can help traders spot trends and act on them. However, an indicator can also give a wrong indication. For this reason, traders usually use multiple indicators to minimize risk when trading.
Below are some examples and descriptions of some indicators within technical analysis:
Relative Strength Index (RSI)
The Relative Strength Index (RSI) indicator shows when a stock is overbought or oversold. The tool is interesting for investors who want to go short as well as for investors who prefer to enter into long trades, in short, the tool fits in principle within any portfolio strategy. If the variable indicates an overbought situation then it is not wise to go long, and if the variable indicates an oversold situation then it is not wise to go short. In short, the tool is simple, clear and easy to apply to different situations.
Bollinger Bands (BB)
The Bollinger Bands (BB) indicator gives people the opportunity to recognize a trend and then act on it. The Bollinger Bands are based on the 20-day moving average. Based on the standard deviation, two lines are then calculated, namely: the upper Bollinger Bands and the lower Bollinger Bands. These two lines are then placed around the price and create a dynamic trend around the price. The greater the distance between these two lines, the more volatile time is. If the price breaks through the upper Bollinger Band, you can interpret that as a buying opportunity. If the price breaks through the lower Bollinger Band, you can interpret that as a selling moment.
Moving Average (MA)
The Moving Average (MA) indicator is also known as the moving average. The Moving Average is the average of a fixed number of consecutive elements in a time series. The Moving Average displays various time series and buy and sell signals. However, the Moving Average is time-sensitive and sometimes shows buy or sell signals that can be loss-making. If the Moving Average increases, you are dealing with a positive sign, if the Moving Average decreases, then it is a negative sign.
Moving Average Convergence/ Divergence (MACD)
The Moving Average Convergence/Divergence (MACD) indicator is a momentum indicator that is calculated using multiple moving averages. Deze indicator is voornamelijk gericht op de sterkte en de richting van de trend weergeven. From time to time, this indicator also displays a buy and/or sell signal. This indicator consists of two lines: the MACD-line and the signal line. The MACD-line is calculated by subtracting the moving average of the past 26 days from that of the past 12 days. The signal line is the exponentially measured average of the past 9 days. If the signal line crosses the MACD-line upward, that is a sign of a buy signal. If the signal line crosses the MACD-line downward, that is a sign of a sell signal.
The Fibonacci (FIB) indicator is widely used but is a tricky part of technical analysis. The Fibonacci retracement makes it possible to analyze any pivot points in a market. Fibonacci is a sequence of numbers that starts with two numbers: 0 and 1. The next number is always formed by the sum of the previous two numbers. The beginning of the Fibonacci number sequence looks like this:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765…
By dividing any number by the next higher number we get a certain ratio, for example 34/55=0.618. Another known ratio is obtained by dividing a random number by not the next higher number but that number after that, for example 34/89 = 0.382. These ratios, 0.618 & 0.382, are seen as the main pivots. These are also known as ‘The golden ratios’.
While technical analysis can provide a trader with good insights into a past trend, it is not always the case that a TA indicator is accurate and sends the right signals. This is especially true in the cryptocurrencies market, as this market is a lot smaller and can be more volatile than other traditional markets, such as the stock market and the forex market.
Automatic crypto trading with algorithms
A lot of people find technical analysis generally unclear, difficult and time-consuming. For these reasons, we have developed an algorithm that basically takes care of all the above points. Our algorithm is built in such a way that it automatically performs these analyzes and automatically determines and executes buying and selling moments. In addition, the algorithm is on 24/7 and acts without emotion to avoid human errors.
Technical analysis is often referred to as a “self-fulfilling prophecy” by critics. A self-fulfilling prophecy is a sociological term used to describe a prophecy that fulfills itself. Zolang er genoeg mensen zijn die geloven dat er iets zal gebeuren, zal het waarschijnlijk ook gebeuren.
In the context of the financial markets, if a large number of traders depend on the same indicators, the chances that these indicators will actually work increase.
Despite all the criticism of technical analysis, technical analysis provides insights into recurring patterns from the past, which can be useful for traders looking to capitalize on the same patterns as they recur. In addition, it offers a tool for traders who find themselves in a volatile market where the price can go in all directions.
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