When crypto traders analyze the crypto market, they use two main methods to predict price changes: technical and fundamental, as each offers unique insights.
The first one focuses on patterns in price charts, looking deep into price movements with charts, indicators, and volume data to predict future trends. The fundamental analysis, on the other hand, studies the adoption, general market conditions, and the technology of the cryptocurrency to try and determine its potential.
Knowledge of both is needed for anyone trading with crypto and looking to improve decision-making skills in this area.
How Technical Analysis Works
Technical traders looking for new crypto to invest in often study market behavior by studying price charts and indicators. As Ines S. Tavares states, new coins come with many early adoption advantages, including high growth potential.
A good example to check out is candlestick charts that provide clear insights into price fluctuations with their “head and shoulders” and “double tops” that can indicate a potential trend shift. “Head and shoulders” represent a trend in trading where a boost (head) was noticed between two drops (shoulders). “Double tops” mean the reverse, when you have two buying trends with a drop trend in between.
Another thing important in technical analysis is the moving averages. They smooth out short-term price fluctuations, making it easier to spot long-term trends. The 50-day and 200-day moving averages are the ones that are often useful for recognizing bullish or bearish conditions of a particular cryptocurrency.
Relative Strength Index (RSI) is one of the key elements in every technical analysis. It’s easy to understand, as every reading of it that is above 70 means that the coin you’re looking at is probably overpriced. If it’s under 30 it’s most likely oversold, pointing to a good buying opportunity.
Lastly, what people doing technical analysis look at is the trading volume. For example, if there is a high volume during a price increase for a crypto, it means that it has strong momentum, which could further increase its value.
In summary, technical analysis helps more with short-term trading than with long-term investments.
How Fundamental Analysis Works
Fundamental analysis looks at different factors than technical ones, and it focuses on things like market supply, adoption rate, technology and the team behind the project. Good examples are Bitcoin and Ethereum. The first one has become something like a modern digital gold, while the latter excels due to its smart contract capabilities.
According to technical analysts, the team behind any new cryptocurrency is one of the crucial things for its future. If the development team is well known, and there are big influential investors behind it, it could start strong. An engaged community looking to jump in on the release is also an important factor to support any new coin coming to the market.
The adoption of big businesses or institutions is another factor in technical analysis. We don’t need to go far to find an example, as the recent announcement by the Trump administration that they will create a crypto reserve is a great example of crypto adoption. This or any other big adoption of a currency can improve trust in it and boost its value over time. Also, a law banning a cryptocurrency can negatively influence its price.
When it comes to the supply of a certain coin, it can’t be ignored as well. Bitcoin, as one of the most popular cryptocurrencies out there, has a limited supply of 21 million coins. This means that there can’t be an inflation of the coin that can drop its price, which, for some, can mean a certain level of stability.
Pros and Cons of Technical And Fundamental Methods
As we’ve seen, both of these analysis methods work in different ways and have their advantages and shortcomings. Here’s the breakdown of their basic pros and cons:
Technical Analysis Pros
- Works well for short-term trades.
- Based on a simple-to-understand data system.
- Provides clear entry and exit points.
Technical Analysis Cons
- Doesn’t pay attention to real-world events like shifting regulations, which can lead to bad decisions.
- Requires constant monitoring of events and quick reactions which can be stressful for some traders.
Fundamental Analysis Pros
- Focuses on real-world events, people behind a crypto project, and help with long-term investment.
- Tries to think ahead by analyzing the technology used for a cryptocurrency. For example, outdated technology can prolong transaction times, which can affect value.
- Tracks broad economic trends, helping you avoid scams driven by sudden hype.
Fundamental Analysis Cons
- Information about a crypto can come from an analyst who is biased or manipulative.
- It’s generally based on a sentiment and an opinion, ignoring data, which can be bad for decision-making.
Combining Technical and Fundamental Analysis in Crypto Trading
As you can assume, the best approach to trading would be not to follow blindly any of these methods but to include both of them in your crypto predictions.
We could say that fundamental analysis is the foundation. By knowing the team behind a project, other people who are willing to be its early investors, and the community feeling around it, you can get a decent picture of whether this cryptocurrency has real-world utility.
But those fundamentals don’t mean everything in the market, such as crypto. This is where technical analysis comes in to save the day. With its sharp focus on the raw data from the market, such as price patterns, volume, and trends, it can give traders precise insights into exact moments when to act (buy or sell).
Technical analysis helps traders understand market psychology, for example, when people are most willing to buy and go all in and when they will be reserved. This is especially valuable when underlying fundamentals remain unchanged, and you are looking to be one step ahead.
