When you trade this or that coin, you need to take an important decision whether to buy it or to sell. You can either guess future price direction or forecast it using one of two (or both of them) analysis methods. This trading guide being a part of our education course is related to Technical and Fundamental forecasting methods that are widely practiced by professional traders.
This type of market analysis involves trading charts. Traders, using this method, work with different timeframes and tools in order to make a forecast of future price fluctuations. Technical analysis is the simplest one as traders don’t need to have special knowledge in economics.
This forecasting method was initially developed for stock markets in the US by financial journalist Charles Dow. He has noticed three main chart features that form the basis of technical analysis. Here they are:
- Fluctuations have repeatable nature meaning the situation that took place earlier, may repeat in future.
- The price includes everything meaning quotes comprise all political and economic events already.
- Prices have tendencies meaning all fluctuations have a certain direction on different timeframes.
Why do many traders prefer to work with technical analysis? This method of quotation forecasting is truly the easiest one. All the information can be read on charts. Some traders believe that you don’t need even to look for the events that are price drivers as they are all included in final asset’s cost.
The other reason why this forecasting method is very popular– it offers plenty of trading tools such as patterns, indicators, as well as different theories helping traders to find entry points.
Technical analysis is self-sufficient as it may be used without any other trading techniques in order to analyze the markets. Some professional traders have never used Fundamental method to predict fluctuations.
Technical analysis is truly a cross market method as you can use it trading stocks, Forex currency pairs, cryptos as well as all types of derivatives.
Trend and counter trend trading
The main task of every trader and investor when dealing with financial markets in general and cryptocurrency, in particular, is to define trends. There are two global approaches to work with them. Most traders try to find tendencies and to open positions along them.
The second approach is to define a trend and to trade in the opposite direction (during corrections of reversal periods). Both of those methods are vital and useful. However, the second one is mostly used by professional traders as it is more difficult to place orders catching price corrections or trying to find reversal points.
Both trend and counter trend methods require knowledge in Technical analysis meaning you need to be able to find a tendency at least.
Let’s take a look at BTC/USD chart. For beginner traders the “naked” price chart looks like that. They see just price fluctuations and nothing more. They can earn here by placing orders randomly and sometimes they win. However, successful trading means having a positive balance in the long term. You need to understand that you will not be able to close all your trades with profit as there is no 100 percent iron-clad trading strategies. However, you can increase your chances significantly by using technical analysis at least.
Let’s have a look at the same chart but this time, we have drawn a line, which is called trend line. We have added just one graphic tool and the situation on the chart looks much more understandable. What can we say about all those price fluctuations?
The currency pair (BTC/USD) has a downtrend first. The price fluctuates most of the time below it but returns sometimes to test it as buyers are trying all the time to change the balance. How to use this information?
You can use opportunities when the price reaches the trend line from below to sell, or find entry points in the beginning of corrections (when the price goes upwards) in order to buy doing counter trend strategies.
This is just a simple example of how technical analysis works. We are going to tell you more about it in our special guide, related to this forecasting method.
Another way to forecast cryptocurrencies’ price fluctuations is to use the fundamental method of quotes’ prediction. This technique is more complicated as it requires skills, knowledge and experience. Classical Fundamental analysis is based on economic, political events as well as inner companies’ data (when is used for stocks).
As for cryptocurrencies, this method studies project and technology behind any coin as well as the general situation on the crypto market. Fundamental analysis should be applied for a long-term period as it is impossible to see its impact in one hour or even one day.
For example, we have a new coin, which is in pre-ICO period currently. We need to understand whether it is promising or not. However, inner project analysis is not the only way to examine the price. You also need to understand the global picture of the cryptocurrency industry.
There are some events that may provoke significant price changes. When China banned ICOs in 2017, cryptos went downwards as investors feared the next steps from China’s government. In addition, cryptocurrencies are very popular in China and such steps make local investors to get rid of cryptos.
However, you should understand that it makes no sense to analyze coins for longer time periods as this market is very flexible and fluid. The perspectives of most coins are still underestimated. The majority of projects are still in progress meaning they have conducted ICOs already but are far from being implemented or are in beta testing mode.
The main postulates of the Fundamental analysis are the following:
- All price changes result from certain reasons meaning all traders and investors are taking decisions relying on some aspects that may according to their opinion, provoke any trend.
- One can find the reasons of price fluctuations when conducting a detailed study of facts related to a certain asset.
- Every event that happened is going on right now or is planned for future will be the reason for some consequences that may affect quotes changes.
- If one knows all the facts that are likely to have an impact on prices and do the right logical deduction, he can forecast the future of an asset.
All those postulates are actual not only for stocks and Forex but for cryptocurrencies as well. However, Fundamental analysis of cryptos have some features that distinguish it from Fundamental analysis of other markets. Here they are:
- Cryptocurrencies have traits of both stocks and currencies as they are part of different projects. Nowadays all cryptos are developed as kind of assets that project team gives to investors in change of fiat money or other cryptocurrencies. Those coins enter exchanges later and may be bought there.
- This industry is decentralized. There is no authority to regulate the market. Every project establishes its own rules of the game (the total amount of emission, type of consensus mechanism etc).
- Cryptocurrencies are still far from full integration into real economics meaning they are not widely used by businesses and customers to conduct transactions and pay for goods and services.
- Coins have no physical incarnation as compared to fiat currencies and stocks.
“Wars” between the adepts
There is a true “Holy War” between those who practice technical analysis and conduct the fundamental method of quotes forecasting. The first try to prove that their approach is better and the only right to predict prices. The second says that it is impossible to understand future fluctuations without learning fundamental basics.
If you read several forums related to trading and investing, you will obviously find users arguing with each other trying to persuade the opponents in their rightness. This “Holy War” began long ago with the appearance of margin trading and still continues as nor “technicians” neither “fundamental” adepts are able to win. Here are some arguments that both sides use in their disputes:
- Technical analysis is illustrative as you can see all the necessary information on the chart. Fundamental forecasting method cannot be “seen” or “touched.”
- You need no events to predict the quotes as all of them are already included in the price.
However, those who prefer Fundamental analysis say that you will not have the complete picture of any market you choose if you avoid looking for important events and take them into account when trading.
Both sides have their reason and both of them are right as Technical analysis method is as important as Fundamental one.
Combining both forecasting methods
The best way is to use Fundamental forecasting along with Technical especially when you deal with cryptocurrencies. Why is it important to practice both of them? First, cryptocurrency industry is not regulated.
There are many scam coins that you can detect using Fundamental analysis. They are not worth trading at all as they have no perspectives in future. Can you find such cryptos using traditional technical analysis? Certainly, you don’t even have a single chance to succeed.
Combining both methods is important for traders and long-term investors as they can see the promises behind this or that project and apply them on charts with indicators or graphic tools in order to see whether they coincide or not.
How to apply those analysis types when trading? When you deal with any new coin, you need first to learn more about the project and its perspectives. To do this, you have a wide range of tools including White Paper document, website information, project team and Roadmap. When a coin passes this first “scam test” you can go on with analysis examining charts.
Professional traders and investors always combine both methods attempting to get better results. This approach is more difficult as you have to gather much more information in this case. Apart from chart data that you need to examine carefully, you are to look through general situation in the crypto industry along with penetrating into coin’s background.
Why is it better to combine those forecasting techniques?
- The complete picture of the market. Sometimes it is better to know the drivers along with studying charts.
- Confirmation. Using both techniques you will be able to confirm your trading signals. It is easier to take decisions when analysis results coincide.
- Flexibility. The more tools you use to find entry points, the more flexible your trading strategy is.
This article gives the basics of both analysis methods. We are going to describe them in our next posts. You will learn more on types of Technical analysis and several practical recommendations on fundamental method.