Traders use technical analysis (TA) to make buy or sell decisions. However, it’s no secret that TA is not 100% accurate all the time. As a result, people use websites like https://swyftx.com/learn/crypto-technical-analysis-guide/ as they provide valuable insight about price movements, giving clues as to whether a coin is undervalued and ready for a parabolic move (to the moon!) or overvalued.
TA can also be used as secondary confirmation when determining entry and exit points. There are many different forms of technical analysis. Here’s all that you need to understand about it before getting started.
What is Technical Analysis (TA)?
Technical analysis, or TA for short, is the act of estimating an asset’s value by analysing statistics generated by market action (price, volume). By studying these trends over time, patterns can be seen in price moves that help traders predict future price movements.
How Does TA Work?
One must first understand that price and value are two different things. Price is merely the amount of money exchanged for an asset, while its actual value refers to the utility it provides.
When using TA, price does not matter as much as volume and momentum. It is assumed that human behaviour dictates what a fair or accurate value for an asset should be.
It is essential to track the changes in volume traded over various time intervals (daily, weekly, monthly). The volume shows whether there are more buyers or sellers and the amount of money involved.
The other crucial part of TA is understanding trend lines. By plotting at least two highs and lows on a chart, areas where an imaginary line will connect price moves in a linear fashion (no dips or spikes). Once the pattern ends, technical analysts will then connect another series of highs and lows.
The continuation of these patterns can indicate whether the asset is in a strong uptrend or downtrend, which will help determine where to focus on setting buy or sell orders.
What is Support & Resistance?
Support is an area on a chart that seems to act as a floor for price. As soon as the market dips below that level, buyers come into the market and purchase more of their favourite assets; this pushes the price up closer to where it was before, which now becomes resistance.
More vital trends tend to have multiple supports acting as footholds for the price. The opposite of support is resistance, which appears as a ceiling or invisible wall that price cannot break through.
How are Support & Resistance Levels Determined?
There are various ways to find these levels, but some common approaches include:
Fibonacci Retracement – this is when you draw a line between the highest and lowest points of an asset’s value and plot it on a chart. Then divide that retraced value by the Fibonacci ratio (usually 23.6%, 38.2% or 61.8%) to determine where price might hit resistance or support.
Moving Averages are taken by taking the average prices of the last few hours, days, weeks or months of volume traded and plotting it on a chart. You can do this for multiple time intervals to understand where the price might find support or resistance.