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Technical analysis (TA) is a method of analyzing past market data, primarily price and volume in order to forecast price action. While there are a wide variety of TA indicators, ranging in complexity, that a trader could use to analyze the market, here are some basic macro- and micro-level tools.
Market structure and cycles
Just as traders can spot patterns within hours, days and months, they can also find patterns over years of fluctuating price action.
There is a fundamental structure to the market that makes it susceptible to certain behaviors.
The cycle can be partitioned into four main parts: accumulation, markup, distribution and decline. As the market moves between these phases, traders will continuously adapt their positions by consolidating, retracing, or correcting as they deem necessary.
The bull and the bear are very different creatures and behave in opposition to one another within shared environmental conditions. It is critical that a trader knows not only under which role they fall but also which one is currently dominating the market.
Technical analysis is necessary not only to position oneself within this ever-changing market but also to actively navigate the ebbs and flows as they occur.
Chasing the whale
Price movements are largely driven by “whales” — individuals or groups who have large funds with which to trade.
Some whales operate as “market makers,” setting bids and asking on both sides of the market in order to create liquidity for an asset while turning a profit in the process.
Whales are present in virtually any market from stocks and commodities to cryptocurrencies.
A cryptocurrency trading strategy must be aware of the tools of the trade favored by whales such as their preferred TA indicators.
Simply put, whales tend to know what they’re doing. By anticipating the intentions of whales, a trader can work in concert with these expert movers to turn a profit with their own strategy.
Psychological cycles
With a zoo full of metaphors, it can be easy to forget that real people — for the most part — are behind these trades and, as such, are subject to emotional behaviors that can significantly affect the market.
This aspect of the market is represented in the classic chart “Psychology of a Market Cycle:”
While the bull/bear framework is useful, the psychological cycle depicted above provides a more detailed spectrum of market sentiment.
While one of the first rules of trading is to leave emotion at the door, the power of group mentality tends to take hold. The rally from hope to euphoria is driven by FOMO — the fear of missing out — from those who have yet positioned themselves in the market.
Navigating the valley between euphoria and complacency is crucial to timing an exit before the bears take hold and people panic sell.
Here, it is important to factor in high-volume price action, which can indicate the general momentum of the market.
The “buy low” philosophy is quite apparent, given that the best time to accumulate within the market cycle is during the depression following a drastic drop-off in price. The greater the risk, the greater the reward.
The challenge faced by the serious trader is to not let emotion dictate their trading strategy amid the deluge of hot takes and analysis by the media, chat rooms, or so-called thought leaders.
These markets are highly subject to manipulation by whales and those that can affect the pulse of the market. Do your homework, and be decisive in your cryptocurrency trading actions.