Technical vs fundamental analysis: how both can improve your crypto trading game
The debate concerning the use and importance of technical and fundamental analysis is of an ever-lasting nature which started long before crypto trading was a thing. While both sides have their own arguments to strengthen their respective positions, they have also managed to find common ground - both methods are used for researching and forecasting future crypto price trends. Furthermore, both can be used in a complementary manner to enhance or emphasise the qualities of one another and ultimately help the crypto trader make an informed decision.
What is technical analysis?
Technical analysis is based on the assumption that all external factors (playing the key role in the fundamental analysis) have been taken into account and have contributed to the current asset price. Thus, the job of a market analyst or a crypto trader is to pay attention only to the historical price action in order to forecast future trends and find market opportunities.
The main focus of a technical analysts is the crypto price chart, to which certain indicators are added in order to help us identify patterns and trends. Today, the list of available indicators on most charting tools, including Sparkdex, is very long. Here, we take a brief look at some of the most popular indicators used by traders to analyse the price action.
Moving average: It shows the average price of an asset over the set period. The most common moving average lengths are 100 and 200, mostly used on higher time frames - 4H, daily or weekly. The lower periods are mostly used for scalping. Read more about this indicator here.
Trend lines: A diagonal line connecting a minimum of three or more important price pivot points. The more pivot points it connects, the higher the importance is. Only those trend lines that are tested by the price action, and we have evidence that they acted as a support/resistance, are reliable and useful.
Volume: One of the most basic indicators which shows the amount of an asset that was traded over a specified period of time. It is mostly used to see the relevance of a certain move i.e. if the move was supported with high trading volume, it is regarded as a legitimate move which may continue in the same direction.
Fibonacci: It represents a sequence of numbers, with each number representing the sum of two prior numbers. Analysts and traders most often use retracement and extension levels to see where the crypto price might bounce and end or continue the current trend. The most important retracement levels are: 23.6%, 38.2%, 50%, 61.8% and 78.6%, with the three central numbers, namely 38.2%, 50% and 61.8% acting as key levels. On the other hand, 127.2% and 161.8% are popular extension levels used to identify the next levels of support or resistance once the main support/resistance is broken.
Oscillators: Oscillators are a popular category of indicators widely used due to their ability to signal a possible trend change that might just start. The most popular oscillators like Relative Strength Index (RSI), Stochastic Oscillator or Moving Average Convergence/Divergence (MACD), signal if a market is overbought or oversold, thus a move in the opposite direction is very much possible.
Unlike technical, fundamental analysis aims to measure the natural or inherent value of the asset. Depending on the asset and the market, it analyses different aspects of the trading environment (economy, specific industry, regulation) as well as the financial information concerning the specific asset. In essence, the fundamental analysis looks at every aspect that contributes to to the measuring of the overall value of an asset.
In the crypto trading environment, fundamental analysis will focus on many different aspects of the market and environment, most notably respective market that is targeted, competitors in this market, the team behind the project, a partnership with other subjects, the demand for this type of assets, the real and the underlying use of the product, regulations, and breaking news that could affect market sentiment etc.
Technical vs Fundamental
As we stated in the introduction to this article, both can be used in a complementary manner for crypto trading, where the strengths of each side are applied in the trading process. For instance, the key advantages of the fundamental analysis are: measures the inherent valuation of a specific cryptocurrency, explains certain movements (especially more volatile ones), collects information and provides insightful data into global market and trends etc.
On the other hand, the main strengths of technical analysis are: applicable to all time frames, analyses historical trends which are often repeated, precise and applicable levels are generated from the analysis, etc. As a result, some of the sharpest minds in markets today and in the past use both types of analysis to identify profitable market opportunities and make the best moves on the crypto market.
One of these opportunities assumes the use of both types of analysis in two different stages of the trading process. The first step is to apply the fundamental analysis to answer the main question: Should I buy/sell this crypto asset? If the answer is no, a trader should stay away from that market, obviously.
However, if the answer is yes, the second step is to use the technical analysis to answer the main question concerning the second step of the process - Where should I buy/sell? By analysing crypto price charts and applying different indicators, a trader will come up with clear levels relating to entry, take profit and stop loss.
It is important to note that this approach should not be used from the opposite perspective i.e. never use the technical analysis first since it doesn’t take into account the fundamental element of the process (the market, competition, regulations etc.). Simply, use both analyses to unlock their full strengths.