Years before crypto trading even existed, traders have argued about the use and importance of fundamental and technical analysis – especially debating which one is more important than the other. We won’t take sides on this, but instead we’ll explain what both analyses are and how they compare.
Fundamental analysis: what is happening in the environment
Fundamental analysis takes different aspects of the trading environment into consideration. Exactly which aspects are monitored depends on the asset, but in the crypto world fundamental analysis will focus mostly on the global economy, innovation, competition between companies, partnerships between companies, the use case for a token, the real uptake of the token, regulations and any other breaking news that could affect market sentiment.
Technical analysis: what has the price action done in the past
Technical analysis takes a different view on the price action. Traders that prefer this style assume that all external factors that play a role in fundamental analysis have already contributed to the current asset price. Predicting what the price trend will do next, means analyzing the historical price action. That’s how crypto analysts try to forecast the future and identify market opportunities.
Analysts do this with a vast array of charting tools and technical indicators. We will go into each of these in separate blog posts, but for now a quick overview will do.
Moving average – This type of technical indicator shows the average price of an asset over the set period and it’s used to generate signals for bullish/bearish reversals.
Trend lines – These are diagonal lines that connect at least three price pivot points. The more pivot points it connects, the higher the importance is.
Volume – A very basic, but very important indicator. Volume shows the amount of traded value for a specific asset or pair over a period of time. The relevance of a certain moves changes a lot depending on the volume. A move that is supported with high trading volume is considered as a legitimate move which may continue in the same direction.
Fibonacci – In almost every price analysis you read, whether it’s for Bitcoin, Ethereum or Dogecoin, you will almost certainly see a reference to Fibonacci retracement levels. The most important retracement and extension levels are 38.2%, 50% and 61.8%. With this indicator, analysts are trying to see where the price will go next – will it end or continue the trend?
Oscillators – Oscillators are a popular type of indicator widely used because they can signal a possible trend change. The most popular oscillators like Stochastic, CCI, RSI and Moving Average Convergence/Divergence (MACD), signal if a market is overbought or oversold. When that is the case, a move in the opposite direction is likely in the making.
Combining Fundamental and Technical analysis
To get the most out of the two analyses, you need to combine them in a way that they strengthen each other.
The key advantages of Fundamental analysis is that it gives you an idea about why certain movements are made and to build a solid portfolio. Knowing what’s happening now will give you a good inclination as to what happens next. Technical analysis on the other hand, gives you another way of looking at the market by analyzing historical trends (which are often repeated) within very specific time frames.
Identifying profitable market opportunities and making the best moves on the crypto market, relies on you mastering both Fundamental as well as Technical analysis. But always start with Fundamentals – looking at the market environment and other external factors, should you buy/sell the asset? If yes, then move on to conduct your technical analysis.
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