On this site, we often brag about analyzes, based on which we give various guidelines. But you may be asking: does technical analysis of cryptocurrencies make any sense? The whole analysis is not complete nonsense, because the market still cannot be predicted and who claims the opposite is a liar ?!
Does technical analysis of cryptocurrencies make any sense?
First of all, it would be useful to clarify what technical analysis is actually for. We often encounter the misconception that TA is actually an attempt to predict the future. This is partly true, but in a different sense than most people think.
The purpose of a technical analysis is NOT to determine how and where the price of the analyzed asset moves, but to estimate the most likely scenarios. Of course, we always have several options. Either it goes up, down or the value does not change. That’s why you’ll always find at least two arrows in a graph.
This bothers some people and claims that such an analysis is unnecessary because they are actually saying something that is quite clear.
Supports and resistances
Here comes the word support and resistance – that is, the price levels to which the analyzed asset will most likely respond. It either bounces off the level or stops at least for a while.
Revealing these reaction levels is very important because it gives us the opportunity to enter the market at the right time. Let’s say the asset is just above the strong support. In this case, it is advantageous to open the long (ie buy) and place the Stop Loss just below the support.
The price of the asset eventually moves and there is a good chance that it will go up, because the way down is “blocked” by a large number of orders. In this case, a much larger volume is required to move downwards.
RRR (Risk to Reward Ratio) is therefore advantageous for the long position. Most traders plot these supports and resistances in an attempt to identify profitable trades.
Forecast of the future
So when analyzing the market, you are not trying to predict the future and make a reliable prediction! It’s an effort to identify trades that are likely to turn out the way you want. Of course, this doesn’t always work out, but it doesn’t matter!
A professional trader usually has several such statistically advantageous deals open at once. How many trades must come out in order to be profitable then depends on your risk management.
Let’s say you open ten trades with a good RRR (to put it simply, consider only longs) and you went to each trade with ten percent of your capital. In each trade, you have a Stop Loss set two percent below the purchase price and a target 10% above it. So the RRR is 1: 5. If you get one trade, your portfolio will increase by 1%.
In this case, it is enough for TWO trades to come out!
- 2 trades end successfully – you have earned 2% on them
- 8 trades end in failure – you converted 1.6% on them
As a result, you are 0.4% in plus!
And that’s exactly what technical analysis is about. It is not an attempt to predict the price of a cryptocurrency. It is impossible. Almost all predictions fail. You make money on probability, not on certainty!
How does technical analysis of a manipulated market work?
But there is one problem. The crypto market is manipulated. As we mentioned in the first paragraph, some whales, exchanges and institutions have such a large capital that they have no problem significantly moving the price of any cryptocurrency. So we can analyze as much as we want, it still won’t work, because these players are doing what they want!
This argument has one serious error. Sure, some market players have the power to move the market. However, the plural is important here – PLAYERS!
Like us, they trade cryptocurrencies to make money. And none of them own enough coins to move the price at will. It is very important to realize that manipulation costs money. Millions, sometimes billions of dollars!
Why does technical analysis of a manipulated market work?
It is important to realize that no whale is on the market alone. There are always several (hundreds) of them and they definitely do not cooperate. Everyone counts for themselves in the first place. Imagine you are a whale. Your goal is quite clear – to make as much money as possible by trading cryptocurrencies. How would you do that?
There is an opportunity to buy cheaply, then manipulate the market so that the value of your purchased coins increases and finally sell everything at a profit. If you tried, you would end up very, very bad. Why?
Let’s go through it step by step:
- You can quietly buy a coin cheaply
- You start pumping it
And another ten big players, traders and half a retailer are waiting for your pump. They all start selling and you just give them liquidity so they can sell at a profit. Eventually, you may be able to pump your cryptocurrency by a few percent, but when you start selling, no one will buy it from you because it’s already high. So with the sale, the price will start to fall and you will not earn anything.
Such an approach to market manipulation simply does NOT WORK! And even if it works by accident, you still want to make as much profit as possible, don’t you? So you will use everything that will increase your success.
Hmm… I wish there was some way to identify possible market movements. Something that practically every trader uses and that would increase your chances of successful handling.
Well, wait, something like that exists – TECHNICAL ANALYSIS!
And that’s why technical analysis works. It is used by absolutely everyone from the smallest trader to the largest whale. They all sit by the graphs and draw lines in them. Everyone is trying to find a profitable trading strategy and make as many trades as possible with a good RRR. Trading is not a gamble, trading is a SCIENCE!