For those new to crypto asset investing, the sheer range of technical analysis indicators and charting tools can become somewhat daunting. Moreover, several media outlets offer daily technical analysis reports for cryptocurrencies but how do you know which analysts’ opinions you can trust?
Technical analysis 101
Technical analysis, also known as chart analysis, is a method to evaluate the price movements of various assets — including stocks, bonds, commodities, and crypto assets — in an attempt to identify price trends and predict future price movements.
Unlike fundamental analysis, technical analysis focuses purely on price action as opposed to the intrinsic value of the asset in question. Chart analysts use various technical indicators and analytical tools to gauge where the price of an asset may go to next. Moreover, chart analysts believe that all information needed to evaluate an asset is found in its price movements and trading volumes and that these are better indicators than an asset’s fundamentals (use cases, management team, customers or users, market cap etc).
It is important to note that there is a major divide among investment professionals about the validity of technical analysis and its predictive powers. Some believe that analyzing charts is not too different from astrology, while others base their entire trading strategies on technical indicators.
While chart analysis will not accurately predict future price movements on a consistent basis, it can be a valuable tool to find the right entry and exit levels for your trades and to identify price trends.
All technical analysis is not created equal — what to look out for
The Internet is full of technical analysis reports for stocks, commodities, forex, and now also cryptocurrencies. While it is great to see an increase in analysis for the crypto markets, the reality is that the expertise of technical analysis ‘experts’ varies greatly. Hence, it is important to know what to look for when reading a technical analysis report.
To evaluate the viability of a technical analyst report, you can look at the following three aspects:
The analyst’s credentials
Firstly, you need to see what credentials the analyst possesses that give him or her the expertise required to provide insight into crypto asset price movements. If the analyst has a background in technical analysis, perhaps through previous employment in the financial markets or a successful track-record in trading, then reading their analysis will probably provide you with an interesting insight into the latest price movements. Should the analyst be nothing more than a blogger, who wants to capitalize on the increased demand for cryptocurrency investment content, then it is best to steer clear and find trustworthy sources for technical analysis reports instead.
What indicators are being used
Secondly, you need to look at the combinations of indicators the analyst uses and how valid their predictive powers are. For example, studies have shown that the use of only one technical indicator will not result in strong predictive powers. Hence, you want to look at TA reports that incorporate several indicators that complement one another in their predictive powers. An analyst who only looks at one indicator is likely not as experienced and he or she claims to be.
A successful track record of ‘being right’
Thirdly, look back at older reports of chart analysts to see whether their analysis has predictive power or not. In other words, check if they have been right in the past. A successful track record suggests that the analyst has found a good combination of indicators that work for him or her and the assets they are covering.
By looking at these three aspects of a technical analysis report and its author, you will be able to find high-quality reports that you can read on a weekly basis to compliment your investment research.
Should you read technical analysis reports for Bitcoin and other cryptocurrencies?
While it is up to you to decide whether you believe in the predictive powers of technical analysis or not, it can never hurt to get the perspective from an experienced chart analyst. If anything, a good technical analysis piece can give you insight on entry and exit points and can help you to determine where to set your price targets and stop-loss limits if you are an active trader.
The cryptographic asset markets are considered well-suited for chart analysis as they are ‘inefficient’ markets. It is difficult to evaluate the fundamental value of assets and they run 24/7, which makes chart patterns more obvious.
It is also important to note that the more people look at and trade using technical indicators, the more the market moves according to buy and sell signals generated by these indicators. Hence, as the number of technical analysis reports for bitcoin grows, which it has over the past few months, one could argue, the more they gain in predictive power.
Having said that, historical data on the accuracy of crypto asset price predictions made by technical analysts is too limited to make a conclusive judgment on whether past crypto asset prices can help to predict future price movements.
Nonetheless, technical analysis can be a useful tool to identify market trends, which, in turn, can be used to make more educated investment decisions.
For in-depth chart analysis reports on a range of cryptographic assets, have a look at technical analysis reports on Brave New Coin by Josh Olszewicz, Aditya Das and Christopher Brookins.