Types of Analysis in the Cryptocurrency Trading Markets

Types of Analysis in the Cryptocurrency Trading Markets

Types of Analysis in the Cryptocurrency Trading Markets | Strategy is indispensable in this versatile field of digital currency trading. By using an effective strategy, the results will be positive in the long run. At the same time, a strategy that doesn’t take shape can trigger mildly unpleasant situations.

We can talk about trading strategies for hours, from the simple “hold on to your investments” (HODL) to more complex ones, but none of them will work if we don’t know how to read the market.

The ability to read the market sets traders apart – some make money, some lose money. So simple! We agree that for a beginner all the graphical representations, numbers and abbreviations can be overwhelming, but over time you will easily assimilate them. In this article, we will briefly detail the two forms of market analysis: technical analysis and fundamental analysis.

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Technical analysis

Technical analysis

The fundamental concept of technical analysis is straightforward: history repeats itself. Analysts who have acquired this way of interpreting the market, study price movements on the historical chart and other relevant data such as: traded volume, support and resistance levels, market impulses and corrections, etc.

Analysts seek to build a well-defined big picture through a process of linking historical and current data. For this, the analyst must identify behaviors that are cyclically repeated. Taking all of these things into account, they will make calculated predictions based on whether the trend is going up or down at that time.

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By the nature of technical analysis, it is assumed that price movements in a trading market are not random — patterns from the past have an essence in the future.

In principle, through technical analysis, analysts consider the demand and supply of specific digital currencies. As soon as a currency forms a trend, technical analysts try to fight it. For example, if a market is bullish for a long period of time, it can result in a small coin supply due to high demand. So the price will increase.

When this price rises, individuals belonging to the category called “smart investors” will try to earn their profits by selling their assets. As more and more people sell, supply will eventually begin to exceed demand, causing the price to drop. And from there, the cycle continues.

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Fundamental analysis

Fundamental analysis, compared to technical analysis, requires a more in-depth study of the intrinsic value of a financial instrument. This is done by taking into account a set of qualitative and quantitative factors about the currency in question.

Let’s say you’ve identified an innovative project on the basis of which a currency will be launched that will have many uses in everyday life, and not just that. If you feel that the price of a currency is undervalued relative to its intrinsic value, you can invest and, in theory, make a profit.

At the same time, if you spot an overvalued digital currency, you can make a profit if you bet on a drop in price. This action is called “short.” In simple terms, shorting is a trading strategy that speculates on the decline of a digital currency. This strategy is risky and should only be used by people who have a lot of experience in this area.

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Using fundamental analysis in cryptocurrency trading markets

While fundamental analysis is not unique to cryptocurrency markets, in this context it requires a different approach. You can figure out how much a digital currency is worth by looking at how it can be used in the real world, how it will affect people, and how strong its community is.

You can collect valuable information from Reddit, an indispensable source in a trader’s arsenal; you can read various news from specialist websites; and you can, for example, anticipate the impact that certain concrete steps in any currency’s roadmap will have.

There are many methods and benchmarks you can consider. Any information assimilated beyond your competitors will give you a huge advantage.

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Let’s use Bitcoin as an example. In the case of this currency, you can see its importance from the ease with which you can use it as a medium of exchange. How is Bitcoin different from traditional money?

We can use this argument to mention the fixed supply of 21 million coins that will come to your “head” at a given moment. We can also point to the ability to make it easier and safer to make payments across borders.

These things can cause more people to use a currency, which will change its value over time.

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