Technical analysis (TA), often called chart indicators, is a method of analysis that predicts future market behavior based on historical price action and trading volume data. Technical analysis methods are widely used in stocks and other assets in traditional financial markets, and are also an integral part of digital currency trading in the cryptocurrency market.

Unlike fundamental analysis (FA), which considers various factors such as asset prices, technical analysis (TA) focuses on historical price behavior. Therefore, technical analysis can be used as a tool to examine asset price fluctuations and trading volume data, and many traders use this tool to identify market trends and favorable trading opportunities.

The earliest forms of technical analysis appeared in 17th-century Amsterdam and 18th-century Japan, but modern technical analysis is often traced to the work of Charles Dow. Financial journalist Charles Dow, founder of the Wall Street Journal, was the first to notice that personal assets and markets often exhibit cyclical trends that can be scrutinized by the public. The results of his work later led to the Dow Theory, which promoted the further development of technical analysis.

In the early stages, the prototype of technical analysis used hand-made tables and manual calculations. With the development of technology and modern computers, technical analysis has become popular and has become an important tool for many investors and traders today.

How does technical analysis work?

As mentioned earlier, technical analysis basically studies the current price and historical price of an asset. The main premise of technical analysis is that asset prices do not fluctuate randomly, but show a traceable trend over time.

The core of technical analysis is the analysis of the supply and demand market forces of overall market sentiment. In other words, asset prices reflect the opposing forces of buyers and sellers, and these forces are closely tied to the emotions of traders and investors (primarily fear and greed).  

It is worth noting that technical analysis is more reliable and effective in regular market environments with high trading volume and liquidity. Markets with high trading volumes are less susceptible to price manipulation and external anomalies. These effects can send out false signals and render technical analysis ineffective.

Traders use various chart tools called "indicators" to test prices and ultimately explore profit opportunities. Technical analysis indicators help traders judge the current trend and discover from it Valuable information on future trends. Because technical analysis indicators are prone to error, some traders use multiple indicators to reduce risk.

Common technical analysis indicators

Normally, traders use various Technical analysis indicators and parameters to identify and discern market trends, such as charts and historical price action. Among the many technical analysis indicators, the simple moving average (SMA) is one of the most well-known and commonly used methods. As the name suggests, a moving average is calculated from the closing price of an asset over a set period of time. The exponential moving average (EMA) is improved based on the moving average and pays more attention to the latest closing price.

Another commonly used indicator is the relative strength index (RSI), which belongs to the category of oscillators. Unlike a simple moving average that simply tracks price spreads over time, oscillators use mathematical formulas to calculate price data and then generate parameters within a predefined range. The relative strength index (RSI) ranges from 0 to 100.

The Bollinger Bands (BB) indicator, which also belongs to the oscillator type, is also very popular among traders. The Bollinger Bands indicator consists of two horizontal bands flowing around a moving average and is used to spot potential overbought and oversold market conditions, as well as measure market volatility.

In addition to basic and simple technical analysis tools, there are also some indicators that need to be combined with other indicators to generate data. For example, the Stochastic RSI is derived from the mathematical formula used to calculate the conventional Relative Strength Index (RSI). Another common example is the exponential moving average (MACD) indicator. Subtracting two exponential moving average indicators creates the main line of the exponential moving average (MACD), which is the MACD line. The first line then generates another exponential moving average, and you get a second line, called the "signal line". Additionally, there is a MACD histogram calculated from the difference between these two lines.

Trading signals

Indicators help traders identify general trends and provide potential buying and selling prices Points (buy and sell signals) reference. These signals are generated when specific events occur in the indicator chart. For example, when the relative strength index (RSI) value is 70 or above, it means that the market is in an overbought environment. Similarly, when the relative strength index (RSI) value drops to 30 or lower, it releases a signal that the market is oversold.

As introduced before, the trading signals provided by technical analysis may not be completely accurate, and technical analysis indicators will bring considerable interference factors (error signals). Cryptocurrency markets are smaller and more volatile than traditional markets, so this issue is particularly concerning.

Disadvantages

Although technical analysis is widely used in various markets, many experts Technical analysis methods are considered controversial and unreliable, often referred to as "self-fulfilling prophecies." This term is used to describe events that occur simply because many people think they will.

Critics believe that in financial markets, if a large number of traders and investors rely on similar indicators such as support or resistance lines, the probability of these indicators working will increase.  

On the other hand, many proponents of technical analysis believe that each charting analyst has a special way of analyzing charts and utilizing various ready-made indicators. This means that it is almost impossible for a large number of traders to use a particular strategy at the same time.

Comparison between fundamental analysis and technical analysis

The core premise of technical analysis is that the market price has reflected the specific All fundamental factors related to the asset. Technical analysis mainly focuses on historical price data and trading volume (market charts), but unlike technical analysis methods, fundamental analysis (FA) adopts a broader research strategy and pays more attention to qualitative factor analysis.

Fundamental analysis believes that the future performance of an asset is not determined solely by historical data. Essentially, fundamental analysis uses a broad range of micro and macroeconomic conditions to measure the intrinsic value of a company, business or asset, including: corporate governance, reputation, market competition, growth rates and industry health.

Therefore, we can think that, unlike technical analysis, which is mainly used to predict price behavior and market behavior, fundamental analysis is to judge whether an asset is overvalued in terms of background and potential. Technical analysis is primarily used by short-term traders, while fundamental analysis is often preferred by fund managers and long-term investors.

One of the significant advantages of technical analysis is that it is based on quantitative data. Technical analysis therefore provides a framework for objectively studying price history, eliminating some of the guesswork that comes with the qualitative approach of fundamental analysis.

However, although technical analysis uses empirical data, it is still affected by personal bias and subjectivity. For example, a trader who has a strong tendency to reach a particular conclusion about a certain asset may manipulate technical analysis tools to support their own biases and reflect preconceived notions. And many times, this happens without their awareness. Additionally, technical analysis may not work when market patterns and trends are unclear.

Summary

Despite the above shortcomings, there is still no consensus on which method is more effective. , but many people think that combining technical analysis and fundamental analysis methods is a more reasonable choice. Fundamental analysis is closely related to long-term investment strategies, while technical analysis provides traders and investors with in-depth and incisive information about short-term market conditions, for example, to determine favorable times to enter and exit the market.