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Technical Analysis: Is It Effective?

Some traders are non-believers in technical analysis. Contrary to the majority of the traders, they think it is not working, and chart patterns and lines are nothing. We cannot blame them because they lack a thorough understanding of technical analysis and trading. Perhaps they read an article claiming that it is flawed. It is most likely that it does not work well with them since they do not know how to utilize it or have a limited comprehension of it. We will take a closer look at technical analysis in this article.

Let us review the definition of technical analysis. According to Investopedia, technical analysis is a trading discipline that analyzes statistical trends acquired from trading activity, such as price movement and volume, to evaluate investments and uncover trading opportunities. In other words, it tries to forecast price movements by studying historical data. Knowing the possible future price condition helps the trader to decide in the present. It entails the study of mass psychology using a mix of science and the arts.

The past, which reflects every trader and investor’s decision in the market, is what we see in historical data. The market consists of enthusiasm, as well as fear and greed of buyers and sellers. It also mirrors the chart patterns. All markets, including the crypto market, are subject to technical analysis. Why is that so? Human emotions and psychology are to blame. Human errors caused by emotions recur; therefore, what happened in the past could happen again in the future. The market is cyclical, and new traders and investors enter it all the time. Only those who have recently entered the market will repeat the mistakes of those who came before them. As a result, it is not surprising that chart patterns repeat and occur in different time frames. Man has memories in addition to feelings. They recall where they went wrong and hate to make the same mistakes again. What makes you think you cannot do it while others can? If others succeed using technical analysis to get wealthy, what makes you think you cannot? Novice traders feel that way too. That is why they consult professional crypto traders on platforms like Bitcoin Pro.

To better understand this notion, let us look at this example. Suppose there are three traders, namely traders A, B, and C. Trader A takes a long position in the market. He paid USD 4,500 for one bitcoin with the expectation that its value would rise. However, when bitcoin hit USD 5,000, he did not sell it right away because his hopes were even higher. The price of bitcoin then fell to USD 4,000. Trader A did not exchange his bitcoin for cash. Trader A will now keep in mind that if bitcoin reaches USD 5,000, he must sell it.

Trader B, on the other hand, takes a short position in the market. He believes the price of bitcoin will fall. Trader B thinks that it is the best time to buy Bitcoin at the current price of USD 4,500. The same thing happened with trader A, but he had a different set of expectations. Now, the price of bitcoin has surpassed USD 5,000, contrary to trader B’s expectations. In such an exchange, he loses. Trader B will now remember to enter his short position when the Bitcoin price reaches the USD 5,000 mark. This event will generate a resistance level in the USD 5,000 price area.

Here comes trader C. These are the people who are unsure about where they will go; they can go long or short at any time and in any situation. In the combat between the bear and the bull, whoever is victorious will leap. Technical analysis, as I previously stated, is a combination of science and art. And it is not simply a hunch. It has been tested and proven throughout time.

To sum it up

Keep in mind that technical analysis is not enough. This process is just one component of a whole trading system. If the technical analysis does not work for you, keep in mind that the trader is the weakest link in the trading system.

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