All fundamentalist believe that in the news you can find everything you need to know to trade any commodity, currency, or stock. And while there may be some merit in their words, the reality is that if you want to understand market signals, you need to know technical analysis. The technical approach is the best way to identify trends and make informed decisions. Technicians are also known as Chartist, and if you want to become one, you need to know the following topics.
The Dow Theory
Even though the cryptocurrency market is new, the principles that rule the market are not new at all. The Dow Theory explains certain things that will help you understand when is time to buy or sell.
The first thing you need to know is that everything that has happened, is happening, or will happen is already included in the price. Consequently, that Ethereum’s price, for example, already has the value of ETH after IBM announced a plan to use the blockchain for future projects. That means all existing information is there. Your job is to interpret what the market is saying and understand if it is going up or down.
The second thing is that market chaos is not random. There always trends which follow obvious market trends and signals. A rally is when a coin sustains an upward or downward trend for a significant period. It is tough for a rally to end abruptly. So Chartists are always looking for the signs of a rally.
The last thing that Dow Theory explains the repetitiveness of any given market. Traders and users respond in the same manner to similar incentives. If news about Bitcoin spreads around main stream media, people will go bullish on BTC. Key events would make the market respond in the same way regardless if it happened for the first time or hundredth time. So always be ready to buy when a giant sell sign appears in the news. That means the mark will turn bearish considerably fast.
Sometimes you just have to be average
Using technical analysis to identify market signals involves using moving average. That is financial terminology for smoothing out the price of cryptocurrency. The best way to calculate a moving average is by finding the average price of a coin for a predetermined period. Most technicians tend to use 5, 10 or 20 day periods when trying to find a crypto coin ready to rally.
Studying moving averages allow trades understand when the momentum is about to shift. If you are looking at a five-day moving average, and it falls below the twenty-day moving average, it means that the market is about to turn bearish. The rally is ending, and a price correction is about to occur. That will give you the edge you need to get ahead.
Understanding these basic principles will make you a better trader than before because you will be able to read the market signs better than your peers.