What is Technical Analysis?

Technical Analysis (TA) is a tool used to predict future price changes based on historical patterns and trends. 

TA has proven to be a powerful trading tool, but there are other factors you need to keep in mind when developing a trading strategy like tokenomics, network activity, use-case, development team, notable partnerships, and other macro-indicators (something we discuss in more detail in Module 15). 

Candlesticks 

Almost everything in TA involves the candlestick chart. Each candlestick shows a snapshot of the trading activity within a given unit of time. For example, if you have the chart set to 1 hour, each candle will represent one hour of trading activity. A green candle means prices went up during that period, and a red candle means prices went down.

Almost all candles will have a ‘body’ and a ‘wick.’ The body is the thicker part of the candle. The wicks are the thinner parts sticking out from the top or bottom of the body.

A candle with almost no body means that almost all of the trading during the time period took place during a very narrow price range. This means that the price did not change much during that time. When you see a candle that’s almost all body with no wicks, that means that the price either moved to the upside or the downside during that period.

Wicks on a candle denote the highest and lowest prices during that trading period. Wicks are incredibly useful as they can tell us when traders are taking profits or buying the dip.

A long wick on the bottom of the candle suggests that traders are buying the dip, meaning that the price could still be bullish. A long wick at the top suggests that traders are itching to take profits. However, it’s only when you factor in trading volumes that you can start making price predictions with candlestick charts. 

Trading Volumes

Factoring in trading volumes is essential for good technical analysis. Each volume bar you see at the bottom of a trading window shows you the amount of an asset that was traded during the time period you set.

As a general rule, you want to be trading on a market that has lots of volume. Low volume tends to lead to price volatility, meaning that the price could suddenly spike up or down.

Patterns

When traders draw lines on candlestick charts, they’re usually looking for 3 things. 

1. Support: an area where the price is expected to bounce from. Support represents an area of demand where buyers are happy to buy at the given price.
2. Resistance: an area where the price is rejected. Resistance is a supply zone where traders sell their assets.
3. Recognisable price patterns

There are many ways to assess where the support and resistance prices could be, and more often than not, they reveal recognisable price patterns. 

More indicators 

There are hundreds of different indicators used in technical analysis trading. Here are some common indicators:

Moving Averages: determine the average price of an asset over a given period of time

MACD (moving average convergence divergence): determines new trends in price and measure price volatility 

RSI (Relative Strength Index): tells you if a cryptocurrency is over- or under-valued

Bollinger Bands: Like MACD, Bollinger Bands are used to measure market volatility

What is Fundamental Analysis?

Fundamental analysis or FA, is a method used to determine an asset’s intrinsic value by looking at different internal and external factors. These factors include reputation, competitors, team, advisors, social presence, marketing, tokenomics and distribution, sector health, and market capitalisation, among others.

Fundamental analysts believe that an asset’s potential future value is determined by more than just its historical performance. FA considers micro-and macroeconomic factors that can affect a project’s performance. (We discuss macro and microeconomics in more detail in Module 20).

It is essentially the process of researching all aspects of a project, and using the information gathered to determine its value and growth prospects.

Our Top Picks:

DOGWIFHAT

120,650%

SPX6900

17,000%

POPCAT

66,567%

PENDLE

5,002%

SOLANA

2,500%

HYPE

1,740%

Don’t miss our next 100X

Trusted by 230K+ investors

Get started

How is it used?

Fundamental analysts look for assets that are not correctly priced by the market and are trading higher or lower than their intrinsic value (often in crypto, this includes its growth potential), as this presents an opportunity. Stock market analysts traditionally used FA, but it is necessary when looking into any investment, especially crypto.

We will discuss how to research Fundamental Analysis in practice in Module 23. 

What is the difference between Fundamental and Technical Analysis?

Fundamental Analysis looks at the broader picture. It differs from Technical Analysis (TA) which considers only price, historical trends and data to identify future opportunities.

FA aims to determine an asset’s actual value by considering all aspects. TA attempts to predict future price action by looking at past trends.

Each method offers its own particular benefits. For example, Fundamental Analysis is considerably more useful when investing over a long time period, whereas Technical Analysis is best for short-term price movements.

What is On-Chain Analysis?

On-chain analysis involves looking at the data stored on the blockchain to measure investor sentiment and behaviour. It is also how scammers and hackers and caught, as well as a way to identify bad actors in projects, what other large investors are buying into (could be a sign to get involved) and much more.

Crypto is the first asset class where investor activity data can be taken from huge data sets on every asset’s blockchain. And, as blockchains are transparent, the data held on them is verifiable and cannot be faked.

How does it work?

On-chain analysts look at all the data stored on the blockchain to measure investor sentiment and behaviour. They take this data like transaction patterns, the classes of investors using the asset, and how they’re using it. They then filter and segment it to identify behavioural patterns. These patterns may help to predict an asset’s future price. 

Why is it important?

On-chain forensics is a valuable tool that allows investors to identify and separate a cryptocurrency’s speculative value from its utility value. It can be used to identify undervalued and overvalued coins and determine whether an asset’s current price can be justified by its fundamentals.

What is a whitepaper?

A whitepaper is basically the crypto project’s business plan. It is a detailed proposal written by the development team outlining the purpose and design of the project. It will typically include information about the team behind the project, the tools and technology used by the project, tokenomics, consensus mechanism, future goals, partnerships and use cases. A good whitepaper should have a clear explanation of what the project is trying to do.

A whitepaper can offer a lot of information about the project and is where many red flags, such as bad tokenomics, unrealistic promises, and an unclear roadmap, can first be highlighted. Note: a project without a whitepaper is usually one to avoid. We discuss how to analyse whitepapers in more detail in Module 23. 

The first whitepaper released in the cryptocurrency space was Satoshi Nakamoto’s document on Bitcoin: A Peer-to-Peer Electronic Cash System. It begins with the statement:

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.”

This document set a standard in the industry and was followed by almost all projects. 

Governments are considering making a whitepaper a legal requirement to launch a project.