Fundamental and technical analysis.
Fundamental and technical analysis: 2 different methods to predict market movement.
In this article we will discuss why fundamental and technical analysis are the two main method to analyze and forecast an asset price movement.
The reason why we trade is pretty clear and common to all: we want to make money, but how we predict price movement can be very different.
Let’s start with an obvious statement: if a market exists,
the price of a commodity is given by the equilibrium between demand and supply.
The price knows nothing about economic theories, internet diffusion, or ICOs. If I offer 1 BTC for 10.000 USD and someone is willing to buy it, a price is formed.
The price evolution depends on the actions of buyers and sellers. If you want to make a profit, you have to deal with human behavior at some point.
Fundamental analysis.
Fundamental analysis was considered the only true or correct way to make trading decisions until the late 1970s. It was the only approach to the financial market that had academic dignity.
It examines all variables that can influence the value of a security. Macro and microeconomic factors are taken into account. The most important assumptions are that we all have the same information and behave rationally. This is why Facebook price was high even before the company was profitable. We all agreed it would have become a very large community where products could be advertised and sold.
If I am a crypto enthusiast I probably believe that in the future everyone will own cryptocurrencies to pay for services and goods. When amazon announces it will accept Bitcoin payments around the world the price will definitely skyrocket.
Hodlers investors use this method to value their coins even though they may not be aware of it.
They are pretty sure that crypto payments will become mainstream in the next few years. When there is a new ICO, they study the start-up project and believe that it has good fundamentals and its value will increase, as in the example of Facebook .
Fundamental crypto traders are mainly concerned with the laws, internet diffusion, the total and maximum coin supply, the cost of mining, and all other factors that can increase the intrinsic value of a coin.
ShieldTrade enables traders who use fundamental analysis to take advantage of automatic algorithms. For example, it is possible to create a robot that buys every time the price drops significantly and is thus able to accumulate crypto at low prices.
Technical analysis.
Technical analysis has been around for as long as there have been organized markets in the form of exchanges. Its origins might be traced back to the studies of Charles H. Dow ( The Dow Jones index is named after him ) in the early 1900s
the basic assumption is:
Price is everything.
The price of a security incorporates all the information available at a given time. If you want to know how buyers and sellers interact, all you have to di is look at the price.
In other words, crypto traders are a group of individuals who are constantly interacting with each other. They develop behavior patterns that you can observe when you look at the price curve. The goal of technical crypto traders is to recognize these patterns, which repeat themselves with statistical reliability.
There are patterns in different time frames because the group of traders can be divided according to their time horizon.
If you look at the Bitcoin chart on a daily basis and you see that, in the past months, it dropped 4 times below the 30.000 USD and every time it rebounded shortly, You probably found a pattern that is called support. At that price, many buyers are entering the market. If it is touched again you might want to be a buyer.
ShieldTrade enables traders who use technical analysis to take advantage of automatic algorithms. For example, it is possible to create a robot to buy every time a short-term moving average crosses above a long-term moving average.
Conclusion.
Which approach is best for cryptocurrency trading is very hard to say.
Technical analysis became mainstream in the traditional market in the early 1980s. It’ s an essential tool for every trader, especially the one with a short/medium time horizon. Even if I do not know anything about crypto, I have not read the white paper of the ICO, and I think mining is the action of digging the ground to find gold, I can make money with technical analysis just looking at the graph and buying the moving average cross over.
On the other hand, it would be silly to invest during the early days of a new ICO quotation without having done a little bit of fundamental research about the project, the team, the market, and the new idea behind the crypto world that is really disrupting: a new way to exchange money as Facebook was a new way to be a community.
ShieldTrade offers the ability to create algorithms for both traders who follow technical analysis and those who prefer fundamental analysis.