There are two primary methods used to predict an asset’s future price. They are known as fundamental analysis and technical analysis:

  • Fundamental analysis involves determining an asset’s true value based on its intrinsic properties as well as the state of the market. Fundamental analysis is typically used for long term trading.
  • Technical analysis involves reading indicators and chart patterns to determine price trends. Technical analysis is typically used for day/swing trading (i.e. short-to-medium term trading).

Many day/swing traders are attracted to the high volatility in the cryptocurrency market. These traders often use technical analysis to guide their trades. They’ll use indicators like the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD, pronounced MACK-DEE). A prudent technical trader will also be watching the charts for trendlines, support and resistance levels, and telltale candlestick shapes.

Having traded forex for several years, and then traded crypto for several months, I’m a strong believer that all this technical analysis stuff is unsuitable for the cryptocurrency market in its current state. I think that if you attempt to approach the crypto-market with a technical analysis strategy, especially if you gleaned this strategy from some random YouTuber, you’re gonna have a bad time.

Now this is not to say that technical analysis is voodoo magic or bogus fortune telling, as some will passionately claim (“Why technical analysis is shunned by professionals”, “Why Technical Analysis is 100% Bullshit”). I’m not one of those guys. I believe technical analysis has its merits.

First of all, technical analysis can work if one applies it methodically, rigorously, and without emotional interference. Even better if it’s augmented by statistics and executed by computers. Think quantitative trading.

Second, technical analysis is great for markets that are stable and predictable. These are properties found in established, well regulated markets like forex and the stock market.

Most small-time crypto-traders do not have the mathematics and computer science background necessary for them to even attempt to dabble with quantitative trading. Even if a few do, it takes significant effort to create an algorithmic trading system, nevermind an algorithmic trading system that works well. Doing so would require rigorous research and trial and error. Who, besides the most devoted trader, has time for that? What I’m getting at is that most small-time crypto-traders are manual and emotional traders. Poor conditions for any technical analysis strategy to succeed.

Additionally, the cryptocurrency market is often unpredictable. It’s a nascent market and there’s a continuous influx of small and big money. This, coupled with minimal regulation, leads to pervasive and frequent market manipulation. Although technical analysis can predict price action based on historical data, it cannot predict a human’s motivations and actions. If an exceedingly wealthy person or orgnization decides to move the market, no indicator or candlestick pattern will give you a heads up. Remember when GDAX, one of the largest and most active crypto exchanges out there, suffered a flash crash in June and prices dropped from $319 to $0.10 in an instant? Tough luck predicting that one.

Finally, I’m not saying that if you’re trading crypto, you shouldn’t bother touching technical analysis even with a ten-foot pole. What I’m saying is that the odds are stacked against you and you should be very vigilant when trading. Do lots of practice, either with a practice account or small amounts of money. Backtest your theories extensively. Get a solid understanding of how the market behaves before making any serious attempt at generating a profit.