Technical analysis (TA) is the process of identifying trends with the use of tools, such as indicators or charts, to gauge opportunistic times to enter or exit an investment or trade.
Investors and traders use charts and TA to find valuable information such as:
- Past and present instability.
- Value compared to the overall market.
- Price fluctuations after important events.
- History of volume and trading levels.
- Price correlation among assets.
- Spotting trends.
- Entry and exit points.
- Identify support and resistance levels.
You may use charts and TA to see an asset’s past price fluctuations—helping to guide your investment decisions of whether the asset will offer fruitful results in the future.
The Importance of Time Frames
It’s always useful to view price action from multiple time frames. Examples of time frames are:
A common mistake is to only ever view price action from the same time frame. Say you’re viewing a chart on an hourly time frame and you spot a pattern. If you switch to a daily or weekly time frame, you may not see that same pattern.
The chart patterns and trends you see on one time frame don’t always appear on another. For example, the levels of support you see on an hourly time frame might not align with what you see on a weekly time frame.
If you’re looking at lower time frames, you might not have complete information. It’s important to check whether other time frames tell a similar story. (Generally speaking, a ‘low’ time frame is one that is in seconds or minutes and a ‘high’ time frame is one that is in hours or longer.)
- TA is not a crystal ball of future price movement. Skilful investors and traders know this and often leverage TA to formulate an array of different possible future outcomes, using their experience and expertise to inform the probability associated with each.
- Like many skills, TA demands a significant commitment of time, practice, energy, focus and emotional intelligence. We see many beginners enter this space who significantly underestimate the time and effort that is required to become proficient in TA. If you identify that TA is an important ingredient in reaching your investment or trading goals, then be sure to invest both time and money in your own education.
- If TA does not sound suited to your lifestyle or interests, basic chart-reading skills such as the ability to identify trends in the movement of price and volume can be an extremely useful tool for even the most novice investors.
- It’s important to remember that TA can sometimes tell you only half the story. It is often important to consider using fundamental analysis (FA) in combination with TA to produce the most informed interpretation of potential future outcomes.
- Appreciate the importance of psychological and emotional self-control, especially in a market as volatile as cryptocurrency. Failing to maintain psychological and emotional control can impair your TA and cause you to make investments or trades that you otherwise wouldn’t.