uccessful trading and investing requires an element of research and analysis. Part of this process is to conduct technical analysis, also abbreviated as TA. In this beginner's guide, we will explain what technical analysis is as well as how to conduct it as part of your own research.
What is technical analysis?
Technical analysis (TA) is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts believe that the collective actions of all the participants in the market accurately reflect all relevant information, and therefore, continually assign a fair market value to securities. They do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
While fundamental analysis looks at a company's financials, technical analysis takes a different tack. It focuses on price and volume data as well as trends in market trading. Technical analysts believe that all relevant information is reflected in a security's price, and they study past price movements to find clues about where the price might head in the future.
Technical analysts use charts because they believe that patterns that have occurred in the past will likely occur again. They look at things like a security's price history and trading volume as well as indicators such as moving averages, Bollinger bands, MACD, and RSI to help them make predictions about where the price is headed.
How is technical analysis used in DeFi?
Technical analysis can be useful in a variety of different ways, but is most commonly applied in order to find potential entry and exit points for trades. By analyzing historical price data, traders can look for patterns that might provide clues about where the price might go in the future.
It's important to note that technical analysis is not an exact science, and there is no guaranteed way to perfectly predict the future movements of any given asset. However, by conducting thorough research and using sound judgment, traders can increase their chances of making successful trades
Popular technical analysis tools
There are numerous strategies and tools that can be used for conducting technical analysis. Here is a rundown on some of the most popular.
Bollinger Bands are a technical analysis tool used to measure a stock's volatility. They are created by John Bollinger and consist of a simple moving average (typically 20 days) with upper and lower bands that are two standard deviations away from the moving average. Bollinger Bands can be used to identify overbought and oversold conditions as well as to trade market trends.
A moving average is a technical analysis tool used to smooth out price data by creating a constantly updated average price. The most common moving averages are the 10-day, 20-day, 50-day, and 200-day moving averages. Moving averages can be used to identify trends as well as to generate buy and sell signals.
The MACD (moving average convergence divergence) is a technical analysis tool that is used to measure momentum. It is created by subtracting the 26-day exponential moving average from the 12-day exponential moving average. The MACD histogram is used to generate buy and sell signals as well as to identify overbought and oversold conditions.
The RSI (relative strength index) is a technical analysis tool that is used to measure the speed and change of price movements. It is created by taking the average of the 14-day up close and the 14-day down close. The RSI is used to generate buy and sell signals as well as to identify overbought and oversold conditions.
How to conduct technical analysis
Now that we've answered the question "what is technical analysis?," let's discuss how to actually conduct it.
The first step is to select a time frame. This can be anything from a one-minute chart to a monthly chart. The time frame you choose will depend on your investment horizon and trading style.
The next step is to add some technical indicators. As we mentioned earlier, there are many different indicators that can be used for technical analysis. Some of the most popular include moving averages, Bollinger Bands, MACD, and RSI.
Once you have selected your time frame and added your technical indicators, you can begin to look for trading opportunities. Technical analysis is primarily used to generate buy and sell signals as well as to identify overbought and oversold conditions.
It's important to remember that technical analysis is not an exact science. There are no guarantees when it comes to predicting the future movements of the markets. However, technical analysis can be a valuable tool for traders and investors alike.
Other ways to conduct research and analysis
Join a trading community
One of the best ways to learn about technical analysis is to join a trading community. There are many different trading communities out there, both online and offline. These communities are a great place to network with other traders, share ideas, and learn from one another. SokuSwap has an active Telegram channel and discord community where you can find support and inspiration from other traders and DeFi enthusiasts.
Read trading books
If you want to learn more about technical analysis, there are many excellent trading books out there that can help you. A few of our favorites include "Technical Analysis for Dummies" by Barbara Rockefeller and "Trading for a Living" by Alexander Elder.
Attend a trading course
Another great way to learn about technical analysis is to attend a trading course. There are many different courses available, both online and offline. These courses can provide you with the skills and knowledge you need to become a successful trader.
Read the news
It's also important to stay up-to-date on the latest news and events that could impact the markets. The world of trading is always changing, so it's important to keep up with the latest developments. You can do this by reading financial news outlets like Bloomberg, CNBC, Defi Decomplicated News, and The Wall Street Journal.
Frequently asked questions
What is technical analysis in simple terms?
Technical analysis is a type of research that uses past market data to predict future market movements.
What are the benefits of technical analysis?
The benefits of technical analysis include the ability to generate buy and sell signals, identify overbought and oversold conditions, and predict future market movements.
What are some of the most popular technical indicators?
Some of the most popular technical indicators include moving averages, Bollinger Bands, MACD, and RSI.
How accurate is technical analysis?
Technical analysis is not an exact science. There are no guarantees when it comes to predicting the future movements of the markets. However, technical analysis can be a valuable tool for traders and investors alike.
What is the best way to learn technical analysis?
One of the best ways to learn about technical analysis is to join a trading community. There are many different communities out there but we recommend SokuSwap.