If you’re just finding your feet in the market, you will be inundated by search engine results telling you 400 types of technical analysis. Fibonacci sequences, Murrey Math Lines, Heikin-Ashi, candlestick patterns, head and shoulders, double tops and bottoms, the list goes on and on. So how effective are these patterns?
There’s a serious debate that takes place among traders regarding just how effective these patterns are. Do you need to commit them all to memory? Or are they just one specific area you need to know about but not pay much attention to? If that theory applies, it likely applies in cryptocurrency more than in other markets, and today we will explain why.
The Art of Charts
It wouldn’t be fair to say that chart analysis is useless. Some traders argue that technical analysis is pointless and that you should focus on other parts of chart research, but it is a balancing act. There are several moving variables when it comes to trading. It isn’t a case of completely ignoring them because some follow a pattern and can indicate where the support and resistance are for that particular asset – which can also indicate a good time to buy.
It is good to use some level of perspective, though. Some traders will drive themselves demented over charts moving up and down, and although support and resistance lines can often signal an excellent place to buy and sell, they are by no means a guarantee. One tiny bit of news can completely invalidate chart analysis, as can any severe volatility in Bitcoin, which drags the whole market up or down with it.
There’s no denying the power and influence Bitcoin has on the cryptocurrency market, and it is a direct indicator of whether the overall market sentiment is positive or negative. Moreover, as Bitcoin is the most visible of cryptocurrencies, it can be used in various places. Whether in El Salvador as a legal tender or playing casino games at Bodog, it’s relatively easy to see why it still asserts such market dominance. Consumers and governments alike flock toward cryptocurrency’s ability to make deposits quickly, securely, and efficiently – with low transaction fees.
There are other factors penciled into the Bitcoin calendar that could signal intense price action too, but again, weighing up the risks and the rewards is essential. For instance, the Bitcoin halving in 2024 is predicted to increase the price of Bitcoin. As it’s part of the deflationary and revolutionary cryptography written into the code that drives scarcity, all indicators suggest that this indicates bullish price action. As basic supply and demand tell us, if there is enough demand but scarcity increases, this invariably pushes prices up.
Other Factors to Consider
As we stated in our introduction, there are several moving variables to consider when trading cryptocurrency, which is widely considered the most volatile marketplace anywhere in the world.
While stocks, commodities, and forex can follow similar patterns and operate within specific parameters, cryptocurrency is an entirely different ball game. It has little to no regulation, so the price of particular cryptocurrencies can be manipulated. This applies across the board; even Bitcoin, which had a multi-trillion-dollar market cap at its peak, has been subject to high levels of automated trading and, in some cases, suspected manipulation.
Once you throw all this into the melting pot, it’s clear why even the most minor news can cause wild price swings. For example, during the frivolous bull run of 2021, altcoins like Dogecoin, with essentially zero utility or fundamentals, nearly hit $0.75, which signaled a price rise in the thousands of percent.
If you had drawn head and shoulders patterns or established “resistance” lines during this period, Elon Musk’s incessant tweeting about the cryptocurrency smashed all conceivable measurements and resistance. More recently, traders looked at the XRP price action. Rumors were building that a settlement between the SEC and Ripple was on the cards, which would signal some seriously bullish price action. Inevitably, the price should increase exponentially if the case outcome is beneficial for Ripple, but nobody knows if it will be or when it will be.
However, during the last few weeks of Q1 2024, the price went from $0.37 to $0.57 because it appeared as though a case resolution was approaching. As a result, some traders continually looked at shorting the cryptocurrency between $0.48 and $0.52 based on chart analysis, completely ignoring that the conclusion was allegedly imminent.
Although this wasn’t the case and the supposed “settlement” date of 31st March passed without incident, the previous chart analysis was flawed as some traders failed to factor in other possibilities. Traders who get married to chart patterns and analysis leave themselves open to losses when they don’t factor in other variables, such as big news items or other tremendous economic stories.
Although short to medium-term chart analysis can help, it shouldn’t be used as the only tool. If you come across articles or websites stating that specific trading methods will work and that you don’t need to consider other factors, such as the news, they are articles you should take lightly. Unfortunately, the trading space has become inundated with hastily thrown-together websites looking to generate traffic through popular articles. The only consideration these websites have is to bring people in so that they can advertise on their page.
Many do not care that they are selling a false idea or potentially not giving you a bigger picture, which isn’t a sign of a company operating in good faith. News impacts all markets; this doesn’t just include cryptocurrency but the likes of forex, too. So, it is a bad idea to hone in on one specific market aspect.
Chart analysis works to some extent, but if your strategy isn’t lucid enough to factor in global and economic news that will cause people to buy and sell the asset and invalidate any analysis, you could lose a sizeable piece of your capital. Your capital is always at risk irrespective of how well you prepare your trade, and you should only use the money you can afford to lose.