Highlights: ①.Gate's "Elementary Contracts Courses in Futures" course introduces various methods of technical analysis that are commonly employed in futures trading. The aim of these courses is to help traders establish a comprehensive framework for technical analysis. Covered topics include the basics of Candlestick charts, technical patterns, moving averages, trend lines, and the application of technical indicators. ②.Serving as the introductory chapter in the series "Master Technical Analysis," this article introduces the concept, basic theory, and practical application of technical analysis. A firm understanding of the foundational concepts discussed here is essential for grasping the specific methods of technical analysis that will be introduced in subsequent courses.
Ⅰ.What is a technical analysis? Technical analysis in the realm of cryptocurrency focuses on studying patterns in market movements, primarily the price fluctuations of Bitcoin (BTC) and Ethereum (ETH). The goal is to identify optimal times for buying or selling assets based on projected market trends.
The modern system of technical analysis is generally considered to have originated with the introduction of Dow Theory. Charles Henry Dow, the founder of the Dow Jones Index, is credited as the pioneer of modern technical analysis. His Dow Theory serves as the foundational principle upon which the entire discipline is constructed.
It's crucial to acknowledge that the validity of all technical analysis methods hinges on the assumption that the following premises are true: 1).Market behavior, whether in price or index form, incorporates all available information; 2).The market tends to move in a specific direction or trend over a given period, and this trend possesses the inertia to sustain itself; 3).Historical patterns tend to repeat themselves.
Ⅱ.Technical analysis tools ①.Candlestick chart The Candlestick chart, also known as the K-chart, traces its origins back to Japan's Tokugawa shogunate era in the 18th century. Initially employed to track fluctuations in rice prices, it has since become the most commonly used technical analysis tool in cryptocurrency trading.
A Candlestick chart for a given time period displays the opening, high, low, and closing prices for that interval. The chart features a rectangular shape—referred to as the "real body"—formed between the high and low prices. Additionally, two vertical lines extend from the top and bottom of this real body, known as the "shadows." The line above the real body is the upper shadow, and the one below is the lower shadow.
When the real body is coloured green, it indicates that the opening price is higher than the closing price. Conversely, if the real body is coloured red, it means that the opening price is lower than the closing price.
The various states of Candlestick charts, along with the combinations of different Candlestick patterns such as rising candlestick patterns, falling candlestick patterns, "buy-low" forms, "sell-high" forms, and consolidations—make up the foundational framework of technical analysis.
②.Trend analysis It is a commonly held belief that everything in the world, be it physical objects or the human mind, follows a specific trend over a certain period. Describing a trend in any subject's movement involves identifying both the direction and the momentum the subject gains to sustain its current path. The cryptocurrency market is no exception; it too moves according to identifiable patterns within specific time cycles, and these trends often have the inertia to maintain their course.
Trends can be categorized as long, medium, or short-term. The direction of these trends can be upward, downward, or sideways (consolidation).
The system of trend analysis, which also has its roots in Dow Theory, incorporates various analytical tools. These include trend line analysis, as well as the identification of support and resistance lines and channels.
③.Moving Average The Moving Average (MA) line is a curve formed by connecting the average prices or indices over a specific trading period. Rooted in the average cost concept from Dow Theory, the MA also reflects principles found in statistical moving averages.
As an indicator, the MA captures both fluctuations and trends in prices or indices, assisting traders in predicting future market directions. It serves as a numerical, graphical, and visual representation of both Dow Theory and Wave Theory.
Moving Average analysis is a staple tool for traders. Beyond just the status of the MA, the adherence and divergence between different MAs can offer valuable insights into market trends.
For a more nuanced understanding of market dynamics—such as the balance between buying and selling forces, as well as the direction and strength of momentum in market trends—it is advisable to use MA analysis in conjunction with other indicators.
These can include the Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), Volume (VOL), and Bollinger Bands (BOLL).
Ⅲ.The purpose of conducting technical analysis ①.Identifying market trends The key to profitable trading is to open positions that are consistent with the market trend. That is, long positions should be opened when the price is about to rise, and short positions should be opened when the market is about to go bearish. So determining the market status is the primary step in trading. Various technical tools can help you in this aspect.
According to Dow Theory, once established, trends have the inertia to sustain themselves and are not easily reversed. "Never go against the trend" is a principle that experienced traders adhere to rigorously. To apply this rule, they first assess market conditions—determining whether the market is bullish, bearish, or in a sideways movement—using a variety of technical analysis methods. Based on this assessment, they then formulate a trading plan tailored to the current market status. Employing such a strategy can significantly improve their success rate in trading.
②.Buy and sell timing After identifying the market's directional trend—which could be upward, downward, or sideways - the next step is to determine the optimal entry point. Profits can be maximized by opening positions at the most opportune time.
The general strategy involves using long-term indicators to assess the overall market trend, while monitoring short-term movements to fine-tune the timing of trades. For instance, one might consult daily and weekly Moving Averages (MA) and Candlestick charts to gauge the general direction of price movement. Then, to pinpoint the best time to enter the market, changes in shorter time frames—such as 4-hour, 1-hour, or even 15-minute charts—can be analyzed.
Specifically, when short-term charts form patterns like head and shoulders bottoms, double bottoms, or rounding bottoms, it may be an opportune time to buy assets. Similarly, sell signals can often be discerned from the formation of corresponding bearish patterns.
③.Identifying stop-loss and take-profit levels Experienced traders often achieve high success rates by adhering to a key rule: they open positions only when clear signals are present and always set take-profit and stop-loss levels for all open positions. Risk management is an indispensable component of any trading strategy, especially given the market's inherent volatility and unpredictability, as well as the potential for 'black swan' events that could drastically alter market conditions. Utilizing stop-loss and take-profit mechanisms helps mitigate losses and maximize profits.
By setting a take-profit level, positions will automatically close once the designated price is reached. This helps secure a certain level of profit and prevents the erosion of gains if the market subsequently moves unfavourably. Conversely, a stop-loss is designed to curtail any minor losses before they escalate into significant ones, ensuring that any loss incurred stays within an acceptable range.
Ⅳ.Summary Originating over a century ago, technical analysis methods have evolved alongside the development of traditional financial markets. Today, a comprehensive technical analysis framework exists for trading traditional financial assets. This form of analysis is grounded in three key assumptions: market prices reflect all available information, trends have the inertia to sustain themselves, and history tends to repeat itself. Technical analysts also consider other factors, such as market psychology and the balance of power between buyers and sellers, as contributors to price movements. Investing doesn't have to be complicated; the key to success lies in understanding the laws governing market movements as they oscillate between bullish and bearish trends and cause shifts in market sentiment from greed to fear and vice versa.
For those new to trading, it's essential to familiarize themselves with basic technical analysis methods and understand the logic underpinning these techniques. Doing so will enable more accurate prediction of market trends, which is a pivotal step in crafting an effective trading strategy and enhancing one's success rate.
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Disclaimer This article is for informational purposes only and does not constitute investment advice. Gate is not responsible for any investment decisions you make. Content related to technical analysis, market assessments, trading skills, and traders' insights should not be considered a basis for investment. Investing carries potential risks and uncertainties. This article offers no guarantees or assurances of returns on any type of investment.
