Trade Crypto Like A Pro – Technical And Fundamental Analysis Explained!

In this post, I explained Technical Analysis (TA) and Fundamental Analysis (FA) in simple terms.

Like most markets, crypto trading is more profitable when you understand the trends.

TA and FA are major tools that can help you achieve that.

 

To an extent, the mastery of these tools distinguishes expert traders from novices.

Little wonder why some traders are not affected or surprised by any shift in a coin’s price.

As you read on, you will learn what Technical Analysis and Fundamental Analysis mean and how to conduct them.

If you are ready, let’s jump right in!


Post Summary

  1. Technical Analysis
  2. Fundamental Analysis
  3. Comparing Technical Analysis and Fundamental Analysis
  4. FAQs
  5. Conclusion

Enjoy your read!


1. Technical Analysis

Technical analysis means predicting the future of a coin’s market based on past statistics.

In other words, watching how a coin did in the past and then predicting what will happen next.

It follows the pattern of a coin to recognize its strengths and weaknesses.

Also, it evaluates the price of the coin and the accompanying market sentiment.

Apart from crypto, TA is also used for stocks, commodities, and fiat currencies.

This type of analysis focuses on what is happening and not really why it happens.

A technical analyst can conclude on the price movement of a coin just from its supply and demand curves.

Technical analysis follows two principles:

  • History repeats itself in crypto pricing/trends.
  • Price movements are never random.

Thus, TA traders believe that when a coin’s price moves in a particular direction, it will later move in the opposite direction.

Using this knowledge, they plan their trades to make profit.

How To Conduct Technical Analysis

a. Candlestick Charts

TA candlestick chart

The image above resembles a candlestick chart of a coin. It is a vital tool for technical analysis.

Let’s break it down_

(i) The green and red rectangles are called candles and the lines at the top or below are the wicks.

(ii) The top and bottom of each candle are the opening and closing prices of the coin for that day.

(iii) Green candles show that the coin increased in value so the opening price is at the bottom and the closing price is at the top.

(iv) Red candles show that the coin’s price reduced so the opening price is at the top and the closing price is at the bottom.

(v) The wicks come out of the candle on either ends showing the lowest and highest prices that the coin reached within the same period.

What predictions can you make from a candlestick chart?

Following the information on a candlestick graph, you can predict the future of the coin of interest.

Take for example where the wicks are long, it shows that the market is highly volatile.

Therefore, you can expect significant losses or gains within the given period.

Secondly, high volatility means the market may correct tomorrow.

On the other hand, where the wicks are short, it shows a possible change to the market.

How?

A short top wick means the highest price of the crypto that day was significant for the coin’s history.

Then a long wick at the top shows the coin was significantly more expensive at some point in the day before traders sold it for profit.

This pattern suggests an upcoming bearish market that will go down.

Furthermore, a short wick on the bottom shows that people continued to sell the coin.

Since this will increase the supply, the coin’s price will likely drop.

Then a longer wick shows the price previously dipped and people think it will not get lower.

Therefore, traders buy the crypto at its lowest value with the hope that it will translate into future upward movements.

b. Trend Lines

trend lines

Another relevant element in TA is Trend lines.

They are used to determine the direction of a coin.

The goal here is to find the predominant trend (going up or down) among all the smaller highs and lows.

Trends can also move sideways to show that the coin has not moved significantly up or down at that point.

Now, different analysis tools can be used to place trend lines.

But the basic procedure is to place the trend line right on the candlestick’s lowest price and roughly extend the line to the next candlestick’s lowest point.

Then you can extend the line automatically from there.

c. Support and Resistance Levels

support and resistance

The third element in technical analysis is support and resistance.

Both are horizontal lines drawn on the trading chart to understand the coin.

The Support level signifies high demand i.e. the point at which traders want to buy the coin in large quantities.

This high demand will halt the coin’s decline and may even shift the momentum upward.

For Resistance levels, the supply is heavy but no much demand because traders feel the coin’s price will still fall.

Eventually, the excess supply of the coin will push down its price.

At some points, there may be variations at the support and resistance levels

Buyers may crowd the support lines and sell off at the resistance line especially where there is lateral movement.

A breakout of support or resistance levels strengthens the current trend as well as when a resistance level turns into the support level.

There may also be false breakouts which has no effect on the trend.

Hence, you must look at multiple figures to define trends.

d. Trading Volumes

The Trading Volume of a coin is another element that proves useful in technical analysis.

It is used to establish whether a trend is significant or not.

A high trading volume indicates a significant trend while a low trading volume indicates a weak trend that may pass quickly.

How to use trading volume to make predictions…

A low volume when there is a decrease in coin price and a high volume when there’s a price increase shows a healthy trend with long-term growth.

But a high volume when there is a decrease in coin price is not healthy because the decline will go up and the upward trend will end abruptly.

Then a low volume when the coin’s price increases will also lead to a temporary downtrend.

e. Market Caps

Technical analysis uses the market cap of a coin to determine its stability.

The market cap is gotten by multiplying the total circulating supply by the price of each coin.

Usually, coins with larger market caps are more stable.

f. Relative Strength Index

RSI

Relative Strength Index or RSI is calculated as 100 – (100/(1-RS).

RS is the ratio of the average number of days that a coin was up to the average of number of days it was down.

Trading charts calculate RSI automatically and display it under the candlestick chart.

The RSI ranges from 0 to 100.

RSIs close to 30 or lower indicates that the coin is currently undervalued and a rise in price is expected.

In the contrast, RSIs that approach or go above 70 indicates the coin is overbought, so its price may drop.

g. Moving Averages

moving average TA

Moving averages is also an element of technical analysis.

It refers to a coin’s average price over a given period. And it helps to recognize trends.

You calculate it from the past 20 days’ trading prices of the coin.

Connecting all of the moving averages of a coin will create a line that will guide your predictions.

Don’t draw conclusion from a single calculation though.

Use several moving averages from different lengths of time to judge.

Note that a shorter-term moving average crossing over a longer-term one could mean an upcoming positive trend.

h. Time Frames

This refers to the time interval for your analysis.

You can set time frames on the price chart depending on your style of trading.

If you’re an intra-day or short-term trader, stick to short time frames like 5mins, 15mins, and 1hr.

Conversely, if you’re a long-term trader, opt for larger time periods 4hr, daily, or weekly charts.

Are you still here? Good!

To make the most of Technical Analysis, don’t make predictions from one element .

Combine results from three or more elements to make the best choice.

Let’s jump into fundamental analysis.


2. Fundamental Analysis

fundamental analysis

Fundamental analysis is a method used to determine the intrinsic value of a coin.

Here, we consider both internal and external factors to establish whether the coin is overvalued or undervalued.

Factors like the business model of the coin and the developer team.

The knowledge gained is then leveraged to strategically enter or exit positions.

Fundamental analysis is an excellent way to understand businesses and industries as a whole, not just a single asset.

We cannot do without FA because crypto values always change.

Investing in an undervalued coin could lead to reasonable profits.

Then buying an overvalued coin could be damaging.

Conducting fundamental analysis will help a trader differentiate the two.

How To Conduct Fundamental Analysis

3 major metrics required for this analysis are:

  • On-chain metrics
  • Project metrics
  • Financial metrics

a. On-chain metrics

on chain metrics FA

This is information gotten from observing the blockchain.

You can achieve this by participating as a node in the network and exporting the data.

Or, preferably, you can pull the information from relevant websites or APIs like CoinMarketCap, Coinmetrics, Binance Research, etc.

What makes up On-chain metrics?

(i) Transaction count – this is a measure of the activities taking place on a network.

(ii) Transaction value – the amount of value that has been transacted within a period.

It can be measured in fiat currency or in the network’s native unit.

(iii) Active addresses – refer to the active blockchain addresses in a given period.

It can be gotten by counting both the sender and receivers of each transaction over set periods (e.g. days, or weeks).

You can also choose to track the total addresses over time.

(iv) Fees paid – this reveals the demand for block space. Users compete to have their transactions confirmed faster.

Subsequently, fees are increased to secure the network.

(v) Consensus mechanism – also provides valuable information for fundamental analysis.

For example, in PoW, a high hash rate reduces the possibility of a 51% attack.

If there is a consistent increase in the hash rate, it can be traced to a growing interest in mining the coin, following cheap overheads and higher profits.

But a decrease in the hash rate indicates that miners may be going offline as securing the network is no longer profitable.

Then for PoS, the amount staked can indicate the level of interest in the network.

b. Project metrics

project metrics FA

Here, we analyze the model of the network and its future potential.

What makes up project metrics?

(i) The whitepaper – is a document that provides an overview of the cryptocurrency project.

It provides information on the goals of the network, technology, use cases, roadmap, tokens supply and distribution scheme, etc.

After reading the whitepaper, compare the information with discussions of the project and check for red flags.

(ii) The team – you want to know how genuine the members of the team are.

Find out from their track records if they are able to see the project through.

Where there is no team, check for the list of contributors on the project’s public GitHub address and activity level.

Look out for updates not older than 2 years.

(iii) Competitors – compare the project with its competitors to see if it will stand out.

(iv) Tokenomics and initial distribution – here you want to confirm that the network’s token is valuable.

Also, check the details of the token’s initial distribution for any red flags.

Example: If a few parties received the bulk of the supply they may eventually manipulate the market and investors will lose funds.

c. Financial metrics

financial metrics FA

In this category, you’re seeking information on how well the coin is doing in the market.

What makes up financial metrics?

(i) Market capitalization – required to figure out the growth potential of networks.

You still remember how to calculate it from the previous section, right?

Some investors feel “small-cap” coins are more likely to grow while others place their bet on coins with large caps.

So, you can’t draw conclusions from the market cap alone.

(ii) Liquidity and volume – Liquidity specifies how easily an asset can be bought or sold.

A liquid asset is easy to sell at its trading price.

And as we saw earlier, trading volume indicates how much value has been traded within a given time period.

Liquidity and trading volume show how much the market is interested in the coin.

(iii) Supply mechanisms – 3 major terms that come to play here are maximum supply, circulating supply, and rate of inflation.

Investors view them differently.

Some appreciate coins that reduce the number of new units produced over time while others don’t.

Also, different investors might see a static cap as destructive in the long run.

This is because it disincentivizes the use of the coin as users would rather hodl.

Again, it disproportionately rewards early adopters but a steady inflationary policy would be fairer for new timers.

Important note:

When conducting fundamental analysis on a coin, do not use one metric alone.

It is more accurate to find the ratio between two or more metrics.

For example, the ratio between the market cap of a coin and its transaction count will tell you more about its health than when judged by the market cap alone.

Got it? Good!

I compared Technical and Fundamental Analysis in the next section.

Tag along!


3. Comparing Technical Analysis and Fundamental Analysis

technical and fundamental analysis

At this point, you’ll agree with me that both types of analysis are important.

While Technical Analysis provides information on transaction history, FA goes further to examine several factors that contribute to the value of the coin.

If you’re looking to make a short-term investment, TA will provide you with the required information.

In a case where you want to invest long-term, only TA will not be enough.

You will need to conduct FA as well to make quality decisions.

Let’s answer some frequently asked questions and then we can wrap up this post.


4. FAQs

Apart from the metrics used in TA and FA, are there other factors that can affect the value of a coin?

Yes.
Factors like uncertainty over politics and significant social movements can affect supply and demand.
For example, Elon Musk’s tweet and a Chinese law contributed to the recent Bitcoin dip.

What tools can I use for my analysis?

Different exchanges provide analysis tools that their users can study and make profitable decisions.
The most common are Binance and Kraken’s Cryptowat.ch
You can also use these charting tools – Coinigy and TradingView.
If you are new to crypto, you may not know how to use these tools at a glance but not to worry, we got you covered.
We curated the perfect course that will teach you how to trade crypto profitably.
Hurry now to ctmastery.com to register!
You can also join our Telegram community at  https://t.me/ctmastery


5. Conclusion

Technical and Fundamental analysis help you trade crypto like a pro.

We discussed the different metrics used for both analysis and what they reflect.

This is where we draw the drapes in this post. I hope you enjoyed the read.

Now tell me; do you use TA and FA for your trading? Which one is more convenient for you?

Let me have your responses in the comments section. Also, ask any questions you may have.?

Before you go, hit those SM buttons to share this post with your friends. Thank you!


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Chinma Udeji
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