Is technical analysis a valuable tool for Bitcoin traders?
Critics of technical analysis emphasize that technical analysis is not science. It is a set of some general principles that everyone believes and applies, which is why it is the main reason why technical analysis sometimes works and sometimes it doesn’t.
There is something to it because technical analysis does not have one specific pattern by which traders should act the same in every market, time and time again. Technical analysis is a set of certain regularities, but among them there are also many exceptions, because each investor may interpret certain situations differently and use various indicators in a different way.
Another argument from critics is that the chart is only a visualization of what has already happened and has nothing to do with the future. And aren’t fundamental investors just relying on the past when they analyse company stocks? This argument seems to be missed and we are all in the same boat.
Another controversial issue raised by opponents of technical analysis is the use of fundamental factors by institutional investors to make investment decisions. Certainly, part of the portfolio of these institutions is based on market fundamentals. However, many institutions use auto-trading software, which usually consists of capturing changes in the order book. level II and technical analysis. Often these institutions, such as hedge funds, execute thousands of trades, which is known as High Frequency Trading (HFT).
Certainly, technical analysis is not a miracle tool that will allow you to make money on every instrument and on every market, while forgetting about the trading risks. Many indicators will be less relevant. Certainly, technical analysis will be more applicable in a short-term game in which it is not the fundamentals that count, but the momentary movement of the price. It is hard to imagine a short-term trader dealing in transactions within a single session analysing the company’s recent financial statements. By the time he finished the analysis, the transaction would have been out of date for a long time. In the long term, it is reasonable to use fundamental analysis, because when investing in the long term, we should determine the real value of the instrument. If a given instrument turns out to be undervalued, we can consider investing in a given security, for example shares. We can also combine fundamental analysis with technical analysis, which should indicate more precisely the moment of entering the market.
We can test the effectiveness of technical analysis using statistical tools. You can find many works available on the Internet that relate to this topic. These studies were aimed at checking whether the market is effective. It is worth mentioning this thesis here. An effective market is characterized by perfect access to information of all participants, an unlimited number of people who can enter this market, free information, each participant has the same view on future traffic and reacts immediately to the information that appears. The effective market can be divided into three groups: a weak effective market, a semi-strong effective market and a strong effective market. In a weak, efficient market, the use of technical analysis is pointless, as its application would not bring above-average profits. In a semi-strong effective market, the use of technical and fundamental analysis is not applicable. In a strong effective market, even inside trading would not bring above-average profits.
According to some statistical studies, the market is ineffective in short periods, and the use of technical analysis is justified at lower intervals, from H1 downwards. On the daily chart, the market in certain periods may be a weak effective market, which means that the use of technical analysis is unreasonable. These studies confirm that technical analysis applies to short-term trading, possibly to medium-term speculation. However, if we invest in the long term, for a period of several weeks or months, then it is justified to use fundamental analysis, or possibly a combination of these market analysis methods.