Advanced tea-leaf reading? Or science at work? The real truth about using TA to trade crypto is somewhere in-between.

 

A large majority of steemit posts about crypto focus on daily chart updates; heads and shoulders, triangles, elliot waves--we're all familiar. While there's no debate that there is some merit to these tools, do they apply as well to the world of cryptocurrency as they do to traditional markets?

There are some considerable differences in the traditional stock markets when compared to crypto; they have a tidy open and close every day, valuations largely represent real-world assets and financial statements, and the barrier to entry for a new security is relatively extreme compared to an ICO. These and other combined effects change TA's effective use case for crypto into something more about predicting human behavior than about predicting logical price movements.

But is it still worth using? The short answer is yes, but knowing when it'll be most effective requires a closer look.

Crypto valuations are mostly speculation.

 

It's an inescapable fact. What we're buying and selling on the crypto market is mostly hopes and dreams. Very few cryptos are actually at a stage where they can demonstrate their use or value. This is why the type of person willing to buy a cryptocurrency is very different than the type of person willing to buy a stock. The biggest difference being that a crypto person has to be a believer to some extent--their faith leads to hype, hype leads to emotion, and to a stock trader emotion is surely the dark side.

These traits are amplified by the market demographics. The stock market is dominated by institutional traders, while it's said (but somewhat difficult to prove) that the individual investors are still the largest player in crypto.

This is why these two worlds largely thumb their noses at eachother (mostly the stock world deriding all things crypto--they're definitely the cynical old man in our dynamic). To a stock trader, rooted for better or worse in tradition and logical reality, the crypto market looks like pure insanity. It's hard to argue that they're wrong, but surely part of their bitter attitude is the effect of watching unbelievable increases in the crypto market month after month while they diligently work toward their annual 10%.

To a crypto trader, the gains don't lie. The technology is here to stay. Blockchain is the new internet, and crypto is going to the moon. If any one of these speculations isn't true then we're all in for some punishment. This speculative and emotional base of the crypto market means that technical analysis is a smaller part of what drives price movement. It takes a back seat to the overwhelming FUD and FOMO.

During news or hype based surges in crypto volume, the support and resistance levels provided by TA matter less mathematically, and can be steamrolled by the sheer scale of movement.

 

The widespread use of technical analysis creates support and resistance (often referred to as "bid" or "sell" walls). Basically if everyone is doing their TA similarly, it leads to a build-up of limit orders at certain levels. Which is one of the reasons TA can be so useful. It becomes a self-fulfilling prophecy. If everyone thinks there is resistance at 10,000 and they all place their sell orders around that level, then they were all correct and there now will be resistance at 10,000.

But the effectiveness of these walls is directly related to market volume. Simply put; if the volume suddenly doubles, the ability of these walls to contain movement is cut in half.

So should I bother with TA when trading crypto?

Yes. Even though it's going to be less reliable overall than in traditional markets. When in doubt you should reach for the chart art. It'll always be your best tool when the market lacks a clear direction. During these times volume often slows to a trickle, and the reliability of resistance and support levels is directly amplified. It becomes much more likely that they'll be the deciding factor in price range.

So don't give up your charts just because crypto doesn't always play ball! Volatility in this space is ubiquitous. Even the best technology that seems like a sure win could be replaced tomorrow by an upstart with shiny new features. But when news is slow, and the hype is less than palpable, technical analysis will always be your best shot at batting above 500.
 

That's all for now. Happy trading and steeming!🚀

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Follow me @leeforder for more thoughts on crypto.

THIS IS NOT FINANCIAL ADVICE. ALWAYS DO YOUR OWN RESEARCH.