Trading cryptocurrencies has grown to become a very common act amongst on cryptocurrency enthusiasts. It's been recorded that there's an estimated amount of over 300+ million cryptocurrency users all over the world and about 40 million active cryptocurrency traders.
Despite the fact that trading cryptocurrencies is risky, the number of traders keeps increasing annually. Of cause, if the risk is something to be avoided, the number of traders shouldn't be skyrocking.
The above now brings us to the question of how are these traders cutting down on the risk? And the answer is analysis.
Analysis is simply an act of interpretation of various past or current events of an asset with the aim of predicting its possible effect on the value of a particular asset.
In cryptocurrency trading, there are different types of analysis and they include;
- Fundamental analysis
- Technical analysis
- Sentimental analysis
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Fundamental analysis is an ancient form of trading analysis which was introduced in 1928 by Benjamin Graham.
Fundamental analysis is carried out by considering various data/information related to an asset such as its max supply, circulating supply, trading volume, size of community, use cases, on-chain matrices, active transfers, etc.
This type of analysis is usually carried out by long term traders and investors who because thier research is focused on long term goal.
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Technical analysis has grown to become the most common type of analysis amongst traders. It is done by predicting the possible price direction of an asset by considering its old data information which are usually its price and volume.
Technical analysis is divided into two major techniques and they are;
- Price action technique.
- Use of indicators.
The price action technique is a type of technical analysis that involves the study of chart patterns which potrayers the different activities of buyers and sellers.
This study helps traders to know when buyers are in charge of the over all movement or when sellers have taken the control.
This activity is clearly seen by the formation of higher high and lows which clarely shows those who are in charge of the current market.
On the other hand, indicators are used to make clear the various market patterns and activities such as trends, volume, price momentum, support and resistance areas, breakouts, and a lot of other market activities.
Using indicators makes identying these things easier with more accuracy because a trader who is based on price action might misinterpret the formation of higher highs and lows when identying price trend but using a trend based indicator such as moving averages will make the actual trend visible by filtering out minor flaucntions.
Nevertheless, it is always best to combine the both type of technical analysis in other to have more trading confluence.
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Sentimental analysis is a type of trading analysis that deals more on traders emotions.
It involves the effect of news, various social media hypes, and posts from influencials persons. These information tends to affect traders emotions thus making them to take either buy or sell positions.
Just like what we saw during Dogecoin boom which was as a result of a tweet from Elon Musk. It is obvious that DOGE coin is only but a meme token without any proper usecase, yet the price surged up to over 20% following Musk tweet about having DOGE.
Traders who rely more on sentimental analysis seek out these social media news early enough before they go public because they know that it is likely to have either a positive or negative effect on the minds of majority which will lead to either buying or selling the asset in question.
In as much as each type of analysis is effective, it is always best to combine them in other to have more efficient result during trading.
Thanks for reading.
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