What is technical and fundamental analysis in crypto trading?

Cryptocurrency and financial market investors use two main methods: crypto technical analysis and crypto fundamental analysis. These help them study market trends and make good investment decisions. Both methods have their own benefits. Knowing the key differences between them can help you choose the right way to invest in cryptocurrencies.

In this post, we will explain how these two methods work and the main differences between technical and fundamental analysis in cryptocurrencies. To understand the differences better, it’s good to first learn the main ideas and important points of both methods.

We also recommend reading What is cryptocurrency? and How should I trade crypto? before starting this one.

What is technical analysis in crypto?

Crypto technical analysisis a method that traders use to study cryptocurrency price trends and patterns. It helps them find good times to buy or sell based on past price data. Unlike fundamental analysis, which focuses on the real value of a cryptocurrency, technical analysis looks at market behavior and price movements to predict the future. 

This approach believes that past price patterns will repeat and that investor psychology affects price changes. Traders analyze price charts and use tools called technical indicators to find the current price trend, support and resistance levels, and the best times to enter or exit trades. 

Important Indicators in Technical Analysis 

• Market Capitalization (Market Cap): Market cap shows the total value of all tokens in circulation for a cryptocurrency in dollars. It helps traders understand the size of the market and how strong a cryptocurrency is compared to others. 
• Trading Volume:  Trading volume is the total amount of a cryptocurrency bought and sold in a set time. High trading volume shows strong interest from investors and better market liquidity. It also helps traders see the strength of a price trend and how active investors are in the market. 
• Candlestick Charts: Candlestick charts are one of the most popular tools in technical analysis. They show the price movements of a cryptocurrency over a specific time. Patterns like Doji and Engulfing help traders understand market conditions and possible points where the trend might change. 
• Moving Averages: Moving averages are one of the best tools in technical analysis. They show the average price movements over a set time, giving a clearer picture of the current trend. Traders often use moving averages to find the trend direction and possible support and resistance levels. 
• Relative Strength Index (RSI): RSI is an indicator that measures the speed and changes in price, also called momentum. It helps traders see if a cryptocurrency is overbought or oversold and predict if the trend might reverse. 
• Moving Average Convergence Divergence (MACD): MACD is an indicator that shows the relationship between two moving averages. It follows the momentum of the current trend. Traders use MACD to find changes in the trend direction and decide the best points to enter or exit a market. 
• Fibonacci Retracement Levels : Fibonacci retracement levels are horizontal lines on a price chart that show potential support and resistance levels based on specific ratios. Traders use these lines to find areas where the price might change direction. 

These are just a few tools in technical analysis, and mastering them takes time. Technical analysis mainly works with numbers and data, helping you make better investment decisions. It assumes that the market already reflects all news and developments, which appear in the current price and trader activity.

Make sure to read: Types of spot trading crypto exchange platforms

What is fundamental analysis in crypto?

Fundamental analysis in cryptocurrency is a deep look at the factors that affect the true value of a cryptocurrency. The true value is the price that investors think the asset should have, and it is shown in the market.

Unlike fundamental analysis in traditional markets, which includes things like a company’s income, expenses, and market share, crypto fundamental analysis focuses on the technology, the potential for buying and adoption, and the support from the community of users and investors of a cryptocurrency.

Also, when analyzing a cryptocurrency project, external factors that affect its price, such as changes in the economy, advances in technology, and laws, are considered. The following are also key factors in fundamental analysis that show the health and growth potential of a cryptocurrency project:

• Technology: The technology behind a cryptocurrency plays a vital role in its long-term growth and stability, as well as its potential to be adopted and bought by various investors. Evaluating the project’s ability to use and adapt to new technologies, and to implement new features, determines the cryptocurrency’s competition and ability in the market.
• Whitepaper and Development Team: Another important factor in evaluating a cryptocurrency project is the details of the technology used and the activity of the development team. Reading the whitepaper of a cryptocurrency shows the project’s goals, technology, and its applications. Additionally, reviewing the skills and experience of the development team gives you a good idea of the project’s long-term goals and stability.
• Tokenomics: Tokenomics refers to the economic system of a cryptocurrency, including how tokens or coins are distributed, the incentives for user and node activities, and how the cryptocurrency is supplied in the market. Looking at a cryptocurrency’s tokenomics and its inflationary, deflationary, or governance mechanisms plays an important role in the project’s sustainability and how investors can affect the market.
• Community Engagement: The level of strength and activity of a cryptocurrency project in interacting with users greatly influences its adoption by potential individual and organizational investors. Therefore, indicators like the number of active users, project events, investor sentiment, and market mood show how much the cryptocurrency is supported by its community and how interested investors are in it. Additionally, a project’s collaboration with organizations and companies shows its usability and power in the cryptocurrency ecosystem.
• Real-World Applications: Understanding and analyzing a cryptocurrency’s real-world applications and how it affects people’s daily lives shows its growth potential and role in various fields. Studying the applications of a cryptocurrency tells you how valuable the project is and how much potential it has for growth and adoption by different organizations.

Make sure to read: What Are Crypto Whales, Bear, Bulls and Sharks?

What is the main difference between technical and fundamental analysis?

Generally, the difference between technical and fundamental analysis can be summarized in two key points:

1. Fundamental analysis is used for long-term investments. It looks at the overall value and growth potential of a cryptocurrency over time. On the other hand, technical analysis is used for short-term trading. Traders use it to make profits from the price changes of a cryptocurrency in short periods.
2. Fundamental analysis assumes that markets do not always grow in a straight line. An asset can move away from its true value for a time. In contrast, technical analysis for cryptocurrency believes that all factors affecting the price of a cryptocurrency are already reflected in its price. Traders use this information to look for opportunities to make a profit.

Even with these differences, it is recommended to use both methods together. fundamental analysis for cryptocurrency focuses on the long-term value and growth potential of a cryptocurrency, while technical analysis looks at the price movements in the short-term.

However, remember that no analysis can remove all risks. Cryptocurrency trading and investing come with risks such as price volatility, changing laws, security issues, and more.

So, always be careful, follow a good risk management plan, and only invest money you can afford to lose. If needed, talk to an expert to help guide you.

Charting the differences

Aspect	Fundamental Analysis	Technical Analysis
Focus	Intrinsic value	Price movements
Purpose	Long-term investment decisions	Short-term trading opportunities
Data Sources	Financial statements, economic reports	Historical price data, trading volume
Time Horizon	Long-term	Short-term to medium-term
Techniques	DCF, P/E ratio	Moving averages, RSI, MACD
Factors	Economic, financial, qualitative	Price, volume, momentum
Users	Long-term investors and traders	Day traders, swing traders
Tools & Software	Financial analysis software, economic databases	Charting software, trading platforms

Make sure to read: Best cryptocurrencies for monthly profits

Which analysis is better? Technical or fundamental?

It’s important to remember: there is no method that guarantees success in investing

Both technical analysis and fundamental analysis have their own advantages and disadvantages, and the choice between them depends on your personal investment approach. As you read earlier, the difference between technical analysis and fundamental analysis is clear. Both methods can lead to successful results and even , but they must be used carefully, considering the risks involved.

As you read earlier, the best approach to investing in financial markets is to combine fundamental and technical analysis.

Make sure to read: What is a crypto spot market?

Conclusion

Choosing the best method for investing in financial markets is very important. Both technical analysis and fundamental analysis have their pros and cons. While no method can guarantee success, using both methods together can give you a better understanding of the market and help you make smarter investment decisions. So, the best way to increase your chances of success is to use both methods wisely and in balance.

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