Analysts look at charts to predict price and you can, too.
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Even if you’ve never opened a stock market chart yourself, you’re likely familiar with the green and red vertical bars that make up a candlestick chart. They’re not only ubiquitous as the lead image of financial stories, but are also the foundation for a method of price prediction known as technical analysis, or TA.
Not everyone is a supporter of technical analysis. However, because crypto lacks many of the fundamentals (such as sales and earnings) that you can dig into with publicly traded companies, it is (like it or not) one of the main tools traders and investors use to make decisions. And because it is so important in crypto, we’re going to spend this week and next week diving in.
In the most basic definition, technical analysis uses historical price movements and patterns to try and predict future price movements. At its simplest, it goes something like this: The last time we saw bitcoin dip down, it bounced back up at X price. So I am going to bet it’s going to do the same thing at the same price and put in a limit order to buy at the previous low price so I can profit when it bounces back up.
Because of the reliance of many active crypto traders on these predictions, there’s a bit of a chicken-or-the-egg debate whether the patterns really do predict price or whether it’s the effect of everyone looking at chart patterns and acting in concert to drive the price in the predicted direction; the self-fulfilling prophecy, as it were. Either way, a lot of people do indeed look and act on these predictions, so you should understand how to add it to your arsenal.
I’m going to start with the foundational pieces first here, so if you’re already familiar with the lingua franca of TA and know the difference between a flag and a pennant, you can skip to the next section, but I want to make sure those who are new to technical analysis have these fundamentals in place:
For a long time I was, admittedly, a very passive, buy-and-hold, long-term investor. The jump into being a more active investor and trader took investing time as well as money into testing out some of the indicators and strategies technical analysts use.
You do not have to play around with real money, but for me it was helpful to set aside a small “learning fund” that I could use to try out these theories. The nice thing about crypto is that you don’t have to buy a whole bitcoin to invest, but can buy fractional amounts – in the case of bitcoin, those are known as satoshis.
If you have funded that crypto exchange we set up the first week of this course, I recommend setting aside a small percentage as a payment to “do crypto” and learn it first-hand, trying out the following three strategies with a little bit of real money. Hopefully the money will go up, but please only allot an amount you can afford to lose:
In 2021, a certain kind of scam called a “rug pull” looted over $2.8 billion worth of cryptocurrency from victims. Decentralized finance is prone to these kinds of scams because of the lack of intermediaries involved in transactions; most decentralized exchanges allow anyone to list a token without auditing the project.
One of the rug pulls of 2021 was Squid Coin. It capitalized on the success of Squid Game to spin up a token quickly and prey on people steeped in meme culture who also wanted to get rich quick; they poured money in without doing due diligence. As you may remember, it turned out to be a scam and the developers pulled the rug out from under all the suckers who believed it was real.
But there were very clear warning signs that a well-seasoned investor would have spotted. Like you will be able to after you read this:
Thanks for reading! Next week we’re going to spend some more time on technical analysis and how timing factors into your decisions.
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Disclaimer: The information contained in this newsletter, and any information linked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. You should seek additional information regarding the merits and risks of investing in any cryptocurrency or digital assets.
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