Technical Analysis is a framework for identifying trading opportunities by studying the statistical trends of the past market data, specifically price movements and volume levels.
By finding the repeating patterns in the past trading activity, the technical analysis aims to forecast future prices. The users of this methodology plot identified patterns and various statistical indicators on the price chart and determine what it means for the price going forward.
There is a level of self-fulfilling prophecy in some elements of technical analysis. For example, if a lot of people anticipate a specific BTC price behavior around a certain “psychological” price level, this price behavior often manifests itself. The reason is - traders in anticipation perform actions that lead exactly to the expected outcome.
Technical analysis is a matter of skill and is subject to personal interpretation. Two different people may identify different patterns in the same chart.
Technical analysis at core assumes that the asset price incorporates and reflects all available information about the asset. So the price is all that’s needed for making a decision.
There is a different approach out there that sits on the other side of the spectrum. It is called fundamental analysis. Fundamental analysis assumes that there is some intrinsic value of an asset that is not always reflected in the market price. And analyzing the fundamental factors that drive the value of an asset, such differences can be identified and used to profit from.
Here’s a simple example. You take the ETH price chart, slice and dice it in different ways. Finally, you get convinced that the pattern indicates the imminent upward price movement. So you buy ETH.
On the other hand, you can go back and study everything that’s happened with the Ethereum project in the past few years. You can assess the adoption and meaningful protocol improvements. You can analyze the quality of talents involved with the development of the project. Eventually, you conclude that given all your findings, the current market price does not do justice to the project. The price will inevitably need to catch up with all the strong fundamentals. So, to be in the position to capture that upward movement, you buy some ETH.
In reality, technical and fundamental analyses can go together and they can also arrive at different conclusions. What approach you choose is your own preference.