Technically Fundamental: Is TA Always the Best Approach?
Updated: Sep 4
Any prolonged time spent trading in the crypto sphere would lead you to believe technical analysis is a major toolkit needed to find a good coin for your profits. A lot of prominent people have technical tools that they use to take a market advantage and capitalize on potential profits - from a series of moving averages, divergences, trendline applications and more. I have used the Aroon to gauge over a thousand charts and if I should enter a trade based on that analysis.
But is technical analysis wrong? What if it’s not applicable to the crypto market and it's all just pseudo science that helps us confirm our bias of making money. After all, it's easy to go blind in the obvious because money is involved. This indeed is one of the roots of corruption today -- that people are willing to do something just for the money and disregard other aspects that get in the way of that goal. Money is the root of all kinds of evil.
Are We Tricking Ourselves?
We can go a little deeper with this by asking ourselves some questions.
Why do we do technical analysis? So we can gain an edge in the market.
What percentage of accuracy is a qualifier for technical analysis to work? This varies dramatically. Some will say that an accuracy upwards to 70% and higher is considered effective, while statistically speaking a method of 33% and higher can also suffice. This depends largely on your strategy, risk, and goals.
Should we even consider a TA strategy below 50%?
“What percentage of accuracy is a qualifier for technical analysis to work? That depends on how well you think it’s necessary for your strategy and thereby questionable to your own confirmation bias.”
Bull Market Mayhem
When things heat up in the crypto market, it's hard to gauge many methods of technical analysis simply because a bull market takes the form in extreme trends. Most methods lose a lot of their home-field advantage and oftentimes there is not enough time to gauge when to buy and sell based on a few indicators. So can we do ANY analysis?
There are a good many things that point to fundamental analysis as a key. In a peak bull market, everything seems to go up in price yet it's seen as more of a “all boats float when there is a flood.” But other than that, people naturally flock to assets that have some value within themselves, whether that is a real project with progress or one that provides traders with DeFi game mechanics.
Statistical analysis is also a consideration although some may believe this bleeds into technical analysis a bit. More realized in practice as quant analysis, this method uses strong mathematical and statistical approaches instead of visual evidence to see consider the next move. A major advantage of this is being able to use an algorithm that helps the process be more automated.
So Does Technical Analysis Always Work?
The short answer? Yes and no. Everything works in a sense and anything can have exceptions to the rule.
“The reason why we think some types of analysis works and others don’t rests on the ability of analysis to be both objective and subjective at the same time. We are using subjective considerations that work objectively in a sandbox environment to find an objective conclusion in a subjective, real time environment.”
For a bull market however, fundamentals may have an edge because technicals say so. Technical analysis can show things like continuation and expansion which are pre-fundamental takes.
There is evidence to suggest that all types of analysis work at some point of time and all of them should be considered to trade with. The bad thing is to try and marry these approaches since none of these will work all the time.
What do you think?