Class 34: Mastering Technical Analysis: A Comprehensive Overview of Methodologies

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お知らせ Class 34: Mastering Technical Analysis: A Comprehensive Overview of Methodologies

Class 34: Mastering Technical Analysis: A Comprehensive Overview of Methodologies

2024-04-26 08:48:36 UTC 1271 読む

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**Highlights**
①. Gate.io's "Basic Futures Courses" course introduces various methods of technical analysis that are commonly employed in futures trading. These courses aim to help traders establish a comprehensive framework for technical analysis. Covered topics include the basics of Candlestick charts, technical patterns, moving averages, trend lines, and the application of technical indicators.
②. This article, as an ending piece of Basic Futures Course, will analyze the role of technical analysis in futures trading in a more comprehensive and higher view, helping users better employ analytical tools in actual trading.

**1. Several Misunderstandings About Technical Analysis**
As a newcomer to the cryptocurrency market, it's easy to fall into the trap of thinking that mastering technical analysis tools like trend lines, chart patterns, and candlestick analysis will guarantee market success. However, this belief is a common mistake that can lead to severe punishment by the market and significant financial losses. The root causes of these failures often stem from several critical misunderstandings ingrained in the minds of beginners, including:

①. Overlook the essence of markets and transactions
Understanding the market's nature is crucial for investors to navigate its waters and make informed decisions, serving as the foundation upon which they build their trading philosophies and strategies. 
At its core, the market is a mechanism for wealth redistribution, with prices influenced by the interplay of buyers' and sellers' emotions, representing the tug-of-war between bullish and bearish sentiments.
Market movements are fundamentally driven by human emotions, and within this constantly evolving space, the one certainty is that it is replete with uncertainties. Prices reflect a complex interplay of various market forces, policy impacts, news, capital flows, and collective mood. Consequently, while short-term market behavior may appear chaotic and unpredictable, long-term trends tend to follow discernible patterns and adhere to underlying principles.
Grasping the inherent nature and laws governing market movements is fundamental to effectively applying any trading concept, strategy, or system. This understanding aids traders in maintaining a level-headed approach during live trading sessions. Without this foundational insight, traders may struggle, becoming easily swayed by fleeting market fluctuations and making impulsive decisions without a clear direction.

②.Blindly rely on top and bottom signals without  considering associated timeframe
Market trends are segmented into different time frames, starting from 5-minute intervals to 15-minute, hourly, daily, weekly, and even longer periods. Generally, short-term trends are subordinate to long-term trends. Traders who concentrate on catching the reversals at the highs and lows of short-term movements often find themselves disappointed. Evaluating reversal signals without considering the associated timeframe is futile. Instead, cross-verifying trends across multiple time periods is a far more effective strategy for ascertaining the genuine market trajectory.
Unless there's a clear shift in the long-term trend, it's logical to expect the current trend to persist. Additionally, big data analysis of trade patterns shows that traders who follow trends tend to realize more consistent profits compared to those attempting to profit from short-term market swings. The primary purpose of technical analysis is to assist traders in identifying the long-term trend so they can strategically align with it.

③. Use a single analytical tool for all types of market conditions
Despite the old saying that one size fits all, such an approach is not applicable in trading scenarios. For trending markets, suitable indicators include Bollinger Bands, ADX, and moving averages. In contrast, for sideways markets, tools like RSI, KDJ, ROC, and CCI are more effective. Many novice investors tend to use technical indicators indiscriminately, regardless of market conditions, leading to substantial losses.
Experienced traders, through years of practice, have developed their own unique analysis systems, which involve combinations of different tools tailored to varying market conditions.
In essence, technical analysis is a personalized investment tool, with methods varying from one investor to another. The capital market is a domain of both risk and return. Disappointed investors should not fault their tools for their investment failures. Instead, they should recognize that it is their lack of effective risk management that has allowed risks to grow unchecked.

**2.  Theoretical Basis of Technical Analysis**
Technical analysis rests on three foundational assumptions:
①. Market behavior is comprehensive, reflecting all known information.
②. Price movements are not random but follow trends.
③. History tends to repeat itself.
Technical analysis is the practice of evaluating market movements by studying chart patterns, meaning that as long as price trends exhibit patterns, technical analysis holds value. This reflects a fundamental premise of technical analysis: the belief that history tends to repeat itself in market patterns.
Why does history repeat itself?
The rationale behind the repetition of history lies in the interplay of price, trading behavior, and psychology. Prices are determined by the interplay of buying (long) and selling (short) behaviors, themselves a product of human psychology, predominantly driven by fear and greed. The continuous struggle between these two forces leads to price patterns.
Technical analysis operates on the assumption that the market follows identifiable patterns, allowing analysts to respond to changes and discern trend directions. By identifying support and resistance levels, traders can establish entry and exit points. This methodology enables investors of all investment horizons—short, medium, or long-term—to pinpoint the most favorable trading times by utilizing daily, weekly, and monthly charts, thereby analyzing the market across varying time frames and perspectives.
The Stock Market Average Price Index, established by Charles H. Dow on July 3, 1884, initially comprised eleven stocks, predominantly from the railroad sector. It wasn't until 1897 that it split into two separate indices: the Industrial Average, with 12 stocks, and the Railroad Average, with 20 stocks. By 1928, the Industrial Average had expanded to include 30 stocks, and in 1929, a separate Utility Average was introduced. Although many new indices have been created since then, they all trace their roots back to Dow's original index.
The system of technical analysis used in stock markets has a centuries-old history and continues to evolve. The methodologies employed in cryptocurrency trading today are derived from stock market technical analysis, which has matured over hundreds of years. The crypto market, while using stock technical analysis as a foundation, has developed its own distinct analytical framework suited to its unique market conditions.
So, why delve into this historical context? Why does Dow Theory hold such significance? The answer is straightforward: many of the technical analysis theories in widespread use today are based on Dow Theory, despite the variations these theories may exhibit. In essence, Dow can be considered the progenitor of the entire technical analysis system.

**3. 5 Primary Technical Analytical Methods **
Generally speaking, there are 5 primary technical analysis methods that constitute the current technical analytical system: indicator analysis, market chart analysis, technical patterns, Candlestick analysis  and wave theory.

①.Indicator analysis
Indicator analysis involves creating mathematical models, often expressed as calculation formulas, which encompass various facets of market behavior. The outcomes of these calculations aim to capture and reflect specific characteristics of the market. Values generated by these indicators, along with the interrelationships among different indicators, offer insights into market dynamics that may not be apparent from market chart alone. 
Common indicators such as Volume (VOL), Moving Average Convergence Divergence (MACD), Stochastic Oscillator (KDJ), Relative Strength Index (RSI), and Moving Averages (MA) fall into categories like trend indicators, momentum oscillators, and volume indicators, each providing unique perspectives on market conditions.

②.Market chart analysis
Market chart analysis is a technique that entails plotting straight lines on market charts based on specific methods and principles, and then interpreting the position and direction of these lines to forecast future market trends.
The efficacy of this method hinges on the accurate construction of these lines, as this directly influences the reliability of the predictions. Presently, the most commonly utilized lines in chart analysis are trend lines, channel lines, Fibonacci retracement lines, Gann lines, and angle lines, each derived through distinct methodologies, and all represent crystallization of generations of traders' wisdom. Interpreting these lines can provide traders with valuable trading signals for real-world trading scenarios.

③.Technical patterns 
Technical patterns are shapes created by price movements that can offer insights into overall market conditions and subsequently guide trading decisions. Commonly used patterns include the double top (M-shaped), double bottom (W-shaped), and head and shoulder top / bottom. The method of pattern analysis, formed and evolved through years of market observation, embodies the collective wisdom of countless traders across generations.

④.Candlestick analysis 
Candlestick analysis is a method that aims to deduce the power struggle between buyers and sellers by examining the arrangements of daily candlesticks, or K-lines, over a period of time. This form of analysis is a cornerstone of many technical analysis strategies, and its intricacies will be explored in depth subsequently.
On any given day, there can be numerous candlestick patterns, which can lead to an almost infinite array of combinations when observed over multiple days. Through years of practical application, several of these combinations have been identified as having significant predictive value for trading decisions. As practice evolves, it is anticipated that more useful combinations will be recognized.

⑤. Wave Theory
The wave theory traces its roots back to the publication "The Origin of the Wave Theory" by Charles J. Collins in 1978. However, the true pioneer of the wave theory is Ralph Nelson Elliott, who introduced the foundational concepts in the 1930s.
Elliott's Wave Theory likens the rise and fall of market prices to the natural undulations of waves. Just as ocean waves ebb and flow according to natural laws, Elliott theorized that market prices similarly fluctuate in predictable patterns, which he described as waves. This theory posits that understanding these patterns can offer insights into market trends and potential price movements.
Elliott Wave Theory simplifies market movements into a pattern of five waves for a rising trend and three waves for a decline. By counting these waves, traders aim to anticipate when a downtrend might end and a bull market could begin, or vice versa, when a bull market might peak before giving way to a bearish phase.
The key advantage of Wave Theory over other technical analysis approaches is its predictive power, allowing traders to potentially identify market tops and bottoms well in advance. This can offer a more proactive stance compared to methods that only confirm trend reversals after they have occurred. However, mastering Wave Theory is acknowledged as one of the more challenging pursuits in technical analysis. Often, larger waves encompass smaller sub-waves, creating a complex nested structure that can complicate accurate wave counting. While it's common to retrospectively identify the "5" and "3" wave patterns after a trend has played out, correctly counting these waves in real time, as the trend is unfolding, is a much rarer skill.
Each of the aforementioned five technical analysis methods offers unique insights into market conditions. Some are grounded in robust theoretical frameworks, while others may not have such solid underpinnings. However, the common thread among these five methods is their endurance through extensive periods of market testing, while many other methods have fallen by the wayside. This endurance signifies that each method embodies the distilled experience and wisdom of many seasoned market participants.
Despite their differences, these five technical analysis methods share the same goal and are not mutually exclusive; rather, they can be used in tandem to enhance trading insights. For instance, it's common to employ market chart analysis and pattern recognition alongside indicator analysis for cross-verification purposes.
It's important to recognize that each of these technical analysis approaches has a different emphasis in practice: some concentrate on long-term trends, others on short-term fluctuations; some analyze the relative positioning of prices, while others look at absolute values; and some methods may prioritize time, whereas others prioritize price. Regardless of their focal points, all methods converge on a singular objective: to aid traders in making profitable decisions. The ultimate measure of a method's validity is its ability to generate profits— How you achieve those profits is secondary to the outcome.

**4. Find a Tool That Best Suits You **
①. Lay a solid theoretical foundation
Dow Theory, as the foundational cornerstone of technical analysis, is essential reading for anyone learning trading skills. Delving into classical theoretical works and grasping the principles of Dow Theory can greatly influence the depth of one's proficiency in technical analysis. Practical trading experience sets the minimum threshold of your market earnings potential, whereas your capacity for theoretical study defines the maximum profit ceiling.

②. Understand the essence of trading and weakness in human psychology
Since the nature of transactions has been covered earlier, let's shift our focus to an equally critical component: emotional stability. Mastery of trading skills is important, but so is the ability to keep a level head. The longer you engage in trading, the clearer you recognise the importance of psychology.Understanding human fallibility, respecting the market's power, and recognizing our own constraints help us embrace the golden principle: engage selectively, but refrain from overreaching.

③. True expertise and improvement come from practicing, reviewing, and summarizing your real-world trading experience
Beyond theoretical study, it's essential to refine your grasp of technical analysis methods through consistent application in live trading. Learning from each transaction is critical. It is through this practical experience that we can discern the limitations of each analytical tool, recognize the boundaries of our personal abilities, and steadily enhance the precision of our analytical system.

④. Try to build and improve your own trading analytical framework
It's important for traders to craft their own analytical frameworks for trading and to develop bespoke systems for position and risk management. By rigorously testing and refining these systems through ongoing practice, traders can gradually evolve into seasoned, mature professionals in the field.

**5. Summary**
The piece- Mastering Technical Analysis: A Comprehensive Overview of Methodologies offers an overarching summary and delves into the theoretical foundations of various technical analytical theories, including candlestick analysis, trend analysis, and an array of technical patterns. It is designed to offer direction and insight to those aspiring to expand their knowledge and proficiency in trading skills.
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**Disclaimer **
This article is for informational purposes only and does not constitute investment advice. Gate.io is not responsible for any investment decisions you make. Content related to technical analysis, market assessments, trading skills, and traders' insights should not be considered a basis for investment. Investing carries potential risks and uncertainties. This article offers no guarantees or assurances of returns on any type of investment.

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