Introduction
Over the past two sections, we've explored fundamental analysis methods for digital assets. Now, we shift our focus to technical analysis—a critical approach for understanding short-to-medium-term market trends. While fundamental analysis helps identify long-term potential, technical analysis provides precision in predicting price movements. This lesson covers core principles of technical analysis and widely-used market theories.
The Three Core Assumptions of Technical Analysis
These assumptions form the bedrock of technical analysis:
- Market Price Reflects All Available Information
Every factor—fundamentals, politics, psychology—eventually manifests through buying/selling activity, creating equilibrium prices that encapsulate collective market consensus. - Price Moves in Trends
Trends persist until disrupted, allowing traders to capitalize on momentum. Like water flowing along the path of least resistance, prices favor continuity. - History Repeats Itself
Market psychology leaves recurring patterns. As Jesse Livermore noted: "Wall Street never changes; the pockets change, the suckers change, but the game remains the same."
Key Technical Analysis Theories
1. Dow Theory
The foundation of modern technical analysis
Identifies three market movements:
- Primary Trend (1+ years, >20% price change)
- Secondary Trend (3+ weeks, correcting 33-66% of primary)
- Minor Fluctuations (noise under 6 days)
- Bull markets feature three upward waves (1,3,5) interrupted by two declines (2,4). Trading longer cycles reduces randomness.
2. Gann Theory
Mathematical approach to market forecasting
- Uses geometric angles (45°, 63°, 90°) and Fibonacci retracements (50%, 63%, 100%) to predict reversals.
Critical rules:
- Avoid over-trading with limited capital
- Always set stop-loss orders
- Master market knowledge
👉 Learn advanced Gann techniques
3. Elliott Wave Theory
An 8-wave cycle governing market behavior
- 5 impulse waves (1,3,5 up / A,C down) + 3 corrective waves (2,4,B)
Key rules:
- Wave 3 cannot be the shortest
- Wave 2 never retraces 100% of Wave 1
- Common retracement ratios: 38.2%, 50%, 61.8%
- Example: Bitcoin's 2019-2022 cycle clearly showed C-wave dominance during bear markets.
4. Chan Theory (Chinese Adaptation)
Geometry-based price analysis
Refines traditional technical analysis using:
- Fractals
- Price segments
- Central pivot zones
Documented in 108 Lessons by Chan Zhongshu Chan (available online).
Why Technical Analysis Works
At its core, technical analysis studies human behavior—not just charts. The same greed/fear cycles seen in 17th-century tulip mania reappear in modern crypto bubbles. While theories differ, all aim to decode collective market psychology.
FAQ Section
Q: Can technical analysis predict exact price movements?
A: No—it identifies probabilities. Think of it as weather forecasting for markets.
Q: Which theory works best for crypto?
A: Elliott Wave and Dow Theory adapt well to crypto's volatility, but combine them with fundamentals for robustness.
Q: How important are stop-losses in technical trading?
A: Critical. Gann's rules emphasize risk management—never risk more than 1-2% per trade.
Conclusion
Technical tools shine when combined with disciplined risk management. In our next lesson, we'll explore actionable indicators like RSI and MACD—the building blocks of trading strategies.