The financial and cryptocurrency markets move in trends. A trend is the overall direction of a market or an asset’s price. When it comes to trading and investing, it is generally a better idea to follow the direction of the market trend. However, different market trends can lead to wildly different market conditions which can be challenging if you don’t know what the underlying trend is and how to adapt to the changing conditions?
Market trends can be broadly categorized into two — Uptrend and Downtrend. An uptrend describes the price movement of a market or an asset when the overall direction is moving upward. This is usually the best time to trade and buy bitcoin in Nigeria. Whereas, a downtrend is the downward movement of market prices from their previous state.
A bear market is described as a period of sustained downtrends in the market. It is characterized by a period of a strong market downtrend that leads to a significant decline in prices over a prolonged time.
Bear markets are often dreaded by investors. Trading assets as volatile as cryptocurrencies during these periods of prolonged market downtrend is not an easy game. It is usually difficult, enormously risky, and requires the mastery of various skills and utilization of diverse strategies to be successful. However, bear markets present their own set of opportunities and if properly managed can potentially lead to an upturn in fortune for investors and traders alike.
Find out everything you need to know about the recent crash in Bitcoin price.
To be successful in a bear market, it is very important to choose the right strategy. There are a variety of strategies available to use when trading during a bear market — ranging from the classic ‘buy the dip’ strategy to a more sophisticated approach like shorting, margin trading, swing trading, scalping, and many more.
But none of these strategies matters if you don’t know how to analyze the market. Being able to analyze and understand the market is essential in choosing the right strategy to adopt during a ‘bear run’. When it comes to analyzing the crypto market, 2 major approaches are usually used; “Fundamental Analysis” and “Technical Analysis”.
Together, technical and fundamental analysis comprise the backbone of investment research. They also contribute enormously to making a sound investment decision. This article focuses on exploring the world of technical analysis, what it entails, how it works, and its importance during the bear market.
What is technical analysis?
Technical analysis (TA) is the art of evaluating investment assets in an attempt to forecast their future price movement. It involves the study of statistical trends gathered from historical price action, volume data, and trading activity to identify trading opportunities.
Unlike fundamental analysis which aims to forecast the value of an asset by considering multiple external factors around the price of the asset, the technical analysis applies various indicators and analytical tools to evaluate the strength and weakness of an asset and forecast its future price trajectories.
Technical analysis is one of the most used approaches to analyze the financial markets. It can be applied to any financial market where the price is governed by the forces of supply and demand such as stocks, forex, gold, and cryptocurrency.
How does TA work?
The overarching principle of technical analysis is based on 3 underlying assumptions:
- The price of an asset already reflects all the relevant market information.
- Fluctuations in asset prices are not random and generally evolve into identifiable trends over time.
- The market participants tend to provide a consistent reaction to similar market stimuli over time.
TA operates on the assumption that past trading activities and price actions of an asset can be valuable indicators of the asset’s future price movements when paired with appropriate investing or trading rules.
With this assumption, a technical analyst can then focus entirely on the statistical analysis of price movements which technical theory views as a product of the market forces of demand and supply for a particular asset in the market. To examine prices, traders utilize a variety of technical indicators to spot favorable opportunities in the market.
What are technical indicators?
Technical analysis tools are used to scrutinize the ways demand and supply of an asset will affect its price, volume, and implied volatility. These indicators are employed to gain valuable insight into the overall market sentiment and subsequently forecast where the price action of the asset is likely headed.
Technical indicators make it easier to identify existing trend patterns and also provide insightful information into trends that may emerge in the future. Technical analysts often use a variety of different indicators and metrics to try and determine market trends, based on charts and historical price action.
Over the years, numerous technical indicators have been developed in attempts to accurately forecast future price movements. Some popular indicators used during technical analysis include Trendlines, Relative strength index (RSI), Moving average (MA), Bollinger Bands (BB), Moving average convergence divergence (MACD), and many more.
Importance of technical analysis in a bear market
Technical analysis focuses primarily on historical market data, such as trading volume and past pricing trends rather than external factors that affect the intrinsic value of an asset. It is built on the premise that history repeats itself and past patterns can be used as indicators to identify patterns of repeated behavior and make calculated predictions.
Thus, this makes it an effective risk management tool to time the market and determine the proper entry and exit levels, stop-losses, as well as target levels. Technical analysis can also be used to identify market risk and vulnerability and make informed speculation on price movements or changes. This helps to identify the right time to buy bitcoin with Naira and the right time to withdraw the money with profits. Identifying this right time can make a lot of difference in crypto trading.
Technical analysis also assumes that price changes are not random and market performance and investor psychology are mutually dependent. Overall market sentiment is impacted by how individuals perceive the market and this will determine whether the market will rise or fall.
During a bear market, market sentiment is negative as investors begin to move their money out of the market to avoid loss. As the price continues to fall, you can expect it to rebound at some point as people try to capitalize on the low price to buy bitcoin in Nigeria. As they buy and hold, demand will outweigh supply, causing the price to go up and the cycle/pattern continues. Careful study of these patterns can give insight into future price actions of an asset and help traders make profits in a bear market.
