When deciding where to invest in the crypto market, keeping your market analysis skills in top shape is absolutely vital. You can analyze the market from three different perspectives. These are sentiment analysis, fundamental analysis, and technical analysis.
While there is more to understand when it comes to fundamental and technical analysis, once you get over the initial hump, it’s all quite comprehensible. Sentiment analysis, while simpler, involves even more uncertainty and speculation. In this article, we will try to briefly present to you how all these types of analysis work and when to use them.
This type of analysis will have you evaluating the hype behind individual coins. This includes how widespread it is, its validity and reliability. Technical and fundamental analysis can inform you of how a currency is currently evaluated. Sentiment analysis, however, can inform you about possible future trends the traditional market will not tell you about. You are essentially studying news and blogs in tandem. What patterns do they both hold? Where do they agree and disagree?
You will have to look outside of just the specific financial information news available to you. This may include economic and political news. Blogs and forums should tell you about the reaction individuals are having to all the available information. One place to keep a close eye on is Reddit. It is one of the earliest proponents of cryptocurrencies and an indicator of current sentiment on cryptos. You should also keep in mind where the market is going. Keep track of how the movement of other coins may affect the popularity of the one you are interested in.
Keep in mind that the time of year can have a significant effect on how traders behave. During holidays, markets are less volatile as traders spend less time analyzing the market. As they spend less time on the market, they are less likely to be making sudden decisions based on the information available to them.
The fundamental analysis describes the investigation of the performance and behavior of a company and the market behind a currency. You will have to investigate the team behind a coin, what their experiences are, and their past performance. You may also have to consider what new features a cryptocurrency offers, and how it differs from other currencies. Does crypto fill a particular niche, or is it trying to enter a bigger market? You will have to ask yourself a multitude of questions; all sorts of information could be of relevance. How has the market reacted to this currency? Have they partnered with any notable companies? What kind of competition is it up against? Are there future plans for further developing the currency? How do regulations affect the coin? Is the coin based on any tangible reserves (gold, for example)?
Analyzing the popularity of the coin is vital. You will have to evaluate how traders feel about the overall future of the currency by visiting online forums and blogs. Look at how often your particular currency is traded, and in what volume. If you want to get information on how professional analysts feel about the performance of a currency, try to have a look at the whitepapers. A whitepaper can give you an overview of how a currency is currently performing and how it may perform in the future. They are quite useful if you want to get a quick overview of a currency’s performance from an experienced trader.
Try to look at all the information available for a particular currency. Then, try to balance all the various factors against each other to create a picture of how you believe it may behave.
The Difference from Sentiment Analysis
Fundamental analysis resembles sentiment analysis quite closely. The difference between them should not be too difficult to explain, though. Sentiment analysis revolves around predicting the decisions traders may make depending on their instinctive reactions. Fundamental analysis, however, involves understanding how the market is likely to react according to traditional wisdom. Fundamental analysis is thus more predictive of long-term effects, whereas sentiment can tell you about sudden developments.
This type of analysis involves getting into the nitty-gritty of the details. You will analyze the charts indicating the current valuation of a currency. You will then base your predictions on future behavior on this information.
So, what should you be looking for in this type of analysis? The most important thing to consider is the trends. There are several things to look for if you are interested in short-term effects. Consider the current movement of the valuation, whether it is going up or down or staying stable. See if it is reaching the resistance or support (the expected upper or lower bound). See if the momentum of the change is increasing or lowering. Is a shift likely to occur soon, or will the current trend continue?
It would then be best if you viewed the past patterns of the valuation for a long-term evaluation. This may involve analyzing how a currency tends to behave, and what time of year this effect tends to take place.
Many types of charts exist, and we cannot discuss them all in such a short timeframe. We will mention, however, that the most popular chart to look at for analysis is a candlestick chart. This can tell you about the upper and lower valuations of a currency at several points in time in a period. This type of chart gives a trader a lot of information at a single glance while being relatively simple to comprehend. This chart can then be further divided into other types, depending on the information you require.
How These Analyses Compare
All of these types of analyses have their uses. Fundamental and sentimental analysis is used to find the overall sentiment of currency and possible future behavior. Sentimental analysis is used for sudden, emotionally driven changes. While fundamental analysis is used for a more well-rounded overview of the currency.
Technical analysis can help you see overriding trends and relies a great deal on the historical performance of a currency. It can possibly be the most reliable form of analysis but takes the most study. This may also be a type of analysis that is not too helpful for the current market. The relatively young age of cryptos means it is a market that is still unpredictable and volatile. This means predicting future trends on past behavior may not be too helpful for now.
The best option for you is to use them all together. This will allow for a clearer overall picture of the behavior of a currency. If you can, try to teach currency analysis as a full-time job. The more time spent on evaluating the currency, the clearer a picture you will get on its possible performance. You can combine and contrast the analysis in your own way and develop a style that works for you.
MetaTrader 4 and 5 (MT4 and MT5, respectively) are popular pieces of software available to carry out your analysis. They can tell you about currency valuations, show articles, and all sorts of information.
We have not even scratched the surface on all the various aspects to keep in mind for fundamental and technical analysis. Therefore, we recommend that you do some of your own research on how to conduct all these types of research.