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Why Technical Analysis Alone Won't Bring You Financial Freedom?

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  • cryptocurrency
11-Feb-2023 Harshil Shah
Why Technical Analysis Alone Won't Bring You Financial Freedom?

Many of the millennials and genZ have started trading and investing in the crypto markets for achieving financial freedom. But that dream has come off to be true for not many of us; traders mostly. There are many reasons for the same, some due to the spur-of-the-moment decisions we take while other reasons are simply not enough experience. 

For both the above-mentioned reasons, the more you put yourself out there the more experienced you will become. That way, fewer 'silly' mistakes will happen. But another class of issues questions the very fundamentals of your knowledge and that are to be immediately solved before putting another cent of your money into trading. 

In this article, we will address one such issue that should be solved ASAP - Over reliability on Technical Analysis. 

But, What's Wrong With Technical Analysis?

There is nothing particularly wrong with technical analysis, but the problem is the markets we trade-in. 

We all know how volatile the crypto market is, there are some ways to be safe from them but 100% safety is not possible. Interestingly, TA or technical analysis works better in other regulated markets; where manipulation is not the first thing to worry about. 

Crypto liquidity is not as distributed as it is supposed to be, to call it a 'healthy market'. BTC and ETH combined are more than 60% of the markets. The fact that 'alt season' comes when simply this dominance is decreased is an alarming one. 

So, Where Do the TA and Its Inadequacies Come into the Picture?

TA is made for a relatively 'healthy market'. Almost all traders know how to find support and resistance, and almost all traders prefer higher leverage when they are sure of their bet. 

So think about it this way, traders, tend to bet more money than they have(multiples of their portfolio in some cases. Thousands, if not millions of traders are going to bet on the same strategy, same support, same resistance, and same patterns. All this, in an unregulated market. You are practically giving your money away. 

So, What Are the Alternatives?

Unfortunately, the chances of surviving in such a market with TA alone are meek. But changing your trading style could be helpful, using fundamental analysis is one way of solving the volatility issue. 

But fundamental analysis usually concentrates on the product and the components revolving around it. How can it be used to improve your trading?

Instead of taking short-term trades based on support and resistance, how about trades that could last for weeks with relatively lower leverage and liquidation? 

Analyzing elements and indicators like volume influx and on-chain analysis can also help in making informed decisions. Instead of focusing on ambiguous elements in TA, focusing on trends will be helpful. 

Fundamental analysis in crypto can be essentially divided into two parts, on-chain metrics, and project fundamentals. 

While both are useful, several aspects of on-chain analysis can help in short-term trades.

Different on-chain analysis metrics

Transaction Count

Transaction count is an indicator that can be useful to monitor network utility. The usage of ML tools or moving averages over time can give you an idea of the correlation between these indicators and price. However, this alone is not a reliable indicator since in the past there were multiple reports of a single party artificially inflating the network price.

Active Addresses

Active addresses refer to the blockchain addresses that are involved in transactions in a given period. This could be used to verify the authenticity of the transaction count metric.

Hash Rate and Staked Amount

Blockchain technology uses different consensus algorithms. Each with its own mechanisms that are integral to network security. An analysis of the data related to these algorithms can be useful for FA.

The hash rate is a commonly used metric to measure network health in Proof of Work (PoW) cryptocurrencies. A higher hash rate makes a network safer. It is also an indication that the network is highly popular.

Conversely, a decrease in hash rate signals that miners are going offline, likely due to unprofitability. These are just some of the many concepts that, as a trader are very useful.  All in all, FA along with TA can increase your chances of making it as a trader. 

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