Fundamentals of Technical Analysis

What is Technical Analysis?

Technical Analysis (TA) is a method of studying market behavior and predicting price direction. It is based on three key elements: price, volume, and time, using charts and statistical tools to reveal market trends and investor sentiment.

Unlike “fundamental analysis,” technical analysis does not concern itself with project whitepapers or economic data, but focuses on price itself. Because in any market—price is the ultimate reflection of all information.

Core Logic

• Market behavior reflects all information: Whether it’s news, policies, or institutional buying and selling, it will ultimately be reflected in price movements.
• Prices move in trends: Markets are not randomly fluctuating; prices tend to continue moving in the same direction.
• History repeats itself: Because human nature doesn’t change, cycles of fear and greed are repeatedly played out in charts.

Therefore, the goal of technical analysis is not to predict the future, but to improve probability advantages. Traders use charts to identify trends and turning points, thus making more rational decisions.

Three Basic Assumptions

Every successful technical analysis system is built on three fundamental assumptions. Understanding these three assumptions is a prerequisite for mastering trend and cycle analysis.

1. The Market Discounts Everything

Price already reflects all known information, including news, expectations, policies, sentiment, and even rumors. This assumption is particularly important in the cryptocurrency market, as the market is highly free and information spreads extremely fast. Whether it’s project updates, policy news, or whale transfers, they are immediately reflected in the price.

Therefore, the chart is the “collective psychology” of the market. When you understand the chart, you understand the market’s emotions. This means that rather than trying to predict news, it’s better to focus on price action. The task of technical analysis is not to explain “why it’s rising,” but to discover “it is rising.”

2. Price Moves in Trends

Prices do not move randomly, but in trends. Once a trend is formed, it usually continues for a period until external forces break the existing balance.

For example, when BTC enters a bull market cycle, each correction is often just a consolidation phase before a larger rise. Understanding the continuity of trends can help traders avoid the mistake of “reversing too early.” This also means that trend-following is fundamental to long-term survival. Trying to short in an uptrend or bottom-fish in a downtrend are behaviors that go against market forces. As the classic trading adage goes: “The trend is your friend, until it ends.”

3. History Repeats Itself

Price action reflects human nature, and human nature is constant in markets. Greed and fear, euphoria and panic, are repeatedly played out in different eras. Therefore, chart patterns, cycle fluctuations, support and resistance patterns reoccur in different time periods. This is why technical analysis has predictive significance—not because charts are magical, but because of the repetitiveness of human emotions.

For example, classic “double top” or “head and shoulders” patterns are essentially manifestations of the exhaustion and reversal of bullish forces. When you see these patterns, you’re actually seeing the recurrence of group psychology.

Structure of Cycles

Market movement is not linear, but cyclical. Each round of trends includes processes of accumulation, breakout, correction, and rebalancing.

The cycle structure in the crypto market is typically divided into four phases:

1. Accumulation Phase

Prices are depressed for an extended period, and market sentiment is pessimistic. Smart money begins to quietly accumulate positions. Volume is low, volatility is small, but downward momentum gradually weakens.

2. Uptrend Phase

After price breaks through key resistance, the main trend is established. Institutional and public funds begin to enter, and prices rise rapidly. This phase is often accompanied by narratives, concepts, and the emergence of new projects.

3. Distribution Phase

Major capital gradually exits, and prices fluctuate at high levels. Although news remains optimistic, volume shows divergence, and the internal structure of the market begins to loosen.

4. Downtrend Phase

Panic spreads, and prices fall rapidly. Retail investors cut losses and exit the market until it re-enters a low volatility range and accumulates again.

This structure has played out multiple times in Bitcoin’s history. From 2013 to 2017, and then to 2021, each bull and bear cycle has confirmed the rule of “unchanging human nature, recurring cycles.”

Combining Trends and Cycles

Understanding the direction of trends and the stages of cycles is key to judging market position.

Simply put:

• Trends tell you “where the market is going now”;
• Cycles tell you “what stage the market is in.”

A typical application method is:

• When the market is in the early accumulation phase and the trend begins to strengthen, it’s time to build positions;
• After entering the uptrend phase, one can hold positions and follow the trend;
• When distribution phase signals appear, gradually reduce positions;
• During the downtrend phase, focus on risk control and wait for trend re-establishment.

Combining trend analysis and cycle analysis forms an analytical framework from macro to micro.

Whether for short-term or medium to long-term trading, decision-making should be based on this.

Trader’s Mindset Shift

Beginners often focus on “the result of price,” while mature traders focus on “the process of price.” This means you no longer ask “why is it rising,” but instead ask “what stage is this trend in?”, “what are market participants doing?”, “does capital support the current direction?”

Learning about trends and cycles is essentially about finding probability advantages from random fluctuations. This is also the core ability of professional traders: they don’t aim to be correct every time, but to achieve positive expectation in the long run.

Practical Suggestions

1. Multi-timeframe observation: Check daily, 4-hour, and 1-hour charts separately to understand the hierarchical relationship of trends. For example, when the daily trend is up but the hourly is pulling back, the pullback is a potential buying point.
2. Use Moving Averages (MA) and volume to confirm trends: During an uptrend, price usually runs above the MA and is accompanied by increased volume. Volume contraction often indicates weakening or reversal of the trend.
3. Combine sentiment and data indicators: Such as the Fear & Greed Index, Funding Rate, on-chain active addresses, etc. They can serve as auxiliary judgment signals for cycles.
4. Maintain a review habit: Record the trend structure and capital changes of major coins once a week, summarizing the market stage with brief notes.

Summary

Trends are the language of the market, cycles are the rhythm of time, and assumptions are the logical foundation for understanding it all. When you master the combination of trends and cycles, you can stay clear-headed amid the noisy price fluctuations. You no longer blindly chase rises or sell on dips, but can make rational judgments based on market structure. This is the beginning of the transformation from a speculator to a professional trader.