Investing in crypto is basically the same as investing in stocks. As the investment profit you will earn is from market price change or price variance when you buy and sell stocks.
Hence before making any investment, you need to know how to predict crypto prices to ensure you have a smooth and excellent investment journey.
Dow Theory in Technical Analysis in Predicting Crypto Prices
When referring to crypto price analysis, Dow Theory is likely to be mentioned as this theory is considered to be the background and foundation in doing technical analysis. But, what is Dow Theory?
Dow Theory was proposed by Charles Henry Dow, a reporter and an editor of the Wall Street Journal, as well as the founder of Dow Jones Company. This theory was not officially released prior to his death in 1902, but his partners eventually published and introduced the theory to the public. To this day, this theory is still considered the foundation of technical analysis.
Basically, Dow Theory states that trend on prices is greatly affected by every possible known factor in the market, be it of the past, present or future. Media coverage on crypto assets is one of the factors, thus all existing news, recent news, or rumors surrounding the assets may influence market price.
The 6 basic tenets of this theory are:
- There are 3 primary kinds of market trends
- The primary trend usually lasts less than a year and can continue for several years
- The secondary trend lasts for ten days to more than 3 months
- The minor trend is varied and can last from hours to months
- Market trends have 3 phases
- Bullish Trend consists of accumulation, response, and speculation
- Bearish Trend consists of distribution, doubting, and panic selling
- All news is discounted in the stock market
All possible news or information is factored into market price trends. This includes any information existing in the past; and where information is lacking, the outcome of any future event is considered as a risk.
- Indices must confirm each other
Related indices must be confirmed moving in the same direction. Case in point: manufacturing industry and transportation. If there is a rise in output, the transportation cost will automatically increase.
- Volume must confirm the trend
Volume should increase when there is a bullish trend and it should decrease when there is a bearish trend. Otherwise, it could be a sign that the trend is reversing.
- Trend persists until a clear reversal occurs
Despite fluctuating market prices, this theory believes that prices move in trends (bullish trend and bearish trend). However, trend reversal may happen and it is hard to predict whether it will continue to stay within a range or it will reverse to its highest or lowest point.
According to this theory, by using technical analysis to predict crypto prices, investors believe that the trends move in repeating patterns. To know the pattern, any detailed information about market conditions in the last, current, and future period is required.
Fundamental and Sentiment Analysis in Predicting Crypto Prices
The other two methods you can use to predict crypto prices are fundamental and sentiment analysis. With fundamental analysis, as an investor, you focus on factors affecting market price trends. And in sentiment analysis, you will have to use psychological factors to make predictions. For instance, when you are panic selling on a bearish trend due to public’s expectations and perceptions.
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