The ability to forecast market movements has evaded investors and traders in the past and will continue to prove to be elusive for years to come. This ability to predict market movements is, of course, the "holy grail" of investing. However, to quote the famous economist John Maynard Keynes "markets can remain irrational longer than you can remain solvent". Nevertheless, the search for the "holy grail" continues!
Approaches to forecasting market movements
There are two distinct approaches to forecasting market movements - a 'fundamental' or 'judgmental' approach, and 'technical analysis' or 'charting'.
Fundamental Analysis
The first approach is to assume that the forecaster can validly anticipate changes in outside factors and base his forecast on these. This is termed 'fundamental' or 'judgmental' forecasting. Fundamental analysts attempt to study everything that can affect the cryptocurrency's value, including macroeconomic factors (such as the overall economy and industry conditions) and cryptocurrency specific characteristics (such as their development team). The end goal of performing fundamental analysis is to generate a valuation that an investor may compare with the cryptocurrency's current price, to find out what sort of position to take with that cryptocurrency (under-priced = buy, overpriced = sell or short). For example: are the COVID19 economic developments likely to have an effect on the BTC/USD rate? If so, what are these developments expected to be? Will these developments have a positive or negative impact on the BTC/USD rate? The answers to these questions can change over time. The fundamental approach can be considered in several stages: long-term, medium-term and short-term.
As alluded to above, there are many factors which can affect cryptocurrency in the medium term, including economic growth, socio-economic and governmental policy. These are generally referred to as the "macroeconomic" environment – as well as natural disasters, changes in sentiment etc.
Technical analysis
Technical analysis or 'charting' is based on examining past price movements without including any external factors or other analysis methods. Technical analysts believe that the historical performance of cryptocurrencies and cryptocurrency markets are indications of future performance. An essential principle of technical analysis is that the current price already reflects all known factors, as they have already been absorbed into recent price movements by market participants. There is, therefore, no value in superimposing further aspects. The chartist's forecast is consequently generated from evaluating historical market or price action. It is assumed that crowd behaviour is not random, but instead is repeated under identical conditions.
A full appreciation of and confidence in the effectiveness of technical analysis is rooted in a clear understanding of the technique's abilities and philosophy behind science.
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