Add the fourth element to technical analysis in the crypto circle - technology of cryptocurrency exchange platforms

So far, almost all technical analysis theories in the cryptocurrency and stock markets are based on three fundamental assumptions and aim to include three elements. When we face the results of these technical analyses, we need to have a clear understanding.

The three basic assumptions are:

1. Market behavior encompasses all factors.

This assumption always makes me think of a phrase often heard at the drinking table: “It’s all in the wine.” When there are countless things I want to say but don’t know how to express, I might as well stop talking. I lift my glass to my mouth, tilt my head back, and drink it all in one gulp, letting actions speak for everything.

In the crypto and stock markets, there are countless factors that can influence index and coin price movements—macro, micro, external, psychological, major influences, minor influences, short-term impacts, long-term impacts… too many to count. How can we analyze them all? The approach given by this assumption is that there’s no need to consider so many; since all these factors are influencing the crypto and stock markets, I only need to observe what is happening in the market. All external influences are reflected in the market’s movements.

Can we do without this assumption? No. Without it, we would be overwhelmed, making it difficult to draw timely conclusions about anything. Simplification is a basic principle in studying any problem across all fields, and in the crypto and stock markets, it has become these assumptions.

Following this principle, what would be the result? The result is that all research findings are only valid under certain objective conditions. They are not foolproof, so we should not blindly worship or believe in them.

2. Prices move along trends.

This is what we previously called the inertia of coin and stock prices. This assumption is the most fundamental and core condition for conducting technical analysis. Trends imply regularity; regularity makes analysis possible. Without trends and regularity, prices would jump unpredictably, making analysis meaningless! Analysts would have to give up their jobs and change careers.

This assumption directly relates to the livelihood of technical analysts, but it is not just made up out of thin air. The movements of indices and coin prices in the crypto and stock markets do indeed have trends and regularities. We must first acknowledge that prices follow certain patterns before we can use various methods to discover and analyze these patterns, and then guide investment decisions. Whether these methods are effective or not is another matter, but this logic is unavoidable.

However, in reality, trends will inevitably change or even reverse. Whether within a trend or outside it, randomness is the most fundamental attribute of the crypto and stock markets. Large capitalists only care about purpose and means; inertia is just old talk?! Small investors can only follow the trend; ignoring it can lead to disaster. This raises a big problem: randomness means no patterns, only probabilities. All technical analysis relies on the assumption of inertia; when faced with randomness, analysts are at a loss. Yet, the crypto and stock markets are filled with randomness at every moment, which makes technical analysis extremely difficult!

3. History repeats itself.

This assumption is based on the idea that human psychological changes follow certain patterns, and investors’ behaviors have an internal logic.

The fundamental reason for the market’s existence is human beings—people’s pursuit of wealth and their avoidance of risk. All changes in indices and coin prices are driven by human actions and are influenced by psychological laws, following certain internal logic. For example, if someone makes money doing something, they are likely to do the same next time they encounter a similar situation; if they lose money doing something, as long as their memory is intact and self-control is not lost, they usually won’t repeat the same mistake. Everyone behaves this way, and thus market patterns form, and the “Mr. History” will reappear.

Based on this, technical analysis theory believes that analyzing historical data of indices and coin prices can guide future actions. If this assumption is invalid, all theories would be just games or jokes. It must be one of the basic assumptions, aligning with human cognition and behavioral laws.

However, history repeating itself does not mean it never changes. What repeats are the objective laws and internal logic; the specific forms are always diverse and ever-changing. This is the real, objective crypto and stock market. Just because it was like this before doesn’t mean it will be exactly the same this time. Rigid, mechanical logic or numerical programs will not work in the crypto and stock markets. Sticking stubbornly to this assumption will only lead to setbacks and suffering.

These are the three basic assumptions of technical analysis. Knowing them helps us correctly understand the various results provided by technical analysis and recognize its limitations and critical points.

It is generally believed that the three elements of technical analysis are: price, volume, and time.

Since it is a market, it must involve price, and price cannot change without variation. Price changes are limited within certain bounds. Price, price changes, and the limits of these changes—these are the most important contents of technical analysis.

Since it is a market, it must involve trading. Behind trading are capital inflows and outflows. The pursuit of capital appreciation and risk hedging is achieved through capital movements; these movements are driven by capital intentions; the causes and drivers of price fluctuations come from the pursuit of profit and risk avoidance by capital. Trading volume is the footprint left by various sizes of capital entering and leaving the market, making volume the most important element of all technical analysis. Without observing and analyzing volume and its changes, technical analysis cannot be considered scientific, objective, or comprehensive, and its value will be compromised.

The evolution of prices and the changes in volume together constitute the development of the trading process. Any development is a process that occurs and changes over time; whether the pursuit of profit or risk avoidance by capital is successful or not, it requires a process—meaning it takes a certain amount of time to see the results.

Earlier, when discussing the three assumptions of investment analysis, we mentioned trends. Without time, how can we talk about trends? Once a trend forms, it will last for a period. However, no trend lasts forever; after some time, the existing trend will end, and a new trend may form. Therefore, time is also one of the most important contents of technical analysis.

The three elements—price, volume, and time—are undeniably significant and valuable for technical analysis. They are the core elements that investors focus on, and naturally, technical analysis concentrates on them. Technical analysis is a human activity; since humans need to eat, it is inevitable that these three elements are the focus. The focus on these elements is determined both by the purpose of technical analysis and by the survival needs of practitioners. However, pursuing these three elements can produce side effects, which I will point out when discussing some technical analysis theories later. On the other hand, some existing technical analysis results, even those widely recognized and accepted, do not fully incorporate all three elements. I will also point out these issues later. These facts tell us that we should not absolutize the three elements.

Both the three assumptions and the three elements are born out of practicality and the pursuit of technical analysis’s predictive and guiding capabilities. I believe that practicality is essential—there’s no point in studying something without practical value. Forward-looking ability is unnecessary because even the most accurate predictions are beyond mortal reach; if predictions are inaccurate, what’s the point of trying to forecast? Relying on predictions can bring both blessings and misfortunes. If forward-looking is difficult to be reliable, then the guidance and role of such predictions should be carefully considered.

Technical analysis is important because it deepens our understanding of market movements. Over-reliance on technical analysis is not advisable because it is based on simplifications and assumptions, especially often simplifying to the extent of ignoring one of the three major elements. Can we still rely on it? Outside the three major elements, market environment should also be considered as an important factor. Does having the first assumption mean we can ignore the market environment? The impact of market environment on the market is well known. Truly comprehensive technical analysis cannot omit the market environment. Especially for individual coin analysis, even if the first assumption suggests the overall market trend reflects the entire environment, we should not underestimate the influence of the overall trend on individual coins.

Price, volume, time, and market environment together form a more complete technical analysis.