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Common Technical Analysis Theories

Sep 18, 2025MEXC

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#Basic #Technical Analysis

Technical analysis is a widely used tool in financial investing, aimed at predicting future market trends by studying historical price movements and trading data. This article will break down the core assumptions behind technical analysis, explore its four key influencing factors, and introduce several classic theories, helping investors better understand and apply technical analysis in cryptocurrency trading.

1. Historical Origins of Technical Analysis: From Japan's Edo Period

Technical analysis has a long history, tracing back to Japan's Tokugawa shogunate era (1603–1867) and the rice trade. In an effort to record price fluctuations and predict future trends, a merchant named Homma Munehisa created the early form of candlestick charts.

Over the centuries, this method evolved and branched into various forms, giving rise to basic candlestick charts, technical indicators, and comprehensive analytical frameworks such as Dow Theory, Elliott Wave Theory, Gann Theory, and the Chan Theory.

While each school has its own unique approach, they share a common goal: interpreting historical market data to forecast future price movements and seek profitable opportunities.

2. Core Assumptions of Technical Analysis: The Three Pillars

All technical analysis frameworks rest on three fundamental assumptions:

2.1 Market Action Discounts Everything

According to the Efficient Market Hypothesis, in a fully competitive and transparent market, price movements reflect all available information, including project fundamentals, macroeconomic conditions, token distribution, and more. This principle is the foundation of technical analysis; without it, the entire approach would be meaningless.

2.2 Prices Move in Trends

Price movements are not entirely random; they tend to follow identifiable trends. Once a trend is established, it often persists for a certain period. This is the most central concept in technical analysis.

2.3 History Tends to Repeat Itself

When market conditions resemble those in the past, investors often make decisions based on prior successes or failures. As a result, market behavior and price patterns have a tendency to repeat over time.

3. Four Core Elements of Technical Analysis

All technical analysis methods are built on the following four key factors:

1) Price: The most direct reflection of market activity, representing the consensus between buyers and sellers.

2) Volume: Indicates the level of market participation. Higher volume suggests stronger activity and market interest, while lower volume indicates reduced participation.

3) Time: The period over which patterns form and evolve. Different timeframes correspond to different levels of price fluctuation.

4) Price Range: The extent of price fluctuations within a given period. In general, longer timeframes tend to allow for larger potential price movements.

4. Classic Technical Analysis Theories

4.1 Dow Theory

Originated by Charles Henry Dow, Dow Theory is considered the foundation of all market technical analysis frameworks. It contains three core assumptions and five key principles, forming a complete trend-following system. At its heart is the classification of price movements into three trends:

1) Primary Trend: Lasts one year or more, and can be bullish, bearish, or a sideways consolidation phase.

2) Secondary Trend: Moves counter to the primary trend, lasting from about three weeks to several months, typically retracing one-third to two-thirds of the primary trend’s movement.

3) Minor Trend: Short-term fluctuations within secondary trends, often daily price adjustments. While difficult to analyze in isolation, they are useful for confirming and interpreting the direction of the primary and secondary trends.

Illustration of the Three Trends in Dow Theory

4.2 Elliott Wave Theory

The Elliott Wave Theory, proposed by American securities analyst Ralph Nelson Elliott, was developed through his study of the Dow Jones Index, summarizing the relationship between market price movements and wave patterns. If Dow Theory explains what a trend is, Elliott Wave Theory offers a more detailed description of how that trend unfolds.

1) Wave Structure

Building on Dow Theory's classification of market trends, Elliott Wave Theory divides a full market cycle into eight waves: five impulse waves and three corrective waves.

Each wave contains smaller waves (sub-waves), and each wave is itself part of a larger wave.
In a bull market model, the five impulse waves move upward, usually labeled as Waves 1, 2, 3, 4, and 5, while the corrective waves move downward, labeled as Waves A, B, and C.
Conversely, in a bear market, the five impulse waves move downward, and the corrective waves move upward.

Bull Market Wave Theory Chart

2) Wave Nesting Structure

Wave structures are not merely simple cycles, they can also be nested within one another. In other words, any given price wave can exist simultaneously within different levels of market cycles (corresponding to the primary trend, secondary trend, and minor fluctuations in Dow Theory). A complete five-wave or three-wave structure can form just one smaller wave within a larger wave cycle; conversely, any smaller wave within a cycle can be broken down into the micro-structure of motive waves or corrective waves.

4.3 Gann Theory

Gann Theory was developed by William D. Gann, one of the most successful investors of the 20th century. Drawing on mathematics, geometry, religion, and astronomy, Gann created a unique technical analysis system that integrates time and price. It encompasses multiple trading rules, retracement principles, and cycle theories, such as Gann's 21 Trading Rules, 12 Trading Principles, Gann Retracement Rules, Cycle Theory, Wave Principles, Division Ratios, Market Geometry, and various charting tools.

Key elements of Gann Theory include:

1) Price fluctuations as the foundation of market cycles: Price moves in the form of rises and falls. When the price shifts from rising to falling, retracement levels of 25%, 50%, and 75% often act as important support zones. When the price starts rising from a low point, multipliers like 1.25, 1.5, and 2 often mark significant resistance levels.

2) Rebound cycle duration: In an uptrend, if measured in months, corrections usually last no more than 2 months. Measured in weeks, pullbacks often last 2–3 weeks. During sharp declines, short-term rebounds can last 3-4 months.

3) Time cycles: Long-term cycles typically span 20, 30, or 60+ years. Mid-term cycles are 1, 2, or 3 years. Short-term cycles can be as brief as 4 minutes.

4) Key cyclical turning points: 10-year and 7-year intervals often represent significant cycle reversals, useful for forecasting major market tops and bottoms

4.4 Chan Theory

Chan Theory is a technical analysis framework developed by the Chinese online figure Chan Zhong Shuo Chan. It is a geometry-based system that deduces market movements step-by-step from structural patterns, aiming to fully categorize all possible price behaviors and guide practical trading decisions.

The core principle of Chan Theory is "all trends must be complete," which includes the following key ideas:

1) Market movements can be classified into three types: uptrend, downtrend, and consolidation.

2) Any given trend type must run its full course before ending.

3) Every completed trend contains a "central axis," a structure made up of three smaller trends of the next lower time frame.

4) Once a trend completes, it will inevitably transition into one of the other two types. For example, after a downtrend finishes, the market will move into either consolidation or an uptrend.

5. Key Features and Applications of the Four Major Technical Analysis Theories

Theory	Key Features/Characteristics	Suitable For
Dow Theory	Emphasizes trend-following	Determining overall market direction
Elliott Wave Theory	Breaks down trends into structured, hierarchical waves	Mid- to long-term market analysis
Gann Theory	Focuses on the precise relationship between time and price	Long-cycle market forecasting
Chan Theory	Uses geometric methods to quantify trend structures	Pinpointing precise entry and exit points

6. Three Major Benefits of Learning Cryptocurrency Technical Analysis

In volatile cryptocurrency markets, technical analysis is an especially important investment tool. Compared with traditional markets, crypto assets trade around the clock and react quickly to changes in information, which makes technical analysis even more practical in developing trading strategies.

Learning and mastering technical analysis offers several significant benefits:

6.1 Identifying Trends and Key Entry/Exit Points

Technical analysis helps investors identify whether the market is in an uptrend, downtrend, or consolidation phase, thus avoiding chasing prices at the top or selling at the bottom in panic. This increases the win rate of trades and improves capital utilization efficiency.

6.2 Enhancing Risk Management Capabilities

By setting take-profit and stop-loss levels and analyzing support and resistance zones, technical analysis enables investors to prepare countermeasures in advance, thereby reducing losses caused by sudden market movements.

6.3 Strengthening Trading Logic and Discipline

Technical analysis helps investors avoid emotional decision-making, enhances discipline, and allows them to handle human emotions such as greed and fear with greater composure.

7. Choosing the Technical Analysis Method That Fits You

The variety of technical analysis methods available in the market is vast, with varying levels of complexity. Every investor has different personality traits, risk preferences, and trading timeframes, which means the ideal technical analysis system will vary from person to person. In a fast-changing market, no single method can handle all scenarios. This is especially true during periods of heightened emotional volatility, when technical analysis can become “distorted” and mislead decision-making.

Therefore, it is advisable for investors to choose strategies based on their level of experience:

Beginners can start with candlestick patterns and Dow Theory to build a foundational understanding of trends.
Intermediate traders can move on to Elliott Wave Theory and Gann tools to strengthen their ability to assess trend structures.
Advanced traders can study the "Chan Theory" to enhance their analysis of complex market movements.

Regardless of the method chosen, maintaining independent judgment and rational thinking remains essential. While technical analysis can provide powerful tools for trading, it cannot account for all fundamental variables. By contrast, fundamental analysis, through examining project value, financial data, industry cycles, and macroeconomic policy, offers a more stable basis for investment decisions.

Only by combining technical and fundamental analysis, capturing both market rhythm and long-term value, can investors develop a more resilient and adaptable investment strategy. In an uncertain market, rationality and multidimensional analysis are the essential steps toward becoming a mature investor.

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