A crash course in reading cryptocurrency charts

Why reading cryptocurrency charts is essential for traders

It is important for cryptocurrency traders to be able to read charts in order to find the best market opportunities. Technical analysis can help investors understand an asset’s future price movements by studying past market trends.

All traders need to do their essential research before investing, and part of that is reading cryptocurrency charts. Technical analysis via these charts can help you understand market trends and predict an asset’s future price movement.

Technical analysis refers to analyzing statistical trends gathered over time to understand how the supply and demand of a specific asset influences its future price changes. Reading crypto market charts can help investors to make well-informed decisions based on when they expect bullish and bearish movements to end.

An asset’s buyer is referred to as a ‘bull,’ while the seller of an asset is called a ‘bear.’ By analysing past trends and movements, traders can attempt to identify patterns that may offer profitable trading opportunities in the future. The best crypto charts will help you monitor market activity; however, it is important to be aware of their limitations.

What is technical analysis?

Technical analysis is a method of studying past price data to try and predict future movements. Technical analysts believe that by looking at an asset’s trading history and price fluctuations, they can get insights into what might happen in the future. This approach can be used for any kind of asset that has historical trading data – including stocks, futures, commodities, currencies and cryptocurrencies.

Charles Dow, the founder and editor of the Wall Street Journal and co-founder of Dow Jones & Company, first introduced technical analysis. This technique was used to create the first stock index, which was known as the Dow Jones Transportation Index (DJT).

The Dow theory is a set of ideas related to technical analysis that were originated by Dow Jones & Company co-founder Charles H. Dow and published in the Wall Street Journal. After Dow’s death, his editorials were compiled into what is now known as the dow theory. Technical analysis has evolved significantly since then, but the basic tenets of the dow theory still form the foundation for much of modern day technical trading research.

Technical analysis is only valid if the market has priced in all known information about a given asset, meaning that the asset’s value is based on that information. Those who use technical analysis and believe in market psychology think history will eventually repeat itself.

Technical analysts who want to use their strategy to determine if an asset is worth considering approach it by complementing their decisions with analysis of trading signals. They study financial information that affects an asset’s price in order to predict its potential growth. When analysing a company’s shares, they may look at the company’s earnings, industry performance, and brand value.

By examining price movements, technical analysts try to discern whether it is a good time to buy or sell.

Dow theory and the six tenets of Dow theory

The Dow Jones Industrial Average (DJIA) is a price-weighted index that tracks the 30 largest publicly traded companies in America. This market metric was created by Charles Dow in 1884, shortly after he delta protocol for the first stock market index. Unlike other indexes which use complex algorithms, the DJIA relies on straightforward data like prices and trading volume to measure business conditions and identify major trends within the economy.

Analysts including William Hamilton, Robert Thea and Richard Russell have contributed to changes in Dow’s theory over time. Some aspects of the theory that were initially emphasised, like its focus on the transportation sector, have become less important. While traders still track the DJT index, it is not seen as a primary market indicator in the same way as the DJIA.

There are six main components of Dow theory, which we will cover in more detail below.

The market reflects everything

Tenet one of the Dow theory is crucial to technical analysis: that the market prices assets based on all available information. If, for example, a company is forecasted to have positive earnings, then the market will price the asset higher.

The concept is comparable to the present-day Efficient Market Hypothesis (EMH), declaring that all available information is taken into account by asset prices and they are traded at their rightful value on stock exchanges.

There are three kinds of trends in the market

According to Dow’s theory, markets experience three types of trends. The primary trend is the major market movement that usually lasts for months or years. This can either be a bull market, signifying prices moving up over time; or a bear market which would instead mean prices are moving down with time.

There are also secondary trends, which can be against the primary trend. The secondary trends could be either pullbacks in bull markets when asset prices move back for a temporary time period. But they could also rallies in bear markets- where again prices would move up before continuing their downtrend.

There are also tertiary trends, which usually last around a week. These are often considered irrelevant market noise that can be ignored because it won’t have any effect on long-term movements.

Primary trends have three phases

Opportunities for traders arise when they examine various trends. For example, a trader can buy an asset at a lower price before it keeps on rising during  a bearish secondary trend that happens during a bullish primary trend . Recognising these types of patterns is difficult, especially considering the Dow theory says primary trends have three stages.

The first stage in a bull or bear market, respectively the accumulation phase and distribution phase, happens before the emergence of an opposite trend. This takes place when investor sentiment is still mostly negative during a bull market or positive during a bear markets. At this point, savvy traders know that a new trend is unfolding and invest accordingly; accumulating assets before prices go up farther (on Bull), or distributing them ahead of declining prices (in Bear).

The second stage is called the public participation phase. During this time, people beyond the initial group of investors become aware that a new primary trend has begun. To take advantage of potential profits, they start buying more assets or selling to prevent losses if prices drop. The second phase sees prices go up or down quickly.

The last stage is commonly called the excess phase during prospering times, and the panic phase when markets are crashing. During either of these phases, people not in the know keep Speculating while those who understand what’s happening start selling or buying.

Indices must correlate

The fourth tenet of Dow theory suggests that a market trend is only confirmed when both indices indicate that a new trend is starting. According to the theory, if one index confirms a new primary upward trend while another remains in a primary downward trend, traders should not assume a new primary upward trend is starting.

Here, it’s worth pointing out Dow’s main indices at the time were the Dow Jones Industrial Average and the Dow Jones Transportation Average, which would naturally tend to correlate, as industrial activity was heavily linked to the transportation market back then. 

Volume confirms trends

The fifth Dow theory states that if the price of an asset starts to move in the direction of its primary trend, then trading volume will increase. The opposite is also true; if trading volume starts to decrease, it signals that theprice is moving against its original trend. Trading volume measures how much an asset has been traded over a certain timeframe and can be seen as a reliable indicator for weakness or strength within a given trend.

A bearish secondary trend happening during a bullish primary one and low volume means that the former is relatively weak. If, however, the trading volume is high during the secondary trend, it signals that more people in the market are selling.

Trends are valid until a reversal is clear

The sixth rule of Dow theory posits that primary trend reversals should be approached with wariness and skepticism, as they can often be mistaken for secondary trends.

What are candlestick charts?

There are several ways to look at and analyse Cryptocurrency market trends, with various types of charts being accessible to traders. However, Crypto candlestick charts offer more in-depth information because of the nature of candlesticks.

Just like line and bar graphs, crypto candlestick charts display time along the horizontal axis and data on the vertical access. The key distinction is that candlesticks reveal whether the market’s price movement was positive or negative during a given timeframe, as well as how significant those changes were.

When viewing crypto market charts, traders can change the timeframe so that each candlestick represents a different increment of time. For example, if set to a four-hour timeframe, every candlestick would show four hours’ worth of trading data. The particular trading period chosen is usually based on what style and strategy the trader uses.

A candlestick pattern is primarily composed of the body and wicks. The candlestick’s body illustrates the cryptocurrency’s opening and closing prices while the uppermost wick shows us how high the price got during that specific time frame, and finally, the bottom wick signifies how low it dropped.

Furthermore, candlesticks can be either green or red. Green candles indicate that the price went up during the period being considered while red candles signify that the price declined. Candlestick patterns can give analysts a significant amount of information with just its simple structure. For instance, technical analysts may use candlestick patterns to forecast potential trend reversals. Consequently, cryptocurrency traders should take note of bullish and bearish candlesticks before making any decisions.

A long wick at the top of a candle’s body, for example, could suggest that traders are selling off their assets and profiting soon. On the other hand, if there is a long wick at the bottom of the candle, it could mean that somebody is buying up the asset every time its price drops.

Furthermore, a candlestick with mostly just the body and very little space for the wicks may suggest that there is either strong bullish sentiment if it’s green orstrong bearish sentiment if it has a red tone. However, If the candlestick doesn’t have much of a “body” and instead long wicks are present, this signals that neither buyers nor sellers have an upper-hand at the moment.

Support and resistance levels

Crypto candlestick charts can be difficult to interpret, but by identifying support and resistance levels using trendlines, the task becomes much simpler. Trendlines are created by connecting a series of prices on a chart.

Price point changes in cryptocurrencies or other assets during a pullback are known as support levels. This is because there is likely to be heavy buying interest at that level, which makes it hard to get past. Resistance levels are price points where there is lots of selling interest, making it difficult for the price to go any higher.

Crypto chart patterns can be identified by drawing trendlines to more easily locate support and resistance levels. An uptrend line is created using a cryptocurrency’s lows in a given period of time, with the second-lowest low considered as stronger support.

Downtrend lines are created by using the crypto’s highest and second-highest highs, with levels touching this line being seen as resistance levels. As the name suggests, downtrend lines are used during downtrends, while uptrend lines are used during uptrennds. Various strategies can be used based on trendlines and support and resistance levels. For instance, some technical analysts simply buy near the support of upturning trends’ metrics or sell near a downturing trend’s peak level basis points.

Cryptocurrency prices often move in a stable range. For example, between September and November 2018, Bitcoin (BTC) traded consistently between $6,000 and $6,500 before dropping to $3200 by December 2018. In this case, the top of the range would be considered a resistance level while the bottom of the ranger is seen as support. If the price falls below that Price movement following a significant drop or if there’s a sudden surge past those boundaries respectively.

Support and resistance levels can also be determined by using long-term moving averages, which are common technical indicators that smooth price data.

What are moving averages?

The moving average (MA) is a widely used technical indicator that produces an averaged price for a given cryptocurrency. This filters out the background noise and offers useful signals when trading in real-time crypto charts. MAs can be customized to periods, allowing greater flexibility to users.

The most commonly used moving averages are 10-day, 20-day, 50-day, 100-day, and 200-day periods. These make market trends more visible by representing a support level during an uptrend or a resistance level during a downtrend.

Different types of moving averages exist that traders can use. A simple moving average (SMA) takes the sum of the average price of an asset over a specified period and then divides it by the number of periods.

Weighing recent prices more heavily makes a weighted moving average (WMA) more responsive to new changes. Similarly, an exponential moving average (EMA) also puts emphasis on recent prices but isn’t aligned with the rate of decrease between any one price and its predecessor.

Moving averages are based on past prices and, as a result, follow trends instead of leading them. For example, if an asset’s price is rising rapidly, the moving average will lag behind and only confirm the uptrend after it has begun.

In crypto trading, two moving averages that are watched very closely are the 50-day and 200-day SMAs. When the 50-day SMA falls below the 200-day SMA, it’s called a death cross because this suggests that prices will soon start to drop. If the 50-day SMA goes above  the 200- day one, however, it creates what is known as a golden cross–an indication that prices will go up.

Other main technical indicators

Next, let’s explore some other well-known technical indicators.

On-balance volume indicator (OBV)

The on-balance volume indicator is a technical indicator that focuses on the trade volume of a cryptocurrency in order to make predictions about future price movements. It was created by Joseph Granville, who believed that trading volume had a major impact on prices in the market.

The OBV, or On-Balance Volume, is a technical indicator that accumulates volume data over time. It’s used to confirm trends because if you’re looking at live crypto charts, you should see that an increase in prices is matched by an increase in the OBV. The opposite is also true for falling prices and the OBV.

Moving average convergence divergence (MACD)

The moving average convergence divergence, or MACD for short, is an indicator that measures the difference between two exponential moving averages. It’s used to generate buy and sell signals, and oscillates above and below a line.

The MACD is a signal that uses crossovers of two exponential moving averages to show when it’s time to buy or sell an asset. When the 12-day EMA crosses below the 26-day EMA, it indicates a sell signal, while the opposite means it’s time to buy. The larger the distance between both lines,

the stronger reading by MACD there is!

The indicator has a signal line, which is a 9-day EMA. The MACD crossing above the signal often implies it’s time to buy while crossing below it implies it’s time to sell. The MACD indicator also includes a histogram for measuring the difference between the MACD and the signal line.

Relative Strength Index (RSI)

The RSI, or relative strength index, is a measurement tool used to find out if an asset is being bought too frequently (overbought) or sold too frequently (oversold). An oscillator tracks this data by monitoring momentum and estimating what direction it’s moving. The findings are displayed on a line graph with two extremes: 0 and 100.

The indicator uses a 14-day timeframe and a cryptocurrency is oversold when its value drops below 30 and is considered overbought when its value moves above 70. Therefore, being overbought signals to sell while being oversold indicates it’s time to buy.

Bollinger bands

Bollinger bands, a concept created by John Bollinger, enable investors to comprehend short-term price movements for assets–such as cryptocurrencies. To create the Bollinger bands, a 20-day moving average is used with standard deviation calculations from the moving average to produce upper and lower limits. The distance between these boundaries can be customised based on an asset’s price volatility.

The bands indicate windows of increased or decreased volatility, but shouldn’t be solely relied upon – other indicators should be used in tandem.

Bollinger Bands are a technical indicator that can help you identify overbought and oversold conditions in the market. When the price of a cryptocurrency moves above the upper Bollinger Band, it is considered to be overbought, while a move below the lower Bollinger Band is considered to be oversold. Bollinger Bands are based on the concept that periods of low volatility are followed by periods of high volatility, which suggests that when the bands tend to separate during times of high volatility, an existing trend might be coming to an end. Likewise, when these bands start converge together during calm markets, this may prepare investors for a period of high upcoming market activity

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