What are the best possible ways for beginners to understand crypto charts? It is very important to read the crypto charts for anyone who is interested in trading with and investing in these digital assets.
It is especially necessary for those who have stepped into the crypto world recently.
This is because when you understand the crypto charts correctly, it will be very easy for you to perform a technical analysis, another necessary thing to do while trading and investing in crypto.
Remember, major events or amendments in the overall market sentiment can have a significant impact on the charts.
Reading crypto charts, however, is not as easy as reading an article on ‘How to invest in crypto.’
You will need to analyze and interpret the crypto charts in order to make an informed and educated crypto investment decision.
For that, you will need to know how exactly you should read the crypto charts.
There are potentially a lot of different ways to do that, and this article will tell you how to go about it.
It is best to put different methods into practice to read the crypto charts for best results.
When you use different methods, it is likely that you will come to know about different indicators but all may lead to the same conclusion.
This will enhance your confidence in the market, having a clearer and better picture of it and make no mistake while investing.
Using a single indicator can often be misleading because your technical analysis will be incomplete and you will not be able to make good trades.
Therefore, go through this article to know about the basics of reading crypto charts according to Dow Theory and its inherent technicalities.
Best Possible Ways for Beginners to Understand Crypto Charts
You will need to enhance your skills if you want to trade successfully in the crypto world.
And, without a sound technical analysis, you are bound to make mistakes that may lead to irrecoverable losses.
Typically, the first important step to a solid technical analysis in accordance with the Dow Theory is to know the ways to read the crypto charts.
This, actually, is an art.
Ideally, while reading the crypto coins you should not only follow the price of your favorite crypto coin, but also know about the current trends of the crypto market by reading the candlestick charts.
You can read the Japanese candlestick charts that will help you to know about the support and resistance levels and determine the market emotions this way.
This will probably give you the most excellent opportunity to predict the future market trends.
Typically, the crypto traders and investors should look into the candlestick charts to have a more objective view on the process of different crypto coins.
This will allow them to make a better crypto trading and investment decision rather than relying on their intuition which is ideally a little bit more subjective.
Usually, the new traders in the crypto market face a very common problem – timing the market.
In order to time your trade correctly, you will need to know the correct entry and exit points. And, this is what the crypto charts will let you know.
Knowing the entry and exit points is very important for crypto trading because if you choose a wrong entry point you will then start losing your money, left, right, and center.
It is the same when you choose the wrong exit point. You will lose money because you may leave it on the table.
Therefore, it is required to maintain a proper balance and for that you will need to use a combination of the crypto charts and technical analysis.
Usually, the crypto charts represent different factors such as:
- The historical price
- The trading volumes and
- The time intervals.
These charts reveal a specific pattern depending on the price movements of a digital currency in the past and it is these patterns that you need to identify to determine the best investment opportunities.
To start with, you should first know about the different timeframes of the crypto charts.
This is because different timeframes will provide different information.
Ideally, there are four different timeframes that most of the crypto traders commonly look for. These are:
- The 15-minute charts
- The hourly charts
- The 4-hour charts and
- The 1-day charts.
If you want to perform day trading, which involves opening and closing your position in one day, you should ideally look for the charts with a short timeframe.
On the other hand, you should look for those charts with a longer timeframe if you are a long-term crypto holder.
It is the time factor you choose that will determine the type of crypto trader you are.
Typically, this is determined as follows:
- Those who choose a trading time ranging anywhere between 10 minutes and 30 minutes are called Scalpers
- Those who prefer buying and selling of crypto coins within the same day are called the Day Traders
- Those who prefer buying crypto coins and hold them for a couple of days to a couple of weeks are called the Swing Traders
- Those who prefer buying and holding crypto coins for a period ranging between a few weeks and 6 or 12 months are called Positional Traders and
- Those who buy crypto coins and hold them for more than a year are called Crypto Investors.
It is also very important to know about the different participants in the market because they are the ones who typically determine the support and resistance levels.
Ideally, there are three types of participants in a crypto market.
- The ones who go for long time holding of their crypto coins in anticipation of the price of it to increase
- The ones who go short and wait for the price of the crypto coins to decrease and
- The ones who do not know what to do or which way to go.
Normally, when the price of a crypto coin reaches the support level, all the market participants tend to buy-in.
The long traders usually tend to add to their position being happy with the state of the market.
The short traders, on the other hand, buy more crypto assets with an expectation to break even.
And, finally, those undecided traders simply buy-in at that specific support level because everyone is doing just that.
Apart from that, you will also need to know about the market emotions or sentiments, which also is a determining factor for the price of the crypto coins.
Once again, the crypto price charts will help you in this regard by a great deal because these charts are typically the graphical representation that represents the emotions of the players in the crypto market.
When the price of a particular crypto coin falls and reaches the support level, emotions like optimism and greed kicks in the long traders.
On the other hand, when the price of the crypto asset rises, pessimism or greed creeps in them.
Therefore, the support and resistance levels in the crypto charts represent the market emotions and it is essential that you read these levels.
This is because these levels create a lot of attention of the participants in the market and anticipations as well.
This attention, in turn, attracts a large number of traders to the market which thereby increases the trading volume and eventually affects the price of the particular crypto coin that is being traded.
Therefore, it can be safely said that just as the technical charts helps the traders to select the right type of commodities and equities, the crypto charts also help the traders to make more informed investment decisions while dealing with cryptocurrencies y picking the right type of crypto coin to invest in.
Understanding the Types and Terms
There are basically two different types of crypto charts you will come across and you should know about them all to identify what you are looking at in the first place.
These are the charts where a single continuous line connects with the closing price of the crypto coin each day.
This is represented in a graph.
This is actually a 2D graphic representation that has only one input in the form of the closing price but across different timelines.
The unique features of the line charts are:
- These charts were the first of the kind to be used in the financial markets
- The charts trim down the price volatility throughout the day and
- These charts give a very clear picture about the closing price of a crypto asset.
The line charts are very simple to use and easy to understand which is why these charts are more commonly used by the traders all over the globe.
The candlestick charts are more useful for the crypto traders because this particular graphical representation offers four specific price inputs namely:
- Close and
Therefore, the candlestick charts are more informative as compared to the line charts.
This is why these charts are more commonly used by the crypto traders which help them to understand the psychology of the other participants in the market.
The body of the candle covers the open and low price and the thin line above the open and close price represents the wick of the candle.
This wick of the candle usually represents the high and low prices of the trading day.
However, when the opening and closing prices of a crypto coin is more or less the same in a trading day it represents a Doji candle which represents an indecisive crypto market.
This type of candle implies that the buyers and sellers were unable to decide whether the stock prices moved upwards or downwards during the day.
In such an indecisive market situation, the traders usually trade with a very rigid range which is within the high and low prices of the Doji candle.
Next, you should know about the specific terms used in the crypto circuit. This will help you to read the price charts more correctly.
First, you should know about the buying and selling zones. These zones are typically represented by the support and resistance levels.
Now, these support and resistance levels are nothing but the typical indicators of those particular areas of value wherein a large number of crypto buyers and sellers place their buy and sell orders respectively.
This makes it quite difficult to cross the price levels by the underlying assets.
These price levels can be either static or dynamic and these are very important to understand when you deal with cryptocurrencies.
Support is typically a level that is formed when the price of a particular crypto coin decreases but cannot cross that level and later on bounces back from there.
On the other hand, a resistance level is that which forms when the price of the coins cannot cross to become higher than the price level.
This is due to the fact that the price band has massive selling zones.
Apart from the above terms, you will also need to know about market cap of the crypto coins since this is a very good indicator of the stability of the crypto assets.
Ideally, the market cap of a crypto coin is evaluated on the basis of the total circulating supply of the coin multiplied by the price of each crypto coin.
If the value of market cap is consistent, it indicates that the crypto coin is more stable.
You must also know about the bullish and bearish reversal patterns so that you can identify them from the crypto charts.
A bullish reversal pattern indicates the downtrend of a particular asset which is nearing bottom. The candle has a short body and a longer wick.
This indicates a trading session where the sellers are driving the prices of the coins low.
This is typically followed by a strong buying pressure during the end of the session on a high.
You may have come across people speaking about the shooting star candle pattern.
If you have not, then be informed, it is actually a bearish reversal pattern.
This occurs during the height of a rally ahead of a downward reversal.
The candle of this type of pattern has a small body and a long upper wick as well.
Typically, a shooting star candle pattern points to the drive by the buyers when it is met by resistance.
Dow Theory and Its Tenets
The Dow Theory explains the market trends typically at high level as well as the behavior.
The signals provided by it are usually used to make out the most important market trend which is then utilized to make better trading decisions according to it.
According to this theory, which is also applicable to the crypto market, everything is considered during pricing.
And, typically, the current prices of the assets reflect the prior, existing, and the future details of it.
The Dow Theory ideally is built on six specific and vital tenets such as:
- The market has three types of movements
- There are three major phases of the major market trends
- The averages of the stock markets should ideally confirm each other
- New information is incorporated by the market as soon as it is available
- The trends in the market exists until it is indicated that these have ended and
- The trends get confirmed by the volume.
Before knowing a bit more about these tenets, it is important to know a few other things regarding the crypto charts.
Since the crypto markets move up and down in a specific pattern, it is possible to identify the behavior of the market if that particular pattern is identified.
This means that, instead of focusing on every single variable on which the price of a particular crypto coin moves, the market analysts can concentrate solely on the price of that coin.
Ideally, the market moves in three major ways. These are:
- The main movement
- The secondary movement and
- The minor movement.
The main movement of the market is also referred to as the primary movement.
This type of market movements in the market indicates the trends of it.
This type of movement can last for one year or several years. Ideally, the main movement of a market can be both bullish and bearish.
The secondary market movement is also called an intermediate movement or the medium swing of the market.
This type of movement mainly occurs within the medium time frame which may be for 10 days or for 3 months.
In this type of market movement, the trends are usually measured on the basis of the changes in the primary price of the coins.
And finally, the minor movement is also called the short swing of the market which actually indicates the speculation in the market in the short term.
When it comes to the trends of the market, the major market trends comprise three phases.
- The accumulation phase – This indicates the stage when the informed crypto investors start to buy or sell their coins in opposition to the general view of the market.
- The public participation phase – This phase is also referred to as the absorption phase and indicates a situation where the rest of the market starts to follow the actions of the informed crypto investors.
- The distribution phase – This is a stage which happens only after the two phases mentioned above. In the distribution phase the informed crypto investors start redistributing their crypto holdings in the market.
All these conditions of the market are based on the tenets of Dow Theory.
For example, the price of the crypto asset changes when there is any new news or event and it is incorporated by the market as soon as it happens.
The changes in the price of the asset typically reflect the hopes and fears of the market participants most accurately.
There are different factors integrated into the market price as well which are:
- Earnings expectations
- Rate of interests of movements
- The revenue projections
- Product initiative and
- Major elections.
Also, if two coins are linked causally, then the market averages should confirm each other.
This means that if there is an increase in the price of one particular coin, the price of the other coin linked to it should also increase.
If the opposite happens, that is if the price of one increases but that of the other decreases, it is a clear indication that market trend is about to reverse soon.
The market trends also get confirmed by volume. When there is an uptrend, the volume should increase with the increase in price.
On the other hand, when there is a downtrend, the volume should decrease when the price decreases.
And finally the market trends tend to last in spite of the ‘noise’ and do not end till there is any clear sign that it has ended.
This makes it quite difficult to find an explicit proof that there is a reversal of the trend.
Technical Analysis and Tools
Technical Analysis or TA is a procedure or a tool that helps in predicting the probable movement of the price of a crypto pair in the future.
Your reading and assumption on the market will be better if only your technical analysis is good.
You will have to read the crypto charts correctly if you want to do an accurate technical analysis.
And, in order to ensure that you will need to focus on these particular elements while reading the crypto charts.
You should look for the popular patterns that are used for technical analysis such as:
- Head and Shoulders pattern – These refer to the reversal patterns of an ongoing trend of the market which represents the peak and bottom of it. The head and shoulder pattern can be inverted as well. This happens when it shows up near or at the bottom of the trend. When there is such a pattern identified in the crypto charts, it indicates a tug of war between buyers and sellers. When one side finally comes to the top, it indicates a greater pullback or pushback, as the case may be.
- Wedges – These are specific patterns on the crypto charts that occur when an ongoing trend in the market begins to settle down. This results in a breakout, finally. Sometimes the market may also move sideways in order to wedge back and forth until it finds a way to move steadily in a firm direction.
In addition to that, you will also need to know the support and resistance levels of the crypto chart and use them for your technical analysis.
As stated earlier, support levels of the crypto chart will indicate that the price level of the crypto asset will not fall further in a fixed period of time.
And, in contrast, the resistance level indicates that the price of the asset will not increase further than that.
Support and resistance levels help the crypto traders to take their positions by being more informed.
Support levels typically indicate the potential low of the price and resistance indicates the potential high.
Usually, at these levels, the price of crypto coins reverses but if it does not, rest assured that there is a new trend coming up.
Remember, when the price falls beneath the support level, there can be further decline in it.
Similarly, when the price crosses the resistance level, there can be further increase in the price.
It is therefore needed to calculate the support and resistance levels more specifically which you can do by using the pivot points.
These are predictive indicators that calculate the average of the low, high, and closing price based on the past trading sessions.
Therefore, you should take your positions accordingly.
You should buy at a support level where the price stops falling and indicates a reverse trend.
And, conversely, you should sell your assets at resistance levels since the price will stop increasing when it reaches these predetermined levels.
Now that you know the right time to buy or sell crypto assets, take a look at some of the most commonly used and productive technical analysis tools that are used by beginners and the more experienced traders alike.
You can use one or a variety of them to save yourself from investing in or trading with a coin that will result in a loss.
This free crypto analysis tool is perhaps the best and comes with lots of hidden features and capabilities.
This is a nice-to-have tool that will allow you to run your trades smoothly but certainly is not the end-all-be-all kind of a tool. However, this is easy to set up and use.
Money Flow Indicator:
The Chaikin Money Flow Indicator is another popular crypto analysis tool that can measure institutional accumulation and distribution allowing you to see when the institutional traders are buying or selling their crypto assets.
There is a zero line in this indicator and when the volume is above it, it indicates a rally and when it is below the zero line, it indicates sell-offs.
Crypto Fear and Greed Index:
This is a good crypto analysis tool to use if you are looking for a bunch of useful information.
The data come up together along with the valuation and a score all of which are plotted on a graph.
When the sentiment is below 20, it indicates fear, signaling a bullish reversal due to the low price of the crypto coins and when it is above 80 on the scale of 0 to 100, it indicates extreme greed and a bearish reversal.
This is an extremely useful crypto analysis tool if you specifically want to identify the reversal trades as well as the counter-trend opportunities.
However, when you use the Fibonacci Extension you should look for the trends and a correction with three swing points.
Also, look for the golden ratio or the magic number to use in your trading. This is the level to which the market reacts with a high level of accuracy.
Reading the Charts
Now, when you read the crypto price charts, you should look for these specific elements in it.
Also referred to as MA, the Moving Averages on a chart is typically a line which indicates the price averages trend for a specific period.
You can choose any timeframe but it is better to go for the long-term averages because these carry more data and weight.
You can also use multiple MAs such as ‘golden cross’ as a bullish signal and a ‘death cross’ as a bearish signal.
Golden cross occurs when a 50-day short term MA moves above a 200-day long term MA. And, death cross occurs when there is a reversal of trend and the short term MA falls below the long term MA.
Volume Weighted Average Price:
VWAP or the Volume Weighted Average Price is also a single line on the chart which is almost the same as MA but includes an additional and important variable – the volume.
This gives a clearer picture of the past price behavior. If the volume is low, the trend will be weak and will reverse fast but if it is high, the trend will be more robust.
Relative Strength Index:
RSI or the Relative Strength Index is another commonly used indicator that is quite easy to read as well.
This is a single line under the price chart having a scale of 0 to 100 where 50 is the neutral. Anything lower than that is considered as an oversold condition indicating a rise in price soon.
Anything higher than 50 indicates overbought conditions which may result in a fall in price soon. Anything closer to 0 or 100 is considered to be more reliable by the investors.
Sometimes, the RSI can be suppressed or elevated for a long time before there is any reversal.
In addition to the above elements, you should also consider a few other things while reading the crypto charts.
One, it is always better to use more than one indicator for accurate prediction and results.
Two, trends in the crypto market tend to continue. In order to figure out correctly and not ride on the momentum, look for breaks in the pattern or prices close below the support level or above the resistance level which indicate a change of course by the trend.
And, three, Bitcoin will always dominate the crypto market. Bitcoin dominance is typically represented as a percentage which indicates its market share.
Higher the value, investors are more bullish on Bitcoin and bearish for the Altcoins. When it is low, the opposite happens.
Start with Candlestick Charts
In order to get the feel of reading crypto price charts, you should start with reading the Japanese Candlestick charts and then move on to the others. This way, you will gain some experience in it.
Candlestick charts are easy to set up and interpret. The Japanese Candlestick charts are the most popular ones used by the crypto traders and investors.
All you have to do is understand the candles by their shapes, sizes, and color and then position your trades accordingly.
These candles come with boxes and whiskers. There are two whiskers that follow the same logic.
The top whisker is known as the shadow and represents the highest price reached by a crypto asset for a definite period of time.
The box along with it, which is known as the body, represents the difference between the opening and closing prices of the crypto during that particular time interval.
The bottom whisker is much similar but represents the lowest price of the asset attained for a specific period of time.
There are two types of candlesticks namely:
- A bullish candlestick and
- A bearish candlestick.
The bullish candlesticks are green in color indicating a rise in price within the selected timeframe.
In these, the closing price is more than the opening price of a crypto asset.
On the other hand, the bearish candlesticks are red in color and here the bottom thick section or the opening price is greater than the closing price which is indicated by the top of the body of the candle.
While reading the candlestick charts, here are the few specific elements that you should look for:
- Time selection – This will show all the transactions that have taken place in a specific timeframe.
- Volume – This will show the amount of trading activity during a chosen timeframe. Longer the volume bar, the more the buying and selling pressure will be. A green volume bar indicates increased interest in buying while a red volume bar indicates decrease in interest.
And, in order to read the crypto charts correctly and discern right information from it, make sure that you have the right combination of crypto analysis tools.
Though this article is only an introduction to the price charts and the ways which you should read them, this will be of enough help when you want to invest in Bitcoin and other crypto.
When you use one or more of the methods mentioned here, you will be able to make informed decisions, not only in crypto trading but also while dealing with stocks and ETFs or Exchange Traded Funds.
However, make sure that you do some additional research for best results.
If you want to start trading with crypto and make consistent profits, you will need to read the charts very carefully to understand the current trends and patterns.
Through this article, fortunately, you know the methods in which you can interpret them correctly.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.