How to read cryptocurrency charts is an art within everyone's reach. Don't be fooled by the apparent complexity of the world of cryptocurrency, FOREX or Bitcoin chart analysis: learning how to interpret price charts is simple.
How to read cryptocurrency charts is an art within everyone's reach. Don't be fooled by the apparent complexity of the world of cryptocurrency, FOREX or Bitcoin chart analysis: learning how to interpret price charts is simple. Knowing how and when to invest in cryptocurrencies is quite another story. Throughout this article I will talk about both stocks and cryptos. It doesn't matter: the rules of technical analysis are the same for both assets.
cryptocurrency charts
Almost all traders and investors use price charts (also called quote charts). Whether it is an intraday chart or a multi-year chart, price charts put the current price in context. Knowing how to read price charts is critical. Within seconds, they provide us with information about market sentiment towards a stock or cryptocurrency, short- and long-term trend, and supply and demand. All the technical analysis theory of reading stock charts is useful for reading charts of Bitcoin and other cryptocurrencies.
The analysis of cryptocurrency charts is the first fundamental step. While all traders use charts, not all their uses are the same. Especially in the stock market world: a Warren Buffett-style stock investor, much more interested in fundamental analysis, will only use a chart to gauge market sentiment, i.e. does the market like or dislike this stock? Similar thing happens with cryptos: it goes without saying that an alt-coin like Ada Cardano or BNB has much more collateral than Dogecoin. Traders, on the other hand, use the wisdom of technical analysis of charts to make most of their decisions: thanks to them, they can identify and take advantage of supply and demand imbalances.
What does the price chart consist of?
The chart is a graphical representation of the price movement within a market (Bitcoin, Ethereum, gold market, Dow Jones, Tesla shares, etc.). It is composed of two axes: on the vertical (or Cartesian) axis the prices are shown and on the horizontal (abscissa axis) the time span.
Charts can be simple or complex. Although all charts show the price, the degree of additional information we can add to a chart is truly deep and detailed. The important thing to keep in mind here is that there is no single valid way of capturing the graphical representation of a market's prices.
Trends
To know how to read cryptocurrency charts, it is necessary to analyze the price. When analyzing the evolution of prices, it is essential to know how to detect a trend. When using indicators, it is critical that we have as broad a perspective as possible on the past evolution of a security's movement. A trend is simply a price that continues to move in a certain direction. Stocks can manifest themselves in the form of three trends:
Bullish: an uptrend means that the price is rising.
Bearish: a downtrend means that the price is moving downward.
Sideways: a sideways trend, in which the price neither rises nor falls significantly, but moves sideways.
Types of stock and cryptocurrency price charts
Not all price charts represent the price in the same way. Each way of representing prices will give priority to some parameters over others. Although there are several types of charts, we are going to focus on the two most popular today: charts that represent the price with lines, and charts that represent the price with candlesticks.
Line charts
Line charts are basic; they plot price over time series data, as in the example above. The above chart gives us two data points: the date and the price. From these essential data points, we can gain various insights into the strength and duration of the trend, how the cryptocurrency or stock price reacts to good / bad news.
However, because each chart entry represents a day of trading activity, we have little data on individual days: What happened during that day? With line charts, we cannot answer questions such as "How wide is the daily trading range?" or "Does this chart tend to close each trading day near its daily high?"
Because they eliminate the noise that candlestick charts generate, line charts are highly valued and used by investors who need a basic view of a crypto or stock's trading history.
This is where the more detailed candlestick charts come into play. While line charts provide easily digestible price history, they do not offer the more detailed information that candlestick charts provide.
Japanese candlestick charts
Japanese candlestick charts are the primary choice for active traders and are the ones we work with the most at Foro Chicharros. Most candlestick charts are based on a daily time frame, which means that each candlestick represents one day of trading activity.
Each candle has four key pieces of information:
Open: the first price at which the crypto was traded when the candle was opened (this varies depending on the candlestick timeframe we are using).
High: the highest price at which the crypto traded during that candle.
Low: the lowest price at which the crypto traded during that candle.
Close: last price at which the share was traded during that candle.
Remember: the open, high, low and close depend on the time frame of the chart. For example, a five-minute chart has a new open every five minutes, each time a new candle is created.
There are two different types of candles:
Bullish candlesticks: when the closing price is above the opening price. In most charting platforms, bullish candlesticks are green or white.
Bearish candlesticks: when the closing price is below the opening price. In most charting platforms, bearish candlesticks are red or black.
The rectangular part of a candlestick is known as the "body", while the thin lines are known as "wicks" or shadows. Analysis of the changes between these candlestick elements is the backbone of many traders' analysis. This style can be referred to as "price action trading", with Steve Nison and Al Brooks being famous proponents.
Candlesticks provide enough information to do a thousand and one analyses based on how they are presented on the price chart. There are bullish and bearish patterns, continuation and trend reversal patterns, as well as single candlestick patterns, double candlestick patterns and triple candlestick patterns.
A bullish engulfing pattern is made up of 2 candles and is formed during a downtrend. The first candlestick will be bearish and the second candlestick will be bullish "wrapping" the body of the first candlestick. Conversely, a bearish engulfing pattern is a 2 candlestick formation that will form in an uptrend. The first candlestick is bullish, while the second is a bearish candlestick that ends up engulfing all the space achieved by the body of the first candlestick. Below, the two types of engulfing (bullish and bearish) reduced to their minimum expression:
The importance of psychology in crypto trading and cryptocurrency chart analysis
All profitable trading strategies take advantage of the predictable nature of human psychology. All successful traders are, at heart, full-time professionals in the economic branch of behavioral finance, a branch of economics based on the study of human behavior and all the variables that determine our decision-making process. Price charts are nothing more than the most efficient way to capture in real time the irrational behavior of the markets.
We must not forget a maxim that we will repeat over and over again: investing or trading in cryptos is a risky practice. No matter how much knowledge one has, no one is untouchable; without proper risk management, even the most expert traders sooner or later fail. And go bankrupt. Some traders choose (wrongly) to use static stop loss levels to manage their risk. This means that they use the same stop loss of, for example, 1% on every daily trade they make, instead of managing their risk dynamically, according to established price levels and volatility, among other factors.
important elements
Volumen
The cumulative measure of trading activity is volume. In other words, volume represents the number of trades that have taken place in a given period of time. Volume is represented as a histogram that usually appears in the lower area below the price chart. When there is a lot of volume, the price tends to move more (in theory) than when there is little volume.
time frames
So far we have been talking about daily charts, but the truth is that quote charts can be used for any time frame: from monthly charts to ten-second charts.
The time frame you choose should depend on three factors:
The amount of risk you wish to assume in each operation.
The number of operations you wish to perform per hour / day / week.
Your schedule/availability to invest/trade.
Your risk level per trade will change depending on the time period you choose to trade. The average range of a monthly candle is much wider than that of a 1-minute chart. You should look at the volatility per candle in your time frame and set your risk parameters from there. For example, it would make no sense to set a stop loss (stop loss limit) of 1% when trading Apple on a monthly chart.
Market movements are characterized by zigzags. All values fluctuate, and for there to be growth, there must be decline. The most prominent method of quantifying volatility over a given period of time is through the Average True Range Indicator (ATR). The ATR is essentially a reading of the average volatility per candle.
Identification of important candlesticks in cryptocurrency chart analysis
So far in this article to understand how to read cryptocurrency charts we have handled objective concepts based on irrefutable facts. When it comes to analyzing individual candlesticks, things get a bit trickier. Some traders (like Al Brooks) treat all candlesticks equally, convinced that each candlestick tells us something about the market.
Other traders, on the other hand, like to base their analysis on the identification of a few fundamental candlesticks which, they say, will determine how the chart will evolve next. It goes without saying that, at this point, we enter the slippery sands of subjectivity in technical analysis.
On his website, trader Ross Cameron refers to the interesting Pareto principle to extrapolate it, in his case, to the psychology of intraday trading. This principle states that 80% of the effects come from 20% of the causes. 80% of your trading profits come from 20% of your trades. 80% of the market share is owned by 20% of the companies, 80% of the trading takes place in 20% of a city, etc.
Many traders use this philosophy to perform their analysis of individual candlesticks. While each candlestick tells a part of the story, individual candlestick analysis would lead to analysis paralysis and the so-called confirmation bias (known behavioral finance bias based on the tendency of the human psyche to favor, seek, interpret, and remember information that confirms one's beliefs). Many, many traders choose to look at a few essential candlesticks within each chart because they believe that these will tell the remaining 80% of the story.
Doji Candle
A doji is a candlestick with identical opening and closing prices. A doji is said to represent indecision on the part of the market. The Japanese say "the market is tired". The meaning of a doji candlestick depends on its context. A doji near a new low in a sustained downtrend may indicate an impending change in investor sentiment. It is not uncommon to see a bullish gap followed by an uptrend in this type of situation. If we change the circumstances for a doji to occur in the middle of a long period of sideways consolidation, the presence of the doji becomes less significant. By definition, sideways price movement indicates market indecision, so a doji does not give us new information. In this image you can see the five types of doji candlesticks: doji star, long-legged doji, dragonfly doji, gravestone doji and four price doji:
(Hammer)
The Hammer candle has a lower shadow that is usually twice the size of the body of the candle. The upper shadow is non-existent or small. A hammer is usually interpreted as a trend reversal candlestick: a candlestick that would suggest that it is a good time to sell or buy. Example: in a common bullish scenario, stocks go down at the open in the middle of a sustained downtrend. Then, the bulls take control throughout the day and the stock closes that day.
This is a clear example of pure market psychology:
The stock is already in a sustained downtrend: its value declines every day.
At a certain point, when the price gap falls, many bulls will perceive the price as "too low". They may be value investors, mean reversion traders or bottom fishers.
When the hammer candle enters the picture, the so-called bulls think that the time has come to enter a buying position: the market has gone too low and now is the time to change the stock price. The hammer is a visual representation of this mass psychology.
The ultimate success of the bulls is based on the market's agreement or disagreement that the stock is, in fact, "too cheap." If the market disagrees, the weak hands that bought into the hammer candle will immediately sell, thus resuming the downtrend.
Marubozu Sailing
The Marubozu sail is characterized by little or no shading and full body. The Marubozu is the most aggressive of all candlesticks. It indicates that, whether bullish or bearish, they were in full control of the price action from the open to the close. The psychology at play with Marubozu candlesticks is simpler than that of Doji and Hammer candlesticks: a bullish Marubozu indicates that buyers are scrambling to buy shares. In other words, there is high demand.
There are no pullbacks because buyers are willing to pay higher prices to own the shares on an ongoing basis. For bearish Marubozus, the opposite situation is true. Several Marubozus in a row would indicate incredibly high pressure on that side of the market. Extreme caution should be exercised when you are on the wrong side of these markets and a Marubozu appears.
Price chart patterns
As with individual candlesticks, patterns formed by several candlesticks are a representation of human psychology in the markets. Just take a look at any technical analysis book and you will go a little crazy with the wide variety of different candlestick patterns and terminology used (triangles, wedges, saucers, spikes, filters, etc).
Historical study of stock price performance demonstrates how certain patterns repeat over time. Technology has not changed investor psychology. The only difference is that today there is more noise and an overabundance of data. Again, we will give a few examples of some of the most popular patterns:
head and shoulders pattern
The head and shoulders is probably the best known chart pattern in existence. It is a reversal pattern, which means that this pattern bets on the reversal or end of an existing trend.
As John J. Murphy points out in Technical Analysis of Financial Markets, major trend changes require a transition period. The problem is that these transition periods do not always herald a reversal in the trend. It should be noted that the term "reversal pattern" can be a bit misleading. When a trend ends, it does not necessarily mean that a new trend in the opposite direction begins immediately. It is more likely that there will be a significant counter-trend move and then sideways consolidations for a while before a new trend begins.
bull flag
The flag pattern gets its name because the shape of the pattern's price resembles that of a flag on a flagpole. Flags are trend reversal patterns. This means that you can take advantage of a momentary pause in the prevailing trend to join the trend.
In this image, at the beginning of the chart, the stock is in a downtrend and has just made a strong downward move. Because the stock is barely moving in a straight line, the stock pulls back a bit and moves up (as marked in green):
It should be noted that pullback price action is considerably less aggressive than flagpole price action. As for exit strategies, there are dozens of options. One way that works well is to stop a stop loss above the flagpole and wait to see what the market offers you if the trade works well, exit when momentum slows.
Last but not least, a not minor detail: a good flag setup will be in harmony with the long-term trend. A bearish flag pattern should coincide with a downtrend on the daily/weekly chart to maximize its probability of success.
technical indicators
Trend-tracking indicators can be useful for detecting new trends and determining when the supply/demand balance is shifting significantly in one direction. Indicators can help us make money. But we cannot think that the mere assistance of an indicator will guarantee us to make money. They only function as guides to make better decisions; not as magic wands.
These technical indicators are, in essence, functions or mathematical equations that are constantly updated in real time on the chart. Ultimately, the value of these indicators is that they may give us an edge in forecasting future market movements. These mathematical equations can be as simple as an average of
prices over time, to mathematics based on much more complicated calculations.
Forecasting price direction
Identifying whether a crypto price is trading too high or too low
Compare the price movements of two different cryptos, such as Bitcoin and Ethereum.
There are thousands of technical indicators. Although there are numerical ones, we are going to focus on the ones that interest us the most when it comes to technical analysis: the graphical indicators. These can be expressed in a multitude of forms, (lines, bars, dots, colors...) Anyone with a minimum of mathematical knowledge can develop their own indicator (with the help of a computer programmer). But, beware, if one tries to pay attention to each of the existing indicators, the risks of losing one's sanity are real. Some indicators cost money and most are free. It is worth using TradingView to view charts because of the remarkable variety of free chart indicators it offers. Below we briefly mention two of the most popular chart indicators: the RSI and the MACD.
Moving average
The moving average is the weighting of the current price with the movements that the price has made in the past. It is calculated based on a variable number of days or calculation periods. Simply put, the moving average lets us know the strength of a current price. Does the price of the stock or cryptocurrency match the past behavior? Is it overbought or oversold? The moving average is a summary of the dominant trend that tells us the degree of consensus between supply and demand.
RSI: (Relative Strength Index)
In order to know how to read cryptocurrency charts it is almost indispensable to look at the Relative Strength Indicator. RSI stands for Relative Strength Indicator. The RSI indicator focuses on identifying overbought and oversold conditions and is used to spot price divergences. You can see the RSI in action in the following image below the price chart:
The RSI is very easy to understand: when the RSI is low, the stock is "oversold" and more likely to rally soon. When the RSI is high, the stock is "overbought" and is more likely to fall soon. The RSI is separate from the candlestick chart and has its own panel above or below the chart. This is because the RSI calculation is from 0 to 100, which means it does not have the same scale as the candlestick chart.
MACD (Moving Average Convergence Divergence)
The MACD (Moving Average Convergence Divergence) indicator helps us to identify changes in the momentum of a stock's price. It collects information from different moving averages and, in combination with support and resistance, can help us identify opportunities to buy or sell a security.
Convergence: two moving averages are moving closer together.
Divergence = two moving averages are moving away from each other
The MACD is made up of three elements:
The MACD line, which measures the distance between two moving averages.
The signal line, which detects changes in the momentum of a price and triggers buy and sell signals.
The histogram, which represents the differen ce between the MACD and the signal line.
When calculating the MACD indicator, only two lines are taken into account: the MACD line and the signal line. The MACD line is obtained by subtracting a 26-period moving average from a 12-period moving average. The histogram is only the graphical representation of the movement of the lines. The signal line is the 9-period moving average of the MACD. If the MACD line exceeds the signal line, it can be interpreted as a buy signal, and if the opposite is true, a sell signal.
We hope that with this basic guide on how to read cryptocurrency charts you will get an idea of how easy it can be to read a simple chart like this to understand the behavior of the price when trainding, stalkin and holdin I hope all this information will be useful for your studies and learning about the topic
I hope you liked this article I'm pandoru1997 until a next article....
