People who have just started trading cryptocurrencies may get confused with all the charts and data. Reading charts accurately is a skill and can be difficult even for seasoned traders, let alone beginners. As there is a ton of information to learn, in this article we are just going to focus on giving you a basic understanding of how to read crypto charts when trading. So without further ado, let's get started.
Cryptocurrency Line Chart
A line chart is the primary trading chart you'll probably face at the beginning of your trading journey. The line indicates the performance of the cryptocurrency over a specific period. These graphs will give you an understanding of how valuable the cryptocurrency is on the market.
The chart is based on a coin’s closing price for the day. There are two possible scales: linear and logarithmic. The linear chart shows price movement during a specific time frame, while the log chart scales according to percent changes. That means that price changes of different absolute value but the same percentage will be shown equally on the chart. It helps to understand the trend of a price movement.
Cryptocurrency Japanese Candlesticks
To read a Japanese candlestick chart, you need to understand what components a single candlestick has. As soon as you know the core idea, you'll manage to read the whole candlestick chart.
Traders call the candlestick an OHLCV chart, which stands for Open, High, Low, Close and Volume. However, V is often omitted as charts don't always contain volume measurements.
Ok, now we have only OHLC – let's understand how these indices are displayed on the candlesticks.
Open Price (O)
Open Price is a trading term indicating an asset's price at the beginning of the trade during a specific period. For example, the first ETH to USD trade was made at 4 a.m for $300. Accordingly, the open price will be $300 for a 1-hour candlestick.
High Price (H) and Low Price (L)
The High Price, as you've probably guessed, means the highest price during a period, and the Low Price represents the lowest price point of the trade. Please note that the High Price and Low Price do not always differ from the Open Price or Close Price.
The High Price or Low Price can be the same as the Open Price/Close Price, meaning that they reached the highest rate or lowest during the candlestick period.
Close Price (C)
The Close Price shows the last price of an asset at the end of the period. Also, the relation between Close and Open Price affects the color of a candlestick. If the Open Price is higher than the Closing Price, the coin has fallen in rate, and the stick will turn red. If the Closing Price is higher – the coin rate has grown, and the stick will be colored green.
Crypto chart patterns
This pattern is formed of a short body at the top and a long wick at the bottom. The Hammer usually appears during a downward trend. It means that the buying pressure is higher than selling and indicates the start of a bull trend.
As its name suggests, this is the same Hammer but reversed with a body at the bottom and long wick at the top. The pattern shows that bearish pressure was not strong enough to drop the price down, and that the market is likely to turn bullish.
Bullish Engulfing Pattern
This bullish pattern is formed of two candlesticks of different body length during a downward trend. The bullish candlestick is larger than the bearish one. As a result, the candle indicates that the price is trending up.
It is a three stick pattern of different sizes and colors formed during a downward trend. The first stick is bearish, the second is intermediate, and the third is bullish. The Morning Star indicates that a new, bullish morning is about to dawn on a market that has been bearish.
This is a stick with a small red body and a long wick at the top which you’ll see during an uptrend. The pattern indicates that there is significant pressure on sellers coming from buyers, which is restricting the price from jumping up. This generally means that the market will turn bearish soon.
It is a reversed Shooting Star pattern with a long wick at the bottom. Hanging Man is the evidence of a massive sell-off during the day, though not without resistance. A significant sell-off is often a good sign of bulls losing the market.
Bearish Engulfing Pattern
This pattern forms during an upward trend as two candlesticks of different sizes. The smaller stick is bullish and represents the end of price growth, ceding the market's control to bears.
A Trend Line is a tool showing the direction of a price. There are three types of trend lines:
- Upward – the price of an asset goes up
- Downward – the price goes down
- Flat – in this case, there is no pronounced price movement, and the price seems to move in a corridor.
To build a trend line, a trader should fulfill two conditions:
- Determine the current trend. It is recommended to use a chart of a more significant timeframe than the working period. For example, if you are trading on a daily chart, you should use a weekly timeframe to identify the trend.
- Set up two points. To draw a trend line for an uptrend, you need to connect two significant lows, and for a downtrend, two significant highs.
You can also draw a trend line using the Low Price or Close Price.
Support and Resistance
You've probably seen horizontal lines on different charts but perhaps you couldn't put your finger on their meaning. These lines represent levels of support and resistance. Determining these levels, we can understand the level of currency supply and demand for a coin. Basically, these lines represent bears (sellers) and bulls (buyers).
A support level is always down below. It indicates the price point at which a large number of buyers will be ready to purchase an asset. Once the currency reaches close to that level, it bounces upwards because the support level (the demand) won’t let the price go lower.
A resistance level is quite the opposite. It is the price point at which sellers are waiting to sell an asset. Every time a coin approaches that point, it will encounter selling pressure, and its rate will go down.
Moving Average Chart
A Moving Average Chart is a simple analysis tool with an average price for a specific time. A trader decides upon a period – it can be a day, ten weeks, several days or months, etc.
The basic signals which MAs indicate are simple and can be described as follows:
- A rising Moving Average represents a bullish trend – a signal to buy
- A falling MA means a bearish market – a signal to sell
- If a price line goes up and crosses the MA chart, it indicates an acceleration of the price growth – a signal to buy
- If a price line goes down crossing the MA chart, it indicates an accelerating price decrease – a signal to sell
- A reverse of the MA in an upward direction during price growth – a signal to buy
- A reverse of the MA in a downward direction during price fall – a signal to sell
Please note, to apply the Moving Average method, the price should be following a trend. Otherwise, this tool doesn't work.
A Moving Average cannot be relied upon to warn about an upcoming change of trend. However, it can help to identify whether a current trend is developing and to confirm when a trend reversal has started.
Bollinger bands is a tool for technical analysis created by John Bollinger, consisting of three lines or “bands.” The middle line is a moving average, which identifies a sharp price deviation from the trend. The lines at the top and bottom are the support and resistance levels of the price.
The trading strategy with Bollinger Bands goes as follows:
- If the lines are narrowing down, then a price consolidation is beginning. But if the borders become too narrow, then volatility is decreasing, and the trader can expect strong price action.
- If the lines are expanding, it may indicate a strengthening trend or the start of a new tendency. But if the borders are too broad, then the volatility is too high, and traders can expect a decrease.
- The position of a price chart relative to the MA indicates the direction of a trend. If a price line is higher than the MA, then the trend is bullish and vice versa. Of course, the MA should be directed in the same direction.
- If the price goes outside the line, it may indicate a reversal of the current trend. Also, it can mean a small correction to a MA.
RSI stands for Relative Strength Index and is used to identify overbought and oversold conditions. The values of RSI range from 0 to 100. Concerning the basic usage of this indicator, everything is pretty simple. All you have to do is set up minimal and maximal signal levels and follow the chart movement.
- If the chart crosses the 70 mark – then it means that the market is overbought, and traders can enter the market with a short position.
- If the chart crosses the 30 mark – then the market is oversold, and traders can open a purchase position.
The RSI indicator is rarely used on its own. Usually, it is paired with another indicator or is included as an element of a more expansive trading strategy. It is most useful as part of a well thought out trading strategy.
What we’ve covered is just the basics, the tip of the iceberg in the large ocean of chart analysis. The charts are very complex and indicate some probable price movements of an asset. Candlestick patterns don't always operate in practice as they are supposed to according to theory. Don't forget about the fundamentals and doing news analysis of the market.