Many people think that analyzing cryptocurrency charts is a complex job, however, this is not the case, this can be quite simple. Next we will give you all the information you need to learn how to read cryptocurrency charts and actions.
How to read Cryptocurrency charts?
The vast majority of traders and investors resort to using price charts, also known as stock charts. These charts, whether for short periods such as the day or for several years, they place the current price in a frame of referencea.
It is essential to master the skill of interpreting these price charts, which, in a matter of seconds, provide data about the market mood in relation to an asset, such as a stock or cryptocurrency, the short and long-term trend, as well as the supply and demand. The technical analysis principles used in reading stock charts are equally applicable to interpreting charts for Bitcoin and other cryptocurrencies.
Examining cryptocurrency charts is an essential initial stage. Although all traders use charts, not all do them in the same way. Especially in the realm of the stock market, a stock investor who follows the style of Warren Buffett, who focuses more on fundamental Analysis, You will use a chart primarily to assess market sentiment, that is, whether or not the market is showing a preference for a particular stock.
A similar scenario occurs with cryptocurrencies: it is evident that altcoins such as Ada Cardano or BNB they offer many more guarantees than Dogecoin. The operators, for their part, rely on the knowledge provided by the technical analysis of charts for most of their decisions, allowing them to identify and capitalize on imbalances between supply and demand.
What is the price chart?
The price chart is a visual illustration that shows the price fluctuation in a specific market, be it Bitcoin, Ethereum, the gold market, the Dow Jones, Tesla stocks, etc. It consists of two axes: The vertical axis represents the prices and the horizontal axis represents the time interval.
Graphics can range from the simple to the more sophisticated. Although they all display the quotes, the level of additional information that can be incorporated into a chart is really broad and precise. It is crucial to understand that There is no single correct way to visualize the fluctuation of prices in a market.
Some traders like to keep a chart as minimalist as possible, while others prefer to fill their stock charts with a level of detail that, to the unfamiliar, can turn the chart into complex and incomprehensible code. There are thousands of analysis indicators available for cryptocurrency charts.
Additionally, there are different types of price charts. Line charts They are the simplest and show only the closing price for each time period. bar charts, instead, they show the open price, the close price, as well as the high and low prices for a given period of time. Candlestick charts provide the same information as bar charts, but are represented in a way that many traders find easier to interpret.
It is also relevant to note that although price charts are a fundamental tool in technical analysis, they should not be used in isolation. They should be complemented with other technical analysis tools, as well as fundamental analysis and market sentiment analysis, to achieve a more complete picture and thus make more informed trading decisions.
In studying how to interpret cryptocurrency charts, it is essential to understand price behavior. In analyzing your trajectory, it is crucial to be able to identify a pattern or trend.
When using indicators, it is essential to obtain as complete a picture as possible of the past fluctuations of an asset. A trend refers to a price that maintains a consistent movement in a particular direction. Values can exhibit three possible behavior patterns:
- Bullish: A bullish pattern indicates that the price is rising.
- Bass guitarist: A bearish pattern suggests that the price is declining.
- Side: A stable pattern means that the price does not present significant changes towards, but remains constant.
It is important to note that trends are essential for making investment decisions. In an uptrend, investors often buy, expecting the price to rise even higher. In a downtrend, they may decide to sell before the price falls further. While in a stable trend, investors might decide to hold their investments, waiting for a clear trend to form before making a decision. Therefore, being able to correctly identify trends is a valuable skill for any investor or trader.
Types of price charts
Price charts on the stock and cryptocurrency markets do not always display the price in the same way. Each chart type prioritizes certain aspects over others. Although there are multiple types of charts, We are going to focus on the two most used today: the charts that use lines to represent the price and those that use candles.
Line charts are a simplified version; plot the price over a period of time. This type of chart provides us with two key information points: the date and the price. From these fundamental data, we can infer various observations about the intensity and duration of a trend, as well as the reaction of the price of a cryptocurrency or stock to favorable or unfavorable news.
However, since each point on the chart represents a full day of trading activity, we don't have much information about the individual events of each day. With line charts, we cannot tell what the trading range was during the day or if the chart tends to close each trading day near its daily high.
Line charts are appreciated and used by investors who require a basic view of the transaction history of a cryptocurrency or stock, as they remove the noise that candlestick charts can generate.
This is where more detailed candlestick charts come into their own. While line charts provide easy-to-understand price history, they do not provide the detailed information that candlestick charts do.
Japanese Candlestick Charts
Japanese candlestick charts are a preferred choice for active traders. Generally, these charts are based on daily periods, which means that each candle represents one day of trading activity and each candlestick on a chart displays four key pieces of information:
- Home: is the initial price of the cryptocurrency when the candle started (this may vary depending on the period of the candle we are using).
- Maximum: It is the highest price at which the cryptocurrency was traded during the validity of that candle.
- Minimum: It is the lowest price at which the cryptocurrency was traded during the validity of that candle.
- Final: It is the last price at which the cryptocurrency was traded during the validity of that candle.
It is important to know that the start, high, low and end are determined by the time frame of the chart. For example, a five minute chart has a fresh start every five minutes, each time a new candle is formed.
There are two types of candles:
Bullish candles: are those in which the final price is higher than the initial price. On most charting platforms, bullish candles are colored green or white.
Bearish candles: are those in which the final price is less than the initial price. On most charting platforms, bearish candles are colored red or black.
The rectangular section of a sail is called "body«, while the thin lines are known as «wicks» or shadows. Analysis of the changes between these components is essential for many traders. This approach can be callede «trading based on price action«.
Japanese candlesticks provide enough information to perform countless analyzes based on how they are represented on the price chart. There are bullish and bearish patterns, trend continuation and trend reversal patterns, as well as single candlestick patterns, two candlestick patterns, and three candlestick patterns.
A bullish engulfing pattern is made up of two candlesticks and forms during a downtrend. The first candle is bearish and the second is bullish, «wrapping» the body of the first. In contrast, a bearish engulfing pattern is a two candlestick formation that forms during an uptrend. The first candle is bullish and the second is bearish, completely covering the body of the first.
Bar charts have become popular among cryptocurrency traders as they present price variations over a specific time interval. This instrument shows the highest, lowest, open and close price that an asset reached for an hour, a day, a week, or any other selected time window.
Buy and sell trades (along with the value of the asset) are shown as colored lines, where green indicates that the price is rising, and red indicates that the value is falling. The lowest price is located at the bottom of the bar, while the maximum reached by the cryptocurrency during that period is located at the top.
Bar charts collect data such as the opening, closing, minimum and maximum price that the cryptocurrency reached in a period. For its part, the opening price is represented by a small horizontal line that extends from the bar to the left of the coordinate plane. The closing price, on the other hand, is a short horizontal line located to the right of the diagram.
Important Elements for Reading Cryptocurrency Charts
There are several key elements that are critical to reading and interpreting these graphs effectively. Understanding each of these elements will provide you with a solid foundation for technical analysis and more accurate trading decisions.
Volume is the cumulative representation of trading activity. In other words, the volume shows the number of transactions that have been carried out during a specific period of time. This is usually displayed as a histogram that is located at the bottom, below the price chart. When the volume is high, the price tends to move more (in theory), compared to periods of low volume.
Analyzing the volume in isolation does not provide much information, it is always necessary to review the volume in conjunction with the price.
Furthermore, it is crucial to remember that high volume during a bullish move in the price could indicate a strong upward trend. On the other hand, if high volume is seen during a price drop, this can be a indicative of a strong downtrend. Analyzing these trends in relation to volume can provide a clearer picture of the possible direction of the market.
Until now, we have focused on daily charts, but the reality is that price charts can accommodate any time interval, from monthly to as little as ten seconds.
The selection of your time interval should be based on three main aspects:
The level of risk you are willing to take on each trade. The number of trades you plan to make per hour/day/week. The availability of time you have to invest.
Your risk level per trade will vary depending on the time interval you choose to trade. The average range of a candlestick on a monthly chart is much wider than on a 1 minute chart. You should consider the volatility per candle in your time frame and set your risk parameters from there. For example, it would not make sense to set a 1% stop loss when investing in Apple on a monthly chart.
Market movements are characterized by manifesting themselves in the form of zigzags. All values fluctuate, and for there to be growth, there must be a decline. The most prominent indicator for measuring volatility over a specific time interval is through the Average True Range (ATR). The ATR is essentially a measurement of the average volatility per candle.
At this point in the article on how to interpret cryptocurrency charts, however, when it comes to analyzing individual candlesticks, the task becomes a bit more complex. Some traders view all candlesticks equally, firmly believing that each one provides valuable information about the market.
On the other hand, some traders they prefer to base their analysis on the identification of a few candles keys that, they argue, will predict the future behavior of the graph. Naturally, by reaching this level, we enter the realm of the subjectivity of technical analysis.
The trader Ross Cameron uses the fascinating Pareto principle to extrapolate it to the psychology of intraday trading. This principle holds that the 80% of the effects originate from 20% of the causes. 80% of trading profits come from 20% of your trades. 80% of the market is owned by 20% of the companies, 80% of the trade occurs in 20% of a city, etc.
Many traders apply this philosophy to analyze individual candlesticks. Although each candlestick tells a piece of the story, detailed analysis of each one could lead to analysis paralysis and the well-known confirmation bias (a common bias in behavioral economics that is based on the human inclination to favor, seek, interpret). and recall information that supports our own beliefs). Many traders choose to examine a few key candlesticks within each chart, believing that these will tell us the remaining 80% of the story.
We'll take a look at two candlesticks below, to gain a better understanding of some of the fundamentals of technical analysis performed by candlestick study professionals. We will refer to the Doji, the Hammer and the Marubozu as examples of some of these «Pareto candlesticks» most relevant:
A Doji candle is one that exhibits the same opening and closing prices. Generally speaking, a Doji is considered to reflect a lack of decision on the part of market participants, as if the market is fatigued. However, the relevance of a Doji candle always depends on the context in which it appears. For example, a Doji that manifests near a new low during a continued downtrend can be a harbinger of an impending change of heart on the part of investors.
In such cases, it is not uncommon to see an upward jump followed by an uptrend. However, if the Doji appears in the middle of an extended period of sideways consolidation, its meaning is diluted. By definition, a sideways price movement denotes indecision in the market, therefore, a Doji in this situation does not provide us with new information. You can recognize five types of Doji candlesticks: Star Doji, Long-legged Doji, Dragonfly Doji, Gravestone Doji, and Four Price Doji.
The Hammer or Hammer Candle It is characterized by a lower shadow that is usually twice as long as the body of the candle, while the upper shadow is non-existent or very small. In general, the Hammer candlestick is interpreted as a trend reversal signal, suggesting that it might be the right time to sell or buy. A common scenario would be, for example, that stocks fall to open in the midst of a continuing downtrend, only to be dominated by bulls throughout the day and close higher.
The Marubozu Candle is distinguished by having minimal or no shadow and a full body. This candle is considered the most daring and aggressive among all. He points out that regardless of whether they were bullish or bearish, they exercised complete control over price action from open to close. The psychology behind the Marubozu Candles is more straightforward than that of the Doji and Hammer Candles: a bullish Marubozu shows fierce competition among buyers for shares, which means that demand is high.
In terms of a bullish Marubozu, there are no corrections as buyers are ready to pay higher prices to continually acquire the stock. Conversely, in the case of bearish Marubozus, the opposite is true. The consecutive presence of several Marubozus would indicate overwhelming pressure in that direction of the market. A high degree of caution is essential when one is on the unfavorable side of these markets and a Marubozu appears.
Patterns on the price chart
Similar to individual candles, patterns that are made up of multiple candlesticks are a reflection of the collective psychology in the markets. A quick review of any technical analysis manual can be a bit overwhelming, given the great diversity of existing candlestick patterns and the terminology used (triangles, wedges, plates, peaks, channels, among others).
Historical analysis of stock price fluctuations reveals how certain patterns play out recurringly. Despite technological advances, the mindset of investors has not changed. The only thing different today is the excess of information and data available. Next, we will present Examples of some of the more common patterns:
head and shoulders pattern
The head and shoulders pattern is, perhaps, the most recognized graphic pattern. It is categorized as a pattern of change, which implies that anticipates a reversal or the end of a current trend.
As indicated by John J. Murphy in his work 'Technical analysis of financial markets', significant changes in trend require a transition period. However, these transition periods do not always herald a reversal in the trend. It is important to highlight that the notion of «pattern of change» can be a bit confusing.
When a trend comes to an end, it does not necessarily imply that a new trend in the opposite direction will be unleashed immediately. Most likely, there will be a significant move against the trend, followed by sideways consolidations for a while, before a new trend develops.
Flag or bull flag pattern
The pattern known as a flag gets its name from the shape that price takes on the chart, similar to a flag blowing in the wind. Flags are considered patterns that indicate trend reversals. This means that you can take advantage of a short break in the main trend to follow that trend.
It is important to note that the price action at the pullback is much less intense than the price action at the top of the flag. As for strategies to exit the trade, there are a multitude of options. An effective way could be to set a stop loss above the flag and wait to see what the market offers. If the trade progresses favourably, you can consider exiting when momentum starts to wane.
A successful flag setup should be in tune with the long-term trend. A bear flag pattern should coincide with a downtrend on the daily or weekly chart to maximize the chances of a successful trade.
Trend analysis tools can be beneficial for identify new trends and discern when the balance between supply and demand is shifting significantly in a particular direction. Although these indicators can help us improve our earnings, we must not make the mistake of believing that their use will ensure benefits. They are actually tools that help us make more informed decisions., and not magic formulas to earn money.
In simple terms, these technical indicators are mathematical functions or equations that are continuously updated in real time on the chart. The value of these indicators is that they can give us an advantage in predicting possible market movements. These equations can range from simple averages of prices over time to calculations based on much more complex mathematics.
Some of the benefits that these mathematical equations could bring you are:
- forecast price direction
- Determining if the price of a cryptocurrency is excessively high or low
- Compare the price movements of two different cryptocurrencies
There are thousands of technical indicators available. Although there are many of them that are numerical, we are going to focus on the ones that are most useful for technical analysis: graphic indicators. These can be represented in various ways (lines, bars, points, colors…). Even someone with basic knowledge of mathematics could design their own indicator, with the help of a programmer.
However, if you try to pay attention to all the available indicators, you could end up being overwhelmed. Some indicators have a cost, but most are free. TradingView is an excellent tool for viewing charts thanks to the wide range of free charting indicators it offers. Here we will briefly talk about two of the most popular chart indicators: the RSI and the MACD.
the moving average It is an indicator that combines the current price with the variations that the price has experienced in the past. It is calculated taking into account a variable number of days or periods of time. To simplify, the moving average offers us information about the momentum or impetus of a current price. Does the value of the stock or cryptocurrency align with previous behavior? Are we facing an overbought or oversold situation? The moving average is a compendium of the prevailing trend that indicates the degree of agreement between supply and demand.
RSI: (Relative Strength Index)
To understand how to interpret cryptocurrency charts, it is almost essential to consider the Relative Strength Indicator. RSI is short for Relative Strength Indicator. The RSI indicator focuses on identifying overbought and oversold conditions and is useful for detecting price discrepancies. You can see the RSI in action in the image below, below the price chart:
When the RSI is low, the stock is said to be 'oversold', indicating that it is likely to rally soon. When the RSI is high, the stock is “overbought”, which suggests that it may drop shortly. The RSI is displayed in a separate panel from the candlestick chart, either above or below. This is because the RSI is calculated in a range from 0 to 100, which means that it does not scale on the same scale as the candlestick chart.
MACD (Moving Average Convergence Divergence)
The MACD indicator (for its acronym in English, Moving Average Convergence Divergence) It is used to detect changes in the momentum of a stock's price. It collects information from various moving averages and, in conjunction with support and resistance levels, can help us discover the right times to buy or dump an asset.
Convergence: When two moving averages approach each other.
Divergence: When two moving averages move away from each other.
The MACD is made up of three fundamental elements:
- MACD line, which calculates the distance between two moving averages.
- The signal line, that identifies changes in the momentum of a price and triggers buy or sell signals.
- The histogram, which shows the difference between the MACD line and the signal line.
In the calculation of the MACD indicator, only two lines are considered: the MACD line and the signal line. The MACD line is determined by subtracting a 26 period moving averages from a moving average of 12. The histogram is simply a visual representation of the movement of these lines.s. The signal line is the 9-period moving average of the MACD line. If the MACD line crosses above the signal line, it can be interpreted as a buy signal, and if it happens the other way around, it is a sell signal.