How to read crypto charts?
Reading a crypto chart is absolutely essential for both beginners and experienced traders in the crypto world. Crypto charts are used to help crypto traders make better investment and trading decisions when dealing with crypto. They are similar to other technical charts that help traders choose equity. But for the uninitiated, crypto charts are graphical representations of price, volume and time intervals in relation to the crypto market. But do you know how to read a crypto chart like a pro? Let’s get down to the basics, then.
Dow Theory: The Foundation of Technical Analysis
Before we start with how to read a crypto chart, it is inevitable for every trader to know the Dow Theory. Charles Dow pioneered technical analysis. He co-founded Dow Jones & Company. He was also the founder and editor of the Wall Street Journal. Dow’s ideas were developed in a series of Wall Street Journal editorials. After his death, other editors, such as William Hamilton, refined these ideas and assembled what is now known as the Dow Theory from his editorials. The Dow Theory can be called a framework for technical analysis. It lists 6 basic principles. Dow’s principles can be considered as the preamble for traders trying to identify and follow a crypto trend.
1. The market reflects everything
The Dow Theory is based on efficient markets hypothesis (EMH). It claims that asset prices reflect all available information and trade on crypto or exchanges at fair value. In other words, this strategy is the polar opposite of behavioral economics. For example, if an organization’s earnings are widely expected to improve, the market will reflect the potential improvements even before they occur. Demand for the company’s shares will increase before the publication of the improvement report. It may also happen that the price does not change significantly after the expected positive report is released.
2. There are three market trends
This theory was the first to propose that the market moves in three directions:
- Primary trend: Primary trends can last months to years and be up or down. This is the most important market movement. Primary trends can either be a bull market, where asset prices rise over time, or a bear market, where asset prices fall over time.
- Secondary Trend: Secondary trends are considered corrections to a primary trend. These trends can act in opposition to the primary trend. Secondary trends can be pullbacks in bull markets. In these cases, asset prices fall temporarily. Secondary trends can also be rallies in bear markets. In such cases, prices rise temporarily before continuing to fall. These trends can last from a few weeks to a few months.
- Tertiary trend: Tertiary trends usually die in less than a week or less than ten days. They are often dismissed as market noise that can be ignored. Tertiary trends can be defined as daily fluctuations in market movements. Some analysts believe that tertiary trends reflect market chatter.
Investors can find opportunities by examining these various trends. For example, by reading a crypto chart, you can find a crypto that has a positive primary trend but a negative secondary trend. In this scenario, you might be able to buy the crypto at a low price and sell it when its value has increased.
3. Trends have three phases
According to Dow theory, there are 3 phases to each primary trend:
- Accumulation phase: The accumulation phase is the start of a primary up (or down) trend in a bull (or bear) market. During this stage, smart traders recognize the beginning of a new trend and either accumulate ahead of an upward move or distribute ahead of a downward move.
- Public participation phase: In this phase, the broader market recognizes the opportunity that smart traders have already identified. Because of this, the public becomes more active in purchasing. This leads to market prices either rising or falling.
- Panic Phase: The panic phase is characterized by excessive buying by investors. Market participants begin to distribute their holdings. This means that they are selling their holdings to other participants who have not yet recognized that the trend is about to reverse.
4. The indices must confirm each other
Dow believed that primary market trends seen on one index should be confirmed by trends seen on another. According to the theory, traders should not assume that a new primary uptrend is beginning if one index confirms a new primary uptrend while another remains in a primary downtrend. For example, if India is experiencing a bullish trend, all indices like Nifty, Sensex, Nifty Midcap, Nifty Smallcap and others should rise, confirming the trend seen in each other. Similarly, for a bearish trend, all indices should move down.
5. Trends are confirmed by volume
If the price moves in the direction of the primary trend, volume should increase. On the other hand, if it moves against it, the volume should decrease. The greater the volume, the more likely the movement reflects the true market trend. When trading volume is low, price action may not accurately reflect the market trend. In an uptrend, for example, volume increases with a price increase and falls with a price decrease. In a downward trend, volume increases with falling prices and decreases with rising prices.
6. Trends will persist until definitive signals indicate otherwise
Dow believed that if the market was trending, it would stay trending. For example, if a crypto starts to rise in response to good news, it will continue to rise until a clear reversal occurs. Primary trend reversals can be confused with secondary trend reversals. As a result, Dow suggested that trend reversals be treated with suspicion and caution.
How to read crypto charts?
In most crypto price charts, the main price indicator is a candlestick. Candlestick charts are easy to read. They provide a simple representation of price action. In practice, crypto market charts can be configured to display different timeframes. Here, candlesticks represent each time frame. For example, suppose a crypto trading chart is set to a four-hour time frame. In that chart, each candlestick represents four hours of trading activity. The chosen trading period is determined by the trader’s style and strategy.
A candlestick consists of two main rods:
- The thicker part is called the “Body”. It shows the asset’s opening and closing price.
- The thinner part is called the “wick”. It shows the highest and lowest price points.
On most crypto charts, a green light indicates a bullish move or an increase in price. Meanwhile, a red candle indicates a bearish move or a decline in price. A candlestick almost without a body and long wicks, on the other hand, indicate that neither buyers nor sellers are in control. The size, shape, duration, and color of these candlesticks, as well as the patterns they produce, can provide hints about future price action. They allow analysts, buyers and traders to take positions or make changes based on probability.
Basic indicators and patterns for reading a crypto chart
Indicators
There are many technical indicators to help traders read a crypto chart. Let’s discuss two popular technical indicators:
Moving average
The moving average line (MA) is calculated by averaging daily prices over a given time period. This line moves across the price chart. When trading in real-time crypto charts, moving averages can be adjusted to provide useful signals. Short-term price fluctuations are not usually considered by MA.
Support and resistance level
The levels of support and resistance are crucial to interpreting crypto charts. During a pullback, support levels are price points where crypto, or other assets are expected to stop due to a concentration of buying interest at that level. On the other hand, price levels where there is concentrated selling interest are referred to as resistance levels. Traders often buy at support levels and sell at resistance levels.
Patterns
Traders can infer potential price movements from patterns formed on cryptocurrency charts, in addition to technical indicators. Let’s take a look at 3 popular crypto patterns:
Hammer candlestick pattern
‘Bullish hammer’ is a type of reversal pattern. They are usually formed after a price decline at the bottom of a downtrend. It also indicates that buyers are pouring into the market. The long bottom wick represents the handle of the hammer. And the whole body of light represents the head of the hammer.
Head and shoulders
Head and shoulders patterns are trend-reversing patterns. They can appear at the top or bottom of a trend. A bullish “head and shoulders” pattern may indicate that the crypto price is about to rise. Meanwhile, a bearish “head and shoulders” pattern may precede a price decline. These patterns show a clear tug of war between buyers and sellers.
Wedges
Wedges show a trend that is losing traction in action. In a crypto chart, you can draw “wedges” by connecting the lower points of price movement over time and another line that tracks the price peaks. When the two lines cross from left to right, you have a wedge. A bullish wedge can indicate that the asset is about to take a positive turn. Meanwhile, a bearish wedge can precede a cryptocurrency price spike and subsequent selloff.
Conclusion
Crypto price charts can help you predict price trends and trade more easily. Chart reading should be used to gain a better understanding of the crypto market by learning several techniques and supported by a strong grasp of crypto market fundamentals. However, chart reading is not the only criterion for crypto trading. A thorough study of crypto charts and patterns, combined with an analytical mindset and sufficient practice, can ultimately give traders a competitive edge.
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