How to read crypto charts?
Cryptocurrencies are taking the world via a whirlwind. The oldest and most popular one is the Bitcoin. Moreover, it’s highest ever market value almost touched $20,000 in late 2017. Other players such as Ethereum, TRON, Ripple, Litecoin, etc. have also gained a considerable market share and present investors with an opportunity to trade and earn with this emerging technology.
Common mistake rookie traders make is trading with intuition, without knowing how to use crypto charts. They buy when everyone is buying, the demand surges while the supply remains stagnant and, hence, the price goes up. Later, they sell when everyone else is selling, leading to over-supply and bringing down the price. This exercise makes an investor buy at a high price and sell at a lower price, and they lose a lot of money in the process.
Markets are essentially about timing. You might have the right idea, intuition, or even knowledge about some fundamental analysis by reading crypto charts to back a decision of purchasing a cryptocurrency. But if it’s at the wrong time, you are destined to lose money. At the same time, you need to be prudent about when you exit the market. Otherwise, you lose money, which otherwise you could earn with just a bit of patience.
A major risk in investing in cryptocurrency is its volatility. However, risks also present us with opportunities, such as making substantial short-term gains. Bitcoin traded anywhere between $5000 and $12000 from August’19 to July’20, and it grew about 2,000% in the year 2017 alone when it touched its all-time peak.
There are a lot of cryptocurrency charts with indicators available freely on the internet. However, the task is to understand how to read them. For better clarity, we will limit the scope of this article to Bitcoin for fundamental analysis and present some basic techniques on reading Bitcoin charts.
1. Trend Lines
The most simple and frequently used technique for reading crypto charts is trend analysis. The trend is a general direction in which anything is developing or changing. Through charts, investors can identify if the price of Bitcoins shows a tendency to go up or go down. A trend forms by joining any two points on the chart; however, a good trend line must contain at least 3 data points.
In the above picture, the green line on the chart shows an upward moving trend. A succeeding point must be higher than a preceding point for an upward moving trend to be true. An upward trending line has a positive slope and proves that as the prices rise, the demand for Bitcoin rises as well. This trend shows a positive outlook for the future, so investors can move ahead and buy.
Contrary to an upward trending line is a downward trending line. A downward trending line has a negative slope and indicates a supply surge leading to a decreased price. If the price breaches this downward trending line, it shows a potential change in market behavior. There could be multiple trends on the same chart as well. For example, look at the following chart:
In a normal circumstance, a chart spanning more than a year is likely to have multiple trend lines. The convergence of this line explains how the asset is behaving and helps in making predictions. The angles and steepness tell us the intensity and the pace of the change in prices. If the slope is high for an upward trend line, the validity of the line reduces, and a turnaround is expected. The flatter the angler, the more reliable and lasting is the trend.
Preparing trend lines is extremely easy and fast and could be used to make some quick predictions. However, the predictions are not adequately accurate, and other techniques offer much better capabilities. A much better but a bit more tedious approach is the “Candlestick charts” method.
2. Candlestick Charts
Candlestick charts are probably the best technical indicators for cryptocurrency. Before getting on with these charts, let’s understand the essential elements which make up this chart.
- Time selection: This feature helps you to select a time frame for each candlestick. It could range from 5 minutes, 10 minutes, 1 hour to even a month or year.
- Volume: It indicates the number of transactions and the intensity of trading activity with reference to a particular time frame. These bars help in understanding the buying and selling pressure. A green bar indicates a buying interest, and a red bar shows a selling or a decrease in interest in buying the asset. The higher the bar, the higher the intensity.
- Types of Candlesticks: There are two main types, Bearish and Bullish. A bearish candlestick is red and indicates that the price of the asset has decreased during the given timespan, while a bullish candlestick is green in color and shows an increase in the price of the given asset. For both candlesticks, the thick sections represent the opening and closing prices, and the wick represents the high and low points of the asset in a given period.
After knowing the key elements of a candlestick, we must understand the patterns they create and the stories they weave along with it.
The above is a 3-month candlestick chart for Bitcoin with a time frame of about 1.5 days for each candlestick. According to the chart, on 27th July, there is a long bullish candlestick indicating that the market price increased by almost 1300 on that single day. Also, the volume bar indicates green portions for an extended duration of time. Such an event is not frequent, and shows that Bitcoin has gained interest in the market and prices are driven by demand. If there is no instant price correction (in terms of sale), then it is expected that Bitcoin would stay around the new high or continue an upward trending line for the near future.
Consequently, somewhere around 2nd August, the candlestick shows long wicks on both sides while the thick part is restricted to a small portion. This phenomenon shows that the open and close prices were near to each other, but during that same time frame, Bitcoin fluctuated in high amounts.
To succeed in the financial trading market, an investor must know how to read cryptocurrency charts. Trend lines and candlestick charts are two simple ways through which beginners can kick-start their trading journeys, perform better in markets, attain more knowledge, learn new tools, and practice with real Bitcoins.