How to Read Crypto Charts - Full Guide
What is the correct way to read crypto charts?
Have you ever wondered how people know when a crypto asset is in the ‘buy zone’ or the ‘sell zone?’ These people have taken time to study crypto charts, and they can recognize the patterns that serve as pointers in the market.
In predicting the price action of any crypto asset, you can carry out technical, fundamental, and sentimental analyses.
To succeed in crypto trading, it is important that you learn how to read charts.
The charts will help you know the best time to enter the market and when to exit for profits or minimize losses.
Technical analysis is not only restricted to the crypto; you can also use it for stock and forex trading.
Charles Dow was the first person to use the term ‘technical analysis.’ He propounded a theory that is fundamental to your success with crypto charts.
Six Tenets of Dow’s Theory and its Application in Crypto
Understanding these tenets will guide you in making the right decisions when reading your crypto chart.
The theory comprises six parts, and each helps you understand a particular aspect of the market and the right interpretation of your crypto chart. The six parts include the following:
1. The market moves in three distinct ways
Dow's theory explains that the market exhibits three movements or trends. The main market movement can last for a year or even more. This particular movement can either be a bull market or a bear market. Then we have the secondary movement or medium swings. This movement occurs within the main market movement. You can notice it when the price of assets starts rallying (going up) in a bear market or when prices crash in a bull market. The third market movement is the tertiary movement or short swings. They often occur within a space of a week and are mostly ignored as noise in the market, which has no impact on the long term.
2. There are three phases in the market.
As a crypto trader, you can find opportunities by examining multiple trends. For instance, you can buy a crypto coin at a cheap price during a bullish primary market movement by identifying bearish medium swings. The first phase is the accumulation or distribution phase for a bull or bear market respectively. You will notice this phase when the market sentiment is generally negative during a bull market or positive in a bear market. During this phase, smart and intelligent crypto traders know that a new market movement is incoming, and they can either increase their portfolio holding ahead of a rally or sell off their assets in anticipation of a market crash.
The second phase is when everyone already know about the new trend. At this point, the public can either start amassing more coins take advantage of the bull run or sell off to cut their losses in a bear market. In this phase, the price can rise or fall in the blink of an eye.
The third phase is characterized by panic if the market is in decline or the feeling of abundance if the market is bullish. Here, most of the public keeps speculating while the trend is ending. Crypto traders who understand what is happening will sell their holdings in anticipation of a market decline or buy more assets if they expect a market rally Although these trends don't always work as envisaged, investors pay attention to them before making any decisions on the market.
3. The market responds to every news.
You can rest assured that price knows it all. Every new information is rapidly reflected in the price. The market takes everything into consideration, hope, fear, history, etc. This theory is akin to the Efficient Market Hypothesis (EMH), which states that the asset price reflects all available information and will trade at its fair value.
4. All market indices must correlate
For a new market trend to be valid, all the market averages must confirm each other. For example, a market index can authenticate a new primary upward trend while another index confirms a primary downward trend. In that case, you should not take any of the confirmations to be valid.
5. Volume authenticate trends
According to Doe, trends in prices can be confirmed by volumes. The theory explains that if the price of an asset is moving toward the direction of its primary trend, the trading volume of the asset should increase. This is because the trading volume shows how much an asset has been traded over a particular period. Conversely, if there is a low trading volume, it shows that a trend is weak and vice versa.
6. Every trend is valid until the reversal is clear
Always believe that a trend is still in action until you have seen proof of a reversal. Unfortunately, reversals in trends are often difficult to predict. For instance, many traders will confuse a reversal in a primary trend with a secondary trend.
Understanding How Crypto Charts Work
To understand how crypto charts work, you need to know the three major sections of a crypto chart and what they are. They include the Candlesticks, the Indicators, and the Order Book.
The candlesticks show you the price action of a crypto asset over a specified timeframe. There are green and red candlesticks, where green tells you that the price is on the rise while red indicates price decline. The candle wicks show the highest and lowest prices during each time frame. You view your crypto charts in timeframes, and the candlesticks represent each time frame. For example, if you set a time frame of 2 hours, the candlesticks will represent 2 hours of trading activity.
The composition of the candlestick at every point in time has an underlying meaning in the market. For example, if the candlestick has a long wick at its top, it may imply that traders are taking profits, and a sell-off might be imminent. However, if the long wick is at the bottom of the candlestick, it may mean that as the price drops, more traders buy. Additionally, if a green candlestick has very short wicks with the body occupying almost all the space, it might imply that traders believe the market is getting ready for a bullish run. On the other hand, if the candlestick is red with short wicks and a body occupying almost all the space, then there is a strong bearish sentiment in the market.
These indicators are mathematical formulas that you can use to identify the price movement of a crypto asset. Some of these notable indicators include the following:
The moving average
The moving average indicator helps you to generate an average price for any crypto asset in the market. When trading crypto charts in real-time, you can adjust the moving average to periods to provide you with useful signals. Some of the averages that most people use include 10, 20, 50, 100, and even 200-day periods. In addition, we have the simple moving average (SMA), weighted moving average (WMA), and exponential moving average (EMA). For example, if the 50-day SMA crosses below the 200-day SMA, it forms a death cross, suggesting a potential price crash. On the other hand, when the 50-day SMA crosses above the 200-day SMA, it forms a golden cross which suggests a potential price rise.
On-balance Volume indicator (OVB)
This indicator strictly focuses on the trading volume of crypto assets. When looking at a live crypto chart, rising prices are often accompanied by a rising OBV, and a falling OBV accompanies falling prices. You can calculate the OBV depending on the relationship between the closing price of an asset and its closing price the day before. If the closing price is higher than the closing price the day before, the formula of OBV becomes (previous OBV + current day's volume). Additionally, when the asset's closing price is the same as its closing price the day before, OBV becomes (Previous OBV + 0) when the asset's closing price is below the previous day's closing price (OBV = Previous OBV-current day's volume).
The moving average convergence divergence (MACD)
This is an indicator that helps you to identify buy or sell signals for an asset. It measures the difference between the 12-day and 26-day EMAs by creating the MACD line. When the 12-day EMA crosses above the 26-day EMA, the MACD line shows a buy signal, and it becomes a sell signal when the 12-day EMA crosses below the 26-day EMA.
Relative strength index (RSI)
The RSI indicator will help you to know whether a crypto asset is being overbought or oversold. It is a line between two extremes, ranging from 0-100. The RSI uses a 14-day timeframe. When the value falls below 30, it indicates that the asset is overbought, while above 70 shows the asset is oversold. It is a sell signal when the asset is overbought and a buy signal when it is oversold.
The Bollinger band is an indicator that will help you to identify short-term price movements of crypto assets. They are created using the 20-day moving average and adding and subtracting a standard deviation from the moving average. Bollinger bands function on the basis that periods of high volatility in the market are followed by periods of low volatility. When the bands separate during a period of high volatility, then a low-volatility trend is likely to commence. Similarly, when the Bollinger bands are close together, the asset may be set for a period of high volatility.
The order book
The order book shows you the different prices at which crypto assets are being bought and sold. You can use the order book to identify support and resistance levels for a crypto asset.
Making Smart Trades with Crypto Charts
The crypto charts are there to guide you in the market, but you need to know how to make the best of it at all times. Here are some essential tips to guide you:
Always consider the overall market trend
When reading a crypto chart, ensure you look at the overall trend to know where the market is headed. If the overall trend is downward, you should expect the price to continue to crash and vice versa.
Keenly observe the support and resistance levels
If the price of an asset falls below the support level, it is likely to continue falling until it hits another support level below. Similarly, when the price breaks a resistance, it will likely continue rising until it hits a higher resistance level.
Always take note of patterns
While reading your crypto charts, you must take note of the patterns in the trend. For example, a double-bottom pattern indicates that the price is about to go up, while a head and shoulder pattern shows that price will likely crash.
Avoid getting caught up in the details
When you are reading a crypto chart, you need to understand that the big picture takes precedence over small details. So, always avoid getting caught up in these little details but be focused on the big picture.
Ensure you have a plan
This is essential if you want to be profitable in your crypto trading. You need to always have your entry and exit points in the market. Additionally, it is also important to have stop-loss and take-profit levels. Having a plan will help you not to take an impulsive action that can liquidate your portfolio.
Reading and understanding crypto charts demands that you practice consistently. With every trade you execute, you will gain more knowledge and understanding of the charts and help build your confidence as a crypto trader.