The cryptocurrency market, just like other financial markets, requires several important skills to be traded. One of such skills is knowing how to read crypto charts. A crypto chart, also called a crypto graph, is a chart that is used to analyze the cryptocurrency market. Crypto charts are formed by the price movement of cryptocurrency assets and show the historical prices, volumes, and time stamps. The skill needed to read crypto charts is part of a collection of activities called technical analysis (TA). Notably, crypto charts follow the financial markets chart developed based on theories introduced by Charles Dow.
So why should investors go through the stress of reading crypto charts? In simple words, to make profits!
The major purpose of reading crypto charts is for traders to find the best opportunities to enter a trade in the market. Traders also read charts to find the best and most profitable exit from trades and determine their long-term actions. Charts are essential to crypto trading and require a certain understanding to assure successful reading and interpretation of price movement.
Let's dive deeper into the concept of technical analysis.
What is Technical Analysis
Technical analysis is the sum of methods and procedures used to analyze financial markets to predict the movement of assets. Crypto technical analysis means predicting a cryptocurrency pair's likely price movement (also called price action) on crypto graphs. Technical analysis takes historical data of price movement at certain points and times to predict how prices will behave at similar points.
Crypto traders use technical analysis for various reasons, such as understanding the price behavior of digital asset pairs, predicting future price movements, and finding the best entry and exit points for their trades. For example, knowing how to read bitcoin charts is a skill that requires technical analysis.
Charles Dow first introduced the concept of technical analysis. He became famous for being the co-founder of the Dow Jones and Company and the founder and editor of one of the foremost financial journals, the Wall Street Journal. Dow sent out his thoughts and ideas on financial analysis as an editorial series compiled as the Dow Theory after he died.
The Dow Theory gradually developed into the technical analysis as we know it today, wherein traders and analysts try to predict the market based on past behavior to find bullish and bearish movements that they can ride. A close concept is a fundamental analysis that considers the types and impact of news events on the price movement of financial assets. Fundamental analysis is often used as a complementary strategy in technical analysis and is an important skill to learn if you want to know how to read crypto chart.
Let’s now take a closer look at the Dow Theory.
What is the Dow Theory?
Dow created the Dow Jones Industrial Average (DJIA), a price-weighted index that he used to track the financial conditions of the market. The Dow Jones Rail Index is also based on the Dow Theory. Both indexes are considered accurate reflections of economic and business conditions within the financial market. Over a century later, financial and technical analysis has its roots in the Dow Theory. The Dow Theory says that if one of its averages increases beyond a previous important high point and that an increase in another average also accompanies the increase, then the market is in an upward trend.
As the Dow Theory looks at previous data to understand possible future movements, it can project the current market prices on future data. There are six principles of the Dow Theory that form the core of reading crypto charts and knowing how to read bitcoin charts.
6 Principles of Dow Theory
Here are the six principles of DOW theory that make it possible to read crypto trading charts.
- The market discounts everything
- There are three primary kinds of market trends
- Primary trends have three phases
- Indices must confirm each other
- Volume must confirm the trend
- Trends persist until a clear reversal occurs
These six principles were compiled after Dow passed away and became known as the Dow Theory. The Dow Theory has three phases:
The Major Market Trends Have Three Phases
The Dow Theory has three phases. These are:
- The accumulation phase (accumulation for bullish market and distribution for bearish market): This phase is just before a reverse trend begins. The market sentiment is mostly negative for upward trends and positive for downward trends. Traders can accumulate or distribute assets in readiness for upward or downward trends.
- The public participation phase: In this phase, more traders in the market begin to react to the trend and jump in. Traders begin to accumulate assets to maximize profits or sell assets to cut losses.
- The spreading phase: In this phase, most traders are caught up in speculations while the trend is about to end. Again, the smart traders begin to accumulate or distribute assets in readiness for a reversal. There is one important concept that you must understand to predict cryptocurrency trends chart.
Support and Resistance
Support and resistance are important concepts in technical analysis. They are often found together and are sometimes complementary, depending on the focus of the analysis. Support and resistance levels are drawn using trend lines that connect successive price points on a chart. The best crypto trading charts analysis incorporates support and resistance to find trading opportunities.
- Support: A support level is a lower price point or level at which buyers' concentration is heaviest, and the price tends to bounce higher during pullbacks.
- Resistance: A resistance level is an upper price point or level at which sellers’ activity is concentrated and at which price tends to bounce lower during pullbacks.
It is necessary to draw trend lines connecting the major lower and higher price points when performing technical analysis for trading charts crypto.
Moving on, let’s look at another important tool for technical analysis.
Relative Strength Index (RSI)
The relative strength index is an indicator that accounts for the magnitude of price change, measuring the overbought and oversold regions. It is one of the most widely used cryptocurrency technical analysis charts indicators. The RSI is shown as an oscillator that moves between the 0 and 100 mark, the oversold and the overbought regions, respectively. The most important things to remember when reading the RSI for charting crypto are:
- The RSI uses a 14-day timeframe.
- When the asset price goes above 70 and below 30, it indicates overbought and oversold conditions.
- The overbought and oversold conditions indicate a sell and buy signal, respectively.
There is another unique consideration that traders must account for during analysis.
Cryptocurrency Market Cap
The market capitalization of a cryptocurrency asset is the total value of the asset. It is calculated by multiplying the currency price of the asset by the total number of coins in circulation. The market cap. of an asset is an important factor in making decisions to enter or exit trades. The more constant the value of capitalization, the more stable the price of the cryptocurrency asset will be. This is reflected on crypto currency charts. An increase in asset capitalization will cause an increase in the value of the coin and vice-versa. Recall the most recent bitcoin crash resulting from a huge drop in the market capitalization after holders sold over $1.5 billion worth of bitcoin.
Now that we know the basis and basics of crypto charts, let's dive into another important aspect.
Types of Charts and Patterns You Need to Know
A Crypto graph is made up of different chart patterns reflecting price movement. It is important to recognize these patterns when trading.
Japanese Candlestick Charts
Japanese candlesticks were developed in the 18th century by Munehisa Homma, a Japanese rice trader researching a way to show rice prices. There are two types of candlesticks, the bullish candlestick and the bearish candlestick. The candlestick structure makes it easy for analysts to see the previous opening and closing prices and the momentum of price movement within a particular time. A candlestick typically has two parts; the body and whiskers (wick), although some candlesticks don't have whiskers.
The bullish candle shows an upward price movement. In a bullish candle, the price opens from the lower whisker and closes at the upper whisker above the body. The size of the body shows the buyers’ momentum.
- The upper whisker shows the close and high prices
- The lower whisker shows the open and low prices
The bearish candle shows a downward price movement; the price opens from the upper whisker and closes at the lower whisker. Again, the size of the body shows the sellers’ momentum.
- The upper whisker shows the high and open prices
- The lower whisker shows the low and close prices
Candlesticks form different patterns. There are two categories of candlestick patterns that form on charts.
Bullish and Bearish Patterns
Candlesticks can form either bullish reversal patterns or bearish reversal patterns. It is important to recognize them when carrying out crypto graph analysis.
- Bullish reversal pattern: A bullish reversal pattern indicates that a bearish or downward trend will end, and a bullish trend may begin. Bullish reversal patterns occur at the middle or end of a bearish trend. The bullish reversal pattern can be a single candlestick or multiple candlesticks. There are many bullish reversal patterns, but they typically have a long bullish candle following a small bearish candle.
- Bearish reversal pattern: Bearish reversal patterns indicate that a bull run is ending, and a bearish pattern may come up. Bearish reversal patterns occur at the middle or end of bullish trends. Again, there are many bearish reversal patterns, but only a few are important to memorize for analyzing the crypto market graph.
The three most important candle patterns to memorize are:
Shooting Star Candle Pattern
The shooting star candle pattern is a bearish reversal candlestick pattern that occurs at the top of a bullish or uptrend. The shooting star pattern is formed when the asset’s price increases, is rejected, and finally closes near the open price. The candle formed has a small body, a shorter lower whisker, and a longer upper whisker. The formation of a shooting star pattern may signal to sell the asset.
The shooting star is one of the best crypto charting patterns for taking sell trades.
Head and Shoulders
The head and shoulders pattern is a bearish reversal pattern that forms as three consecutive peaks, with the first and last peaks equal or nearly equal in height and the middle peak being higher than the two. The pattern is typically found near the end of a bullish trend and is one of the strongest indicators of an upcoming bearish trend. A reverse pattern called the inverted head and shoulders signals the end of a bearish trend and the beginning of a bullish trend. It is necessary to memorize the head and shoulders pattern to know how to read cryptocurrency charts.
Wedges patterns are formed when trend lines converge into an acute angle. There are two types of wedges, rising and falling wedges; they occur in the middle of a trend and signal a pause in either an uptrend or a downtrend. The wedge pattern is often interpreted as a pause in trend but can be bullish or bearish if found in an uptrend with a downslope or a downtrend with an upslope. You can learn how to read crypto prices easily with the wedge pattern.
Crypto trading can be profitable if you have the right knowledge, skills, and mental attitude. The first step is to learn the basics, such as crypto chart reading. Once you know how to read cryptocurrency charts, planning your trades and maximizing opportunities is easier. You'll also need to know the concept of support and resistance and memorize certain candlestick patterns such as the bearish and bullish patterns, the head and shoulders pattern, the wedge pattern, and the shooting star pattern. Although candlestick patterns are mostly accurate, it is best to confirm their signals using indicators.
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