Just like technical charts that help traders choose stocks and commodities, cryptocurrency charts are used to make better investment decisions when dealing with cryptocurrencies.
Cryptocurrency charts are graphical representations of historical prices, volumes, and time intervals. The charts form patterns based on past price movements of the digital currency and are used to identify investment opportunities.
Why reading cryptocurrency charts is essential for traders
Reading cryptocurrency charts is essential for traders to find the best opportunities in the market, as technical analysis can help investors spot market trends and predict an asset’s future price movements.
Technical analysis refers to the analysis of statistical trends collected over time to understand how the supply and demand of a particular asset will affect its future price changes.
Reading cryptocurrency market charts can help investors make informed decisions based on when they expect the ups and downs to end.
A bullish move refers to a bullish price move driven by bulls who are the buyers of an asset. A bearish move is a downward movement in price that is trampled by bears, the sellers of the asset.
Technical analysis can help traders assess trends and price patterns on charts to find trading opportunities. The best cryptocurrency charts will help you monitor market movements, but they come with a few caveats.
What is technical analysis?
“Technical” refers to the analysis of past trading activity and changes in an asset’s price, which technical analysts say can be useful predictions of an asset’s future price movements.
It can be used for all assets with historical trading data like Stocks, futures, commodities, currencies, and cryptocurrencies.
Technical analysis was first introduced by Charles Dow, founder, and editor of The Wall Street Journal and co-founder of Dow Jones & Company.
Dow was partially responsible for creating the first stock index, the Dow Jones Transportation Index (DJT).
Dow’s ideas were written into a series of editorials published in The Wall Street Journal, and after his death, they were compiled to develop what is now the Dow Theory.
It is worth noting that technical analysis has evolved over years of research to include the patterns and signals we know today.
The validity of technical analysis depends on whether the market has evaluated all known information about a particular asset, meaning that the asset is fairly valued based on that information.
Traders who use technical analysis, who use market psychology, believe that history will eventually repeat itself.
Technical analysts can incorporate fundamental analysis into their trading strategy to determine whether an asset is worth approaching and supplement their decisions with trading signals analysis to know when to buy and when to sell in order to maximize profit.
Fundamental analysis is the study of financial information affecting the price of an asset to predict its potential growth.
For a company’s stock, fundamental analysis can include analysis of earnings, industry performance, and brand equity.
As technical analysts attempt to identify bullish and bearish price action to help traders make more informed decisions.
Dow Theory and the Six Principles of Dow Theory
Charles Dow helped create the first stock market index in 1884. The creation of this index was followed by the creation of the Dow Jones Industrial Average (DJIA), a price-weighted index that tracks the 30 largest publicly-traded companies in the United States.
Dow believed that the stock market is a reliable means of measuring business conditions within the economy and that through its analysis it is possible to identify key market trends.
The Dow Theory underwent some changes thanks to input from several other analysts, including William Hamilton, Robert Thea, and Richard Russell.
Over time, some aspects of Dow’s theory weakened, including the focus on the transportation sector. Although traders still follow the DJT, it is not considered a primary market index while the DJIA is.
The theory consists of six main components known as the Six Principles of Dow Theory. Let’s look at them individually in the following sections.
The market reflects everything
The first principle of Dow Theory is one of the central tenets of technical analysis: that the market reflects all available information into asset prices and values that information accordingly.
For example, if a company is expected to report positive earnings, the market will value the asset upwards.
The principle approximates today’s Efficient Market Hypothesis (EMH), which states that asset prices reflect all available information and are traded on stock exchanges at fair value.
There are three types of trends in the market
The Dow Theory also suggests that markets experience three types of trends. Primary trends are large market movements and typically last for months or years.
Primary trends can be a bull market, meaning asset prices are rising over time, or a bear market, meaning they are falling over time.
Within these primary tendencies, there are secondary tendencies that can counteract the primary tendency.
Secondary trends can be pullbacks in bull markets, where asset prices fall temporarily, or rallies in bear markets, where prices rise temporarily before continuing their downtrend.
There are also tertiary trends, which usually last a week or a little over a week and are often considered just market noise that can be ignored as they don’t affect long-term moves.
Primary trends have three phases
- The accumulation phase
- The public participation phase
- The excess phase
Traders can find opportunities by examining various trends. For example, during a primary uptrend, traders can use a secondary downtrend to buy an asset at a lower price before it continues higher.
Spotting these trends is difficult, especially given the Dow Theory which states that primary trends have three phases.
The accumulation phase
The first phase, the accumulation phase for a bull market and the distribution phase for a bear market, precedes a countertrend and occurs when market sentiment is still predominantly negative in a bull market or positive during a bull market.
During this phase, smart traders understand that a new trend is beginning and either collect before an up move or distribute before a down move.
The public participation phase
The second phase is called the public participation phase. During this phase, the broader market recognizes that a new primary trend has begun and begins buying more assets to take advantage of bullish price moves, or selling to cut losses on bearish moves. In the second phase, prices rise or fall rapidly.
The excess phase
The last phase is called the excess phase during bull markets and the panic phase during bear markets.
During the flood of panic phase, the general public keeps speculating while the trend is about to end.
Market participants who understand this phase start selling in anticipation of a primary bear phase or buying in anticipation of a primary bull phase.
While there are no guarantees as to the consistency of these trends, many investors consider them before making their decisions.
The indices must correlate
The fourth principle of Dow Theory states that a market trend is only confirmed when both indices indicate that a new trend is beginning.
According to the theory, if one index confirms a new primary uptrend while another remains in a primary downtrend, traders should not assume that a new primary uptrend is beginning.
It is worth noting here that the main Dow indices at the time were the Dow Jones Industrial Average and the Dow Jones Transportation Average, which of course tended to be correlated since industrial activity at the time was heavily linked to the transportation market.
Volume confirms trends
The fifth principle of Dow Theory states that trading volume should increase when an asset’s price moves in the direction of its primary trend and decrease when it moves against it.
Trading volume is a measure of how much an asset has traded over a given period of time and is seen as a secondary indicator where low volume signals a trend is weak, while large trading volume signals a trend is strong.
When the market sees a secondary downtrend with low volume during a primary uptrend, it means that the secondary trend is relatively weak.
When the trading volume is significant during the secondary trend, it shows that more market participants are starting to sell.
Trends are valid until a reversal is clear
Finally, the sixth principle of Dow Theory suggests that trend reversals should be treated with suspicion and caution since reversals in primary trends can easily be confused with secondary trends.
What are candlestick charts?
Cryptocurrency market trends can be viewed and analyzed in a variety of ways, with different types of charts available to traders. Crypto candlestick charts offer more information due to the nature of candles.
Crypto candlestick charts show time on horizontal access and private data on the vertical axis, just like line and bar charts.
The main difference is that candlesticks show whether the market price movement has been positive or negative over a given period and to what extent.
Cryptocurrency market charts can be configured for different time frames, with candlesticks representing this time frame.
For example, if a cryptocurrency trading chart is set to a four-hour timeframe, each candle represents four hours of trading activity. The trading period chosen depends on a trader’s style and strategy.
A candlestick essentially consists of a body and wicks. The body of each candle represents its opening and closing prices, while the upper wick represents how high a cryptocurrency’s price has reached during that period, and the lower wick represents how low it has reached.
Likewise, candlesticks can be of two different colors: green or red. Green candlesticks show that the price has increased over the period under consideration, while red candlesticks show that the price has fallen.
The simple structure of candlesticks can provide users with a lot of information. Technical analysts can use candlestick patterns to identify possible trend reversals, for example.
Cryptocurrency traders should be aware of bullish and bearish candlestick patterns.
A long wick at the top of a candle’s body, for example, can indicate that traders are taking profits and that a sell-off may occur soon.
On the contrary, a long wick at the bottom can mean that traders are buying the asset every time the price falls.
Similarly, a candle where the body takes up almost all of the space and has very short wicks can mean there is strong bullish sentiment when it’s green, or strong bearish sentiment when it’s red.
On the other hand, a nearly disembodied candle and long wicks signal that neither buyers nor sellers are in control.
Support and Resistance levels
Reading live crypto candlestick charts is easiest when using support and resistance levels that can be identified using trend lines. Trendlines are lines drawn on charts that connect a range of prices.
Support levels are price points during pullbacks where cryptocurrencies or other assets are likely to stall due to a concentration of buying interest at that level.
Resistance levels are price points where there is concentrated selling interest. The concentrated buying and selling interests make these levels difficult to clear.
Support and resistance levels can be identified using trend lines as they make it easy to identify crypto chart patterns.
An uptrend line is drawn using the lowest and second-lowest lows of a cryptocurrency over a given time period. Levels touching this trendline are considered support.
Using the cryptocurrency’s highest and second-highest highs, a downtrend line is drawn, with levels touching this line being considered resistance levels.
As the name suggests, downtrend lines are used during downtrends while uptrend lines are used.
Different strategies can be used based on trend lines and support and resistance levels. For example, some technical analysts simply buy near uptrend line support and sell near downtrend line resistance.
Oftentimes, the price of a cryptocurrency can move sideways within a reasonably stable range. For example, between September and November 2018, Bitcoin (BTC) traded between $6,000 and $6,500 before falling to $3,200 in December 2018.
In this case, resistance levels are at the top of the range while support levels are at the bottom of the range.
A breakout can occur when the price of the cryptocurrency falls below this range with a strong move, or a breakout when it rises with a strong price move.
Support and resistance levels can also be determined using long-term moving averages. These are common technical indicators that smooth price data by creating a constantly updated price average.
What are moving averages?
A moving average (MA) is one of the most commonly used types of technical indicators and it essentially cuts out the noise by generating an average price for a specific cryptocurrency.
Moving averages can be adjusted to time periods and provide useful signals when trading live cryptocurrency charts.
The most commonly used moving averages are for periods of 10, 20, 50, 100, or even 200 days. This makes market trends more visible, with a 200-day moving average seen as a support level during an uptrend and a resistance level during a downtrend.
There are different types of moving averages used by traders. A simple moving average (SMA) simply adds up the average price of an asset over a given period and divides it by the number of periods.
A weighted moving average (WMA) gives more weight to recent prices to make them more responsive to new changes.
Likewise, an exponential moving average (EMA) gives more weight to recent prices but is not consistent with the rate of decline between a price and its previous price.
Moving averages are lagging indicators as they are based on past prices. Traders often use moving averages as signals to buy and sell assets, with the periods depending on their time frame.
The 50-day and 200-day moving averages are closely watched on cryptocurrency trading charts because when the 50-day SMA breaks below the 200-day SMA, a death cross forms, indicating an impending price drop. If the 50-day SMA breaks above the 200-day SMA, a golden cross will form, which indicates a price increase.
Other important technical indicators
Here we will look at some other popular technical indicators.
On-balance volume indicator (OBV)
The balance volume indicator is a technical indicator that focuses on the trading volume of a cryptocurrency.
It was founded by Joseph Granville on the belief that trading volume is one of the main drivers of price movements in the markets.
The OBV is a cumulative indicator that rises and falls based on the trading volume of the days included in a given period.
It is used to confirm trends as traders should see rising prices accompanied by rising OBV when analyzing live cryptocurrency charts. Falling prices should be accompanied by a falling OBV.
OBV is calculated in several ways as follows:
Moving average convergence divergence (MACD)
Moving Average Convergence Divergence is an indicator that measures the difference between the 12- and 26-day EMAs to form the MACD line and is used to identify buy and sell signals.
It is an oscillator, which means it is an indicator that oscillates above and below a central line.
When the 12-day EMA breaks below the 26-day EMA, the MACD shows a sell signal, while the opposite signals that it is time to buy the asset in question. The greater the distance between the two lines, the stronger the MACD value!
The indicator also has a signal line, which is a 9-day EMA. The MACD crossover above the signal usually implies it’s time to buy, while the crossover below it implies it’s time to sell.
The MACD indicator also includes a histogram to measure the difference between the MACD and the signal line.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator used to measure whether an asset is overbought or oversold.
The RSI is plotted as an oscillator, which is a line between two extremes and can range from 0 to 100.
The indicator uses a 14-day time frame and a cryptocurrency is considered oversold when its value falls below 30 and overbought when its value rises above 70. Being overbought is a sell signal while being overbought is a buy signal.
Bollinger Bands were invented by a man named John Bollinger in 1983, Bollinger Bands help traders to identify short-term price movements in trading instruments, including cryptocurrencies.
Bollinger Bands are created using a 20-day moving average and adding and subtracting a standard deviation from the moving average.
Bollinger Bands parameters can be adjusted, with the bands expanding and contracting based on the price of the cryptocurrency.
The bands show periods of greater or lesser volatility and should not be used in isolation, but used with other indicators as well.
If a cryptocurrency’s price moves above the upper band, it is considered overbought, while a move below the lower band is considered oversold.
Bollinger Bands are based on the concept that periods of low volatility are followed by periods of high volatility, which means that if the bands break apart during periods of high volatility, the ongoing trend can come to an end.
Likewise, when the bands are close together, the asset can gain for a period of high volatility.
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