Introduction

Traders who are interested in finding the best opportunities in the cryptocurrency market should possess the essential skill of reading charts. This skill involves using historical statistics and metrics to analyze and predict the current and future market movement of a coin. Though it may appear daunting at first, analyzing the confusing lines and shapes on a chart becomes easier once you know where to start. This article aims to provide traders with tips on how to read charts effectively. We will cover everything you need to know to make sense of the data and use it to your advantage.

What Is Technical Analysis?

Image Source - ChartSchool

Understanding how to read cryptocurrency charts is a fundamental skill in technical analysis. However, before delving into the nitty-gritty of chart analysis, it’s important to understand what technical analysis is all about.

Technical analysis is a trading technique that traders utilize to identify the next market trend as early as possible. It’s called “technical” because it involves a range of techniques that a trader must employ. To conduct technical analysis, a trader must analyze an asset’s past trading activity and price fluctuations to predict the asset’s future price movement. It is a technique that allows traders to take advantage of potential rallies by “riding the trend.”

Technical analysis is not limited to cryptocurrencies alone; it can be used for any asset with historical trading data, such as stocks, futures, commodities, and currencies.

What Is Market Movement?

The cryptocurrency market follows trends and these trends determine how the market moves. Market movement in cryptocurrency is divided mainly into two: The Bullish Movement and The Bearish Market Movement.

The Bullish Market Movement

The bullish market movement refers to an upward price trend in the market, accompanied by an atmosphere of positivity. Bulls, or asset buyers, drive this movement. According to the Dow Theory, a market is considered bullish when prices have increased by at least 20%. In a bull market, traders are advised to buy more.

The Bearish Market Movement

On the other hand, a bearish market movement indicates a downward price trend and a sense of negativity. Bears, or asset sellers, are responsible for this movement. According to the Dow Theory, a market can be classified as bearish when prices have dropped by at least 20%. In a bear market, traders are encouraged to sell.

To take full advantage of the market’s opportunities, traders must comprehend the principles of technical analysis and acquire expertise in reading charts.

How To Analyze Cryptocurrency Charts

When it comes to crypto trading, you can display charts in different timeframes depending on your intention. You can choose to view a graph for fifteen minutes, one hour, twenty-four hours, a whole week or even the entire existence of a project. The timeframe you choose can reflect your trading style. For instance, day traders usually focus on short periods so that they can take advantage of the best opportunities within the day. Swing traders may want to look at a longer duration, such as a couple of days or a week, to detect price movements. On the other hand, long-term investors may look at periods of months or years.

It’s important for every trader to familiarize themselves with the different ways to visualize crypto charts.

The Line Charts

The line chart is a fundamental price chart in technical analysis that visualizes price changes over a chosen time period on a simple line. There are two types of line charts: logarithmic scale and linear scale (also known as arrhythmic scale).

The Linear Scale

Image Description - The linear chart (Bitcoin Price)

The linear scale displays price changes in absolute values. In a linear chart, the price scale is divided into equal parts, making it easier to judge the speed of price changes.

The Logarithmic Scale

Image Description - The logarithmic chart (Bitcoin Price)

The logarithmic scale is based on percentage changes in price. Although logarithmic and linear charts look similar, the only difference is the vertical scale. In linear charts, price is cut off equally, whereas in log charts, the price scale is divided by percentage changes. Therefore, two price changes that differ in absolute value but are equal in percentage will be represented by the same vertical shift on the log scale. The logarithmic scale is better suited for examining trends and the overall price amplitude.

Typically, the volume indicator is shown below the charts. The volume indicator illustrates how much cryptocurrency has been traded during that period. When combined with a price chart, a volume indicator can provide a clearer picture of the market. For instance, if both the price and the volume are increasing, it may suggest that people are rushing to buy, and the rally may continue.

On the other hand, if the price rises but the purchasing power cannot accelerate, it means that traders are still sceptical of a bubble.

The Candlestick Pattern

Image Source - The Data Visualization Catalogue

Another chart that you might have heard quite often is candlestick pattern.

Candlestick patterns are commonly used by crypto traders to gain more informative data about price moves and volumes, including opening and closing prices and the highest and lowest levels within one session.

Image Source - Incredible Charts

The candlestick chart is made up of candles, each divided into three parts: the upper tail, lower tail, and body. The upper tail presents the highest price traded, while the lower tail represents the lowest price. It is so popular to see candlestick dashboards with subsequent columns full in green and red. Green illustrates an uptrend (bullish), while red is for a downtrend (bearish). There are different types of candlesticks, but in this article, what we would be emphasizing on is the most common patterns a trader will see while trading.

The Hammer and Reverse Hammer Candlestick Pattern

Image Source - LiteFinance- The Hammer Candlestick Pattern

As a trader, it’s essential to understand the different candlestick patterns that occur in both bull and bear markets. In a bull market, two common patterns are the hammer and reverse hammer. These patterns are represented by green candles, with the former having a thick column on top and a tail below, resembling an uptrend after a downtrend. The latter, however, has a thick column at the bottom, indicating a stable uptrend throughout the session.

Image Source - LFT- The inverted or reverse hammer candlestick pattern

The Hanging Mans and Shooting Star Candlestick Pattern

Image Source - Medium

In contrast, bear markets have the hanging man and shooting star candlestick patterns. The hanging man has a red thick column on top, indicating a potential recession after a bull market. The shooting star, on the other hand, has red at the bottom and warns about a mainstream downtrend movement.

However, as a trader, it’s not enough to rely solely on candlestick or line charts. There are some other indicators and techniques that can help you capture the trend over a set period.

Support and Resistance Levels

As we have already discussed, studying only the line chart or candlestick chart of a single day is not enough to understand the trend. There are other indicators that can help you capture the trend over time. Two basic indicators that you might hear often in trading are support and resistance.

When it comes to reading live cryptocurrency candlestick charts, support and resistance levels make it much easier. The support line indicates the bottom of a downtrend, where the price is likely to bounce back and push the value up. In simple words, support is the area where sellers find it difficult to bring the price down. This area can put a stop to a downward trend from continuing. It can be considered as the floor that supports the price.

Image Source - Investopedia

On the other hand, the resistance line refers to a level on the top, where an uptrend may stop. Resistance is the ceiling. In this scenario, sellers increase their selling pressure, making it difficult for the asset price to go beyond that level. This can stop an upward trend from continuing upward. Technically, the support line indicates the lowest price so traders can buy the dip, and resistance is the highest price in a bull market for doing that. After that, an inverted trend will take place, making the market balanced again.

It is important to note that support becomes resistance when broken through, and resistance becomes support when broken through.

The Moving Average

Image Source - Investopedia

Moving averages are a commonly used technical indicator that generates an average price for a specific cryptocurrency. There are different types of moving average methods such as the Simple Moving Average (SMA) and the Weighted Moving Average (WMA).

The Simple Moving Average (SMA)

The SMA is a simple method that calculates the average price of a coin over a particular period by summing up the average price and dividing it by the number of periods. Simple moving averages are useful for showing trending lines by connecting different averages and market prices.

The Weighted Moving Average (WMA)

Thee WMA gives more weight to recent prices. This makes recent prices more responsive to new changes, making the WMA more advanced than the SMA. There is also an advanced variant for SMA and WMA called Moving Averages Convergence Divergence (MACD).

The Moving Average Convergence Divergence (MACD)

Image Source- Commodity

The MACD mainline is generated by subtracting two of the 12-day and 26-day Exponential Moving Averages (EMAs), plus a signal line from a 9-day EMA. Each MACD creates a histogram based on the difference between the two EMAs.

When the MACD line is above the zero line, it means that there is an uptrend. Conversely, when it’s below the zero line, it means that there is a downtrend. When the MACD line is above the signal line, it generally indicates the entry point, while the opposite situation might suggest that it’s time to exit the market.

Image Source - Commodity

Bollinger Bands

Another indicator that uses the simple moving average is Bollinger Bands. They help traders identify short-term price movements in the price of a coin. Bollinger bands add an upper and lower band by standard deviations around the moving average.

Image Source - Tradeciety

If the moving average line moves closer to the upper band, it typifies an overbought market state. If it moves closer to the lower band, it typifies an oversold state. The wider the bands, the more volatile the coins, and the wider their prices swing.

The Relative Strength Index

The Relative Strength Index (RSI) is an indicator that measures market momentum. It uses two lines on the chart to show overbought and oversold states. This indicator works on a 14-day time frame and has a default value of 70% for overbought and 30% for oversold.

Image Source - Commodity

When the RSI line crosses the upper or lower line, it acts as an alert to the market that buying or selling orders are too much. The trend is likely to rebound and push the price back to a balanced level. Therefore, when the market is overbought, and the RSI goes below 70%, it is a signal to sell. On the other hand, when the market is oversold, and the RSI exceeds 30%, it is time to buy.

Conclusion

As a trader, knowing how to read cryptocurrency charts is a crucial skill that can help you make informed decisions and navigate the market. The basic charts and explanations discussed in this article can help you understand cryptocurrency exchanges and show you that reading charts is not as complicated as it may seem at first.