How to Read Crypto Charts?
Both new and experienced traders in the crypto world need to know how to read a crypto chart. Crypto charts are used to help people who buy and sell cryptos make better decisions about where to invest and how to trade. They look like other technical charts that help traders decide which stocks to buy. But for those who don't know what they are, crypto charts are graphs that show the price, volume, and time intervals of the crypto market. But are you an expert at reading crypto charts? Before proceeding, you must have to learn What is cryptocurrency.
Dow Theory: The Foundation of Technical Analysis
Before we get into how to read a crypto chart, every trader needs to know the Dow Theory. Charles Dow was a pioneer in the field of technical analysis. He was a co-founder of Dow Jones & Company. He was also the one who started and ran the Wall Street Journal. Dow's ideas were made clearer in a series of Wall Street Journal editorials. After he died, other editors, such as William Hamilton, worked on these ideas and put together what is now known as the Dow Theory from his editorials. The Dow Theory can be seen as a framework for technical analysis. It enumerates 6 fundamental tenets. Dow's tenets can be thought of as the introduction for traders trying to spot and follow a crypto trend.
1. The market reflects everything
The Dow Theory is based on the hypothesis of efficient markets (EMH). It says that the prices of assets are based on all the information that is known and that they trade on crypto or stock exchanges at their fair value. In other words, this strategy is the exact opposite of behavioral economics. For example, if most people think that a company's earnings will go up, the market will already reflect this before it happens. Before the improvement report comes out, there will be more interest in the company's shares. Also, the price might not change a lot when the expected good report comes out.
2. There are three market trends
This was the first theory to suggest that the market moves in three ways:
By looking at these different trends, investors can find opportunities. For example, if you look at a crypto chart, you might find a crypto whose primary trend is up but whose secondary trend is down. In this case, you might be able to buy the cryptocurrency for a low price and then sell it when its value has gone up.
3. Trends have three phases
According to the Dow Theory, each primary trend has three stages:
4. Indices must confirm each other
Dow thought that a primary market trend seen on one index should be backed up by a primary market trend seen on another index. According to the theory, traders shouldn't think that a new primary upward trend is starting if one index confirms a new primary upward trend but another index stays in a primary downward trend. For example, if India has a bullish trend, all indices like the Nifty, Sensex, Nifty Midcap, Nifty Smallcap, and others should rise, confirming the trend seen in each other. In the same way, all indices should be going down for a bearish trend.
5. Trends are confirmed by volume
If the price moves in the main trend's direction, the volume should go up. If it is moving away from it, on the other hand, the volume should go down. The more volume there is, the more likely it is that the movement shows the real trend of the market. When the number of trades is low, price action may not show the market trend accurately. In an upward trend, for instance, the volume goes up when the price goes up and down when the price goes down. In a downward trend, the volume goes up when prices go down and down when prices go up.
6. Trends will persist until definitive signals indicate otherwise
Dow thought that if the market was going in a certain direction, it would stay in that direction. For example, if a cryptocurrency starts to go up because of good news, it will keep going up until there is a clear sign that it is going down. Primary trend reversals and secondary trend reversals can be hard to tell apart. So, Dow said that people should be suspicious and careful when a trend changes.
How to Read Crypto Charts?
Most charts of crypto prices use candlesticks as the main price indicator. Charts with candlesticks are easy to understand. They show how prices move in an easy-to-understand way. In practice, charts of the crypto market can be set up to show different timeframes. Here, the candlesticks show each time period. For example, say a four-hour timeframe is set on a crypto trading chart. Each candlestick on that chart shows how trading went for four hours. The trading period chosen depends on the style and strategy of the trader.
Two main bars make up a candlestick:
Most crypto charts show that a green candle means that the price is going up. A red candle, on the other hand, shows a bearish move or a price drop. On the other hand, a candlestick with almost nobody and long wicks means neither buyers nor sellers are in charge. The size, shape, length, color, and pattern of these candlesticks can give clues about how prices will move in the future. Analysts, buyers, and traders can use them to take positions or make changes based on how likely something is to happen.
Basic Indicators and Patterns to Read a Crypto Chart
Traders can read a crypto chart with the help of many technical indicators. Let's talk about two of the most common technical indicators:
The moving average (MA) line is made by taking the average price of each day over a certain amount of time. This line goes across the chart of prices. Moving averages can be changed to give useful signals when trading in real-time crypto charts. MA usually doesn't take into account short-term changes in prices.
Support and Resistance Level
When reading crypto charts, the levels of support and resistance are very important. During a pullback, support levels are price points where cryptos or any other asset are expected to stop because there is a lot of buying interest at that level. On the other hand, resistance levels are price points where there are a lot of people who want to sell. Traders often buy at levels of support and sell at levels of resistance.
In addition to technical indicators, patterns on cryptocurrency charts can also help traders predict how prices will move. Let's look at three of the most common crypto patterns:
Hammer Candle Pattern
"Bullish hammer" is a pattern that shows a change in direction. Most of the time, they form after a price drop at the bottom of a downtrend. It also shows that there are a lot of buyers on the market. The long bottom wick is the handle of the hammer. And the whole body of the candle is the hammer's head.
Head and Shoulders Pattern
Head-and-shoulders patterns are signs that a trend is about to change. They can show up at the beginning or end of a trend. A "head and shoulders" pattern that is bullish could mean that the price of crypto is about to go up. In the meantime, a price drop may come before a bearish "head and shoulders" pattern. These patterns show that buyers and sellers are in a clear tug-of-war with each other.
Wedges are an example of a style that is becoming less popular. On a crypto chart, you can make "wedges" by connecting the lowest points of price movement over time with one line and the highest points of price movement with another line. When these two lines cross from left to right, the result is a wedge. A bullish wedge could mean that the value of the asset is about to go up. On the other hand, a bearish wedge could come before a cryptocurrency's price peaks and the sell-off that follows.
Charts of crypto prices can help you predict price movements and make trading easier. By learning more techniques and having a strong grasp of the basics of the crypto market, chart reading can help you understand the market better. But chart reading is not the only way to trade cryptocurrencies. With enough practice, an analytical mindset, and a thorough look at crypto charts and patterns, traders may be able to get a leg up on the competition.