Ever wondered how to read crypto trading charts? In every market, be it stock exchanges, forex and yes crypto, the price movements are displayed on some kind of chart. These charts can show a movement of an hour or they can even show a year. Whichever timeframe the chart is showing, the different pikes mean a different thing. For example on an hour chart, one pike means the movements of that hour. In this article, we going to dive deep into the world of charts so by the end of it you are going to be a master at reading crypto trading charts.
What’s a trading chart? Where does it come from?
When there’s some kind of data that we want to visualize we use charts, and the crypto market is no different. Basically, these charts are nothing more than the visualized format of the prices in a time frame. If it’s your first time looking at it it can be confusing. But why does it look like this and where is it come from?
The willingness to see the price movements of an individual product is as old as the willingness to trade with them. The charts that we used today are called the candlestick charts and they have been developed in Japan in the early 1800s.
After that, the western trading communities started using it because it was an effective way to summerise trading data as you can see today in crypto market websites and apps.
Charts in the crypto market, and how to read them?
So you know the history of the candlestick chart, but without knowing how to look at it is not useful, so I’m going to explain it to you.
Every candlestick chart is represented by individual candles. One candle shows the maximum and the minimum price in a given period of time (and a volume in the old school days but in these modern crypto markets they automatically incorporated).
Every candle has an area between the open and the close (the end of the time frame that it represents) called the “real body”. Price executions below and above this area is called the shadows or wicks.
So basically the wicks show the highest and the lowest price in that time frame, and the body shows the opening price and the closing price.
Depending on the previous candle the price can start from the bottom and go up (the price is increasing) or can start from the top and go to the bottom (the price is decreasing). Originally if a candle is hollow on the inside that indicates price movement upwards, and if it’s filled means the price is dropping down.
Technical analysis – the basics
So far we discussed how to read one single candle in the candle charts but if you want to make investing design based on these, you have to look at the whole chart of candles, this is called technical analysis. That is what we are going to discuss in the following.
Technical analysis is an investing strategy mostly used by short term investors where the decision making is based on price movements on the chart by certain indicators that help the investor decide if the price will go up or down. This sounds easy but in reality, it is a complicated task that can be learnable but takes time and dedication.
Technical analysis is approximately as old as the candlestick chart, people wanted to see the correlation in the charts to “know the future” of a given asset. It makes sense since the basic thesis of investing is buying low and selling high.
The theory behind technical analysis is that the price changes of an asset in the past can indicate the asset’s future price. The first one to research this was Charles Down and he came up with the Down Theory. Since then hundreds of researches were done on this subject therefore a lot of indicators exist today.
A few of the most used indicators today are On-Balance-Volume (OBV), Average Directional Index (ADX), Aroon Indicator, MACD, and Relative Strenght Index (RSI). Let’s see what they mean in the crypto market.
The On-Balance-Volume Indicator: measures the positive and negative flow of volume of a given cryptocurrency. Basically, it adds up or subtracts the volume when the price is rising and when the price was falling. When this indicator is rising it means that there is a strong buying market and the price probably will go up and vice versa.
This indicator can be used to determine trends but when using it watch out for divergence. For example, if there is an indication of an upwards trend, but it is not backed up by strong buying power the price can still go down.
The Average Directional Index: it is also a trend indicator that measures the momentum and the strength of a trend. ADX is giving you a number and if this number is more than 40 that indicates a strong trend. Below 20 means it is a weak trend so also look out for divergence.
The Aroon Indicator: This indicator can show you if the given crypto is in a trend or not in a calculation period. It can also signal if a new trend is forming or the current trend is about to be broken. This indicator comprises two lines. the Aroon-up line and the Aroon-down line. When these two lines cross each other that can possibly mean a trend change.
MACD: The moving average convergence divergence is a very useful indicator that not only can be used to determine trends but it gives you trading signals. When it is above zero it indicates an uptrend and when it is below zero it indicates a downtrend.
It consists of two lines: the MACD line and an indicator line the latter moving slower. If the MACD line is crossing the indicator line it shows a possible investing opportunity. For example, if the MACD line crosses below the indicator line, it can be wise to short the given cryptocurrency because the price is falling. If the MACD line crosses the indicator above the signal line it means the price is on the rise. (It is just an example not a piece of advice to invest only based on this indicator.)
The Relative Strenght Index: The RSI has at least three main uses. It can plot recent price gains versus recent price losses between zero and 100, so it helps measure momentum and strength. The RSI can be used to indicate if a cryptocurrency is overbought or oversold. If its value is above 70 or below 30 it means it is overbought or oversold and a price correlation is probable.
You can also measure divergence with it. If this indicator moves against the price it can show that the current trend is weakening and probably reverse soon.
Use the right indicators for your strategy
These are just a few indicators but as I mentioned earlier there are hundreds more. A usual technical analysis strategy uses 4-5 of these or even more, with well-defined buying and selling signals. If you consider investing this way, you should investigate what indicators are a good fit for you and your risk level. But be aware that it is not the only investing strategy you can use, and never invest more money especially in the short term that you can afford to lose. The crypto market can be really profitable but also unpredictable sometimes, so look at these indicators as tools to help you make a financial decision. It is always a good idea to combine more strategies and see what experts say about the market.
The price charts of an asset are visualized data of the price movement in a given timeframe. The one that is used today by crypto markets is called the candlestick chart, which is a series of candles one candle representing the given timeframe. A candle has a ‘real body’ which is the opening and the closing transition, the ‘shadow’ or ‘wick’ is the highest and lowest price. This knowledge is the foundation of the technical analysis, which is an investing strategy mostly used by short term investors. This strategy is based on the premise that past price movements can predict future price movements. An investing strategy of this kind uses usually 4-5 indicators that provide buying and selling signals. Never invest more money into the crypto market that can you afford to lose!