If you can read crypto charts, you’re already miles ahead of the rest of the market. Reading charts and understanding candlesticks are two essential skills. They help you detect trends, discover buying opportunities, and predict future price movements. If you want to make better trading decisions, you better learn how a chart works.
A crypto chart seems incredibly complicated at first glance. But once you gain a grasp of the basic elements, data types, and patterns, then everything becomes much easier. But before I show you my beginner’s guide to reading crypto charts, you need a quick reminder of why charting matters in the first place.
Technical Analysis (TA) is the art of converting patterns in market data into charts that reliably pinpoint trends and price directions. By combining price, volume, and momentum data, analysts evaluate an asset’s strength and generate trading signals that indicate where the asset is positioned in reference to the market or other sectors.
Charles Dow, American journalist and founder of the Wall Street Journal, pioneered Technical Analysis by creating the Dow Jones Industrial Index in the late 1800s and recording the market’s highs and lows, from which he drew patterns and correlations. His studies eventually turned into the Dow Theory.
The Dow Theory is also what led to the rise of bull and bear financial markets. They are two market cycles that indicate whether we have a downfall or shopping spree. Here is my explanation of how bear and bull markets work in the cryptocurrency sector.
Technical analysis works on the basis that past trading activity and price-swings indicate potential paths for future price movements. This is influenced by the belief that human psychology drives financial markets and that certain behaviouristic patterns reoccur under similar conditions.
In the trading world, we constantly assume that history repeats itself. Prices are believed to move in cycles called “trends” and alternate between bull markets and bear markets. We also believe that nothing is random and that by examining market data, we can recognize short or long-term trends invisible to the untrained eye.
The price of an asset is merely a number on the screen. Apple shares cost $169 today, yesterday they cost $173, and tomorrow they might cost $175. We gain no insight from this data, nor does it help with making the right investment decision – even if we check our stock app every day.
But if we aggregate and visually represent Apple’s price data in chronological order, we gain a better understanding of the stock’s movement. Individual price points suddenly form a chart, similar to how individual notes, when combined, form a symphony.
The chart above is a conglomerate of Apple’s daily price movement between the period of March 2021 and January 2022. Even without using any technical analysis tools we can tell that Apple has been trending up for nearly an entire year. And if we incorporate trendlines into the chart, it’s easy to tell how the price behaves cyclically.
AAPL trends up, then down. Between the two is a period when AAPL ranges sideways for a while, attempts to make a higher high, but faces rejection and initiates a downtrend. The same pattern repeated three times throughout the past year.
Now let’s take a look at a few decentralized examples that show you how to read crypto charts for day trading. Here, it’s important to see how prices react to certain price levels.
At the beginning of the chart below, Bitcoin established a support level at $52,763 depicted by the green line (1 & 2). The level held for a while but eventually failed. When the price once again came into contact with the level (3), it acted as resistance and rejected Bitcoin’s efforts at making a higher high.
The red line tells a similar story. When Bitcoin broke down the level acted as the first point of resistance (1). It was broken on the second attempt (2) and acted as support when price came crashing down again (3). Here, TA helped with establishing zones of interests where traders can short or long the asset.
Price data is visualized through candlesticks – which represent the most important part of a chart. These candle-shaped objects represent price information stored in a unit of time which we call a time frame. Prices move up and down constantly but we have to aggregate the information into a more coherent form to provide any meaningful information.
Candles have four main components from the OHCL system: Open, High, Close, Low.
The candlestick has a body and shadows. While the body shows the open and close price, the shadow refers to the highest and lowest point it reached. Sometimes we refer to highs and lows as wicks. Note that the candlestick is red or green depending on whether it closed higher or lower than the previous candle.
Other chart formats include: bars, lines, Renko, and Heikin ashi. Although their differences are primarily aesthetic, they differ by the amount of information they provide.
Bar charts are similar to candlestick charts, only that they use horizontal lines to depict the opening and closing price. The opening price has a small line to the left while the closing price has a line to the right. Bars use the same OHCL model, but place greater emphasis on the difference between the closing and opening price.
Line charts provide minimal information, indicating only the closing price within a given time frame. Traders use lines to simplify the chart and view the long-term trend.
Renko charts use price movement to generate price blocks rather than units of time. Once an asset moves far enough from its initial price position the renko chart creates a new Renko – named after the Japanese word for brick (Rengo). This chart type has a price size that represents the range of a price brick (e.g. $1, $20, $50). Renko charts remove noise from low time frame price movement and allow traders to see the trend more easily.
Heikin Ashi is another Japanese chart type that you can use to read crypto charts. Heikin Ashi relies on a modified version of the OHCL model called COHL (close, open, high, low):
Like Renko, Heikin Ashi makes analyzing the chart’s trend much easier.
I recommend using the basic candlestick chart to everyone. Although the other types provide numerous benefits, candlestick charts are still the number one solution for beginners. I have used and continue using candlesticks from day one. I only switch charts when I want a better view of the market’s general trend.
Time frame refers to the interval at which you trade or monitor price action. Time frames matter because they indicate an asset’s trend. However, it is worth noting that assets can trend differently at different time frames. For example, even though Bitcoin is in a down trend on a weekly time frame, it is trending up on the yearly time frame.
Time frames allow traders to pick the pace at which they trade. Day traders who quickly jump in and out of the market prefer trading lower time frames. But an investor who is here for the long haul doesn’t care about the asset’s short term performance when it’s trending up.
Choosing a time frame depends on your trading style. Day traders often focus on lower time frames (LTFs) while swing traders play with higher time frames (HTF).
Lower time frames:
Higher time frames:
HTFs are generally more reliable. The consensus is that anything happening at LTFs is noise and doesn’t indicate an asset’s long-term price. But as we have noted, just because it’s noise doesn’t mean that a day trader can’t profit from it.
Novice traders tend to experience tunnel vision when trading time frames. Even though it is preferable to stick with one time frame, traders should always observe the one above it or below it to complement their choice. If that isn’t done, you might not notice important events unfold. A 4H candle that seems bullish HTF might be bearish at LTF, if for example, its momentum has slowed down towards the close.
Once you understand the OHCL model for candlesticks and time frames, you can finally read crypto charts. You can now open a chart for any cryptocurrency trading pair, start drawing, and identify trends and patterns. Who knows, you might predict Bitcoin’s next move.
Reading crypto charts boils down to selecting the proper time frame and knowing whether an asset trends up or down. Assets trend up when the price rises over a medium-to-long time period. This period ranges from 4H to 1W. If an asset breaks the trend – like falling under a diagonal trend line – it’s time to sell and trade in the opposite direction.
But wait, what’s a trend line? Just because you can read crypto charts does not mean you have the skill set required to identify complex trends. There are all kinds of patterns and tools that traders use to trade profitably. If you don’t understand these, you’re still stuck at step one.
Don’t be discouraged. I put together a thorough ebook designed for complete beginners interested in trading cryptocurrencies. By reading this ebook, you can go from zero to crypto hero and master cryptocurrency trading – which includes drawing trend lines. All that’s required is a willingness to learn.
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