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How to Read Crypto Charts: Guide for Beginner Investors (2021)

Knowledge Crunch | Tuesday, October 26, 2021 4:39 PM GMT

Developing the right skills on how to read crypto charts is an art. This new skill will help you not only track the price of your favourite coins/blockchains like Bitcoin or Ethereum, but the crypto candlestick charts will actually tell you a lot about the trend of the market as well.

Whether you’re new to crypto or simply looking for a refresher, you’re in the right place. We’re going to go over why this technical skill in crypto chart analysis is so crucial. In short, staying objective and strategic with investments in crypto make all the difference. We all root for certain currencies, but charts help keep us level-headed and prepared to make proper choices rooted in the market’s trends and motion.





Table of Contents

 

What is a Crypto Chart?

What is the Dow Theory?

The 6 Tenets of the Dow Theory

What is Technical Analysis?

6 Crypto Chart Patterns You Need to Know

6 Terms to Know When Reading Crypto Charts





What is a Crypto Chart?

A “crypto” chart is a 2 Dimensional data set where the graphs project the price and time. Hence, it is a data analysis tool to study price patterns over a period of time. The underlying asset for technical analysis could be anything like: the stock market, commodities, forex or the hottest topic of the town and everyone’s favourite digital asset – cryptocurrencies. 

It’s important to note there are two types of crypto charts used widely by investors

Line chart - A line chart is a graphical representation wherein the line connects the closing price of each day in a graphical representation. It is a 2D chart with the closing price as the single input across different time frames. A line chart is a way of representing the price of assets using a single, continuous line. This chart will tell you the market sentiment, notify you of any bounces, price changes and price level of a particular crypto asset.

Source: Coinmarketcap

The Line chart was the first of the charts to be used in financial markets. Like for example here we have a BTC chart. Its only visual advantage is that it reduces the volatility of prices during the day and gives a very clear picture by depicting the closing price of the asset (even through an hourly chart). The line chart is simple to understand and easy to use. Because of its simplicity, it has been widely used by many traders globally.

The Japanese candlestick chart

A Japanese candlestick chart is a graphical representation of four inputs – opening price, high, close, and low. It is much more informative and quite widely used by traders to track the market cap. The types of cadles sticks are as follows:

The green candle represents an up move where the bar will represent high, close, open, and low (in that order). The red coloured candle represents a bearish state where the candle represents high, open, close, and lowest price (in that order). Its advantage is that there are dozens of widely used Candlestick formations with multiple candlesticks that indicate a possible/potential move on the market.

Source: Coinmarketcap

Cryptocurrencies are just a different type of asset class, but technical analysis works perfectly well with it too. This type of data is used by all asset classes but what is the source of this theory?



What is the Dow Theory?

Technical analysis as we know it today (That includes the crypto markets) was first introduced by Charles Dow who postulated the Dow Theory in the late 1800s. The Dow Theory is really a collection of theories about how financial markets move over time. 

There are six Dow Theory tenets, which were put forward by Charles Dow in a collection of editorials he wrote. It is super important to know the principles of Dow theory when reading a crypto chart and any other charts that have to do with investments, so let's get into those.












The 6 Tenets of the Dow Theory

At its core, Dow Theory is about price trends and over one hundred years later, it forms the basis of most technical analysis used in day trading and investing today. Ideas like uptrends, downtrends, support and resistance got their start from Dow Theory.

 

Tenet #1: The Market discounts everything

This Dow theory principle has been taken from the efficient market hypothesis. It says that all available information is already reflected by the current price from company earnings to macroeconomics. This is also the philosophy of technical analysis but is the antithesis of fundamental analysis and behavioural economics.

 

Tenet #2: There are 3 kinds of market trends

These three types of trends are split by the length of time they occupy:

Source: SmartyB

Primary trends last a year or more and are the major market trends. They can be bull markets (price travelling up), bear markets (price trending down) or sideways ranges.

Secondary trends last a few weeks or perhaps months and usually counter-trend corrections, where the price moves in the opposite direction to the primary trend.

Minor trends last less than three weeks are the hunting grounds for day traders but are considered noise by long-term investors.

 

Tenet #3: Primary trends have three phases

The three phases are dictated by what the price did previously and the role of the ‘smart individuals’ and the general public. The three phases are given slightly different names depending on whether it is a bull or bear market.

Source: SmartyB

A bull market will start with an accumulation, then move to a public participation phase and finishes with an ‘excess’ phase. A bear market starts with a distribution phase, then a public participation phase and then a panic phase.

It is always the smart individuals (accumulating) assets after a big decline, ready for the next bull market or selling (distributing) assets after a big move up ready for the next bear market. Once the price reverses, the general public follows the momentum and after a big move, those buying in greed at the top or selling in fear at the bottom are left ‘holding the bag’.

 

Tenet #4: Indices must confirm each other

Charles Dow created the Dow Jones Industrial Average and the Dow Jones Transportation Average and would use these two indices to confirm each other. These days investors will apply the same concept to different national stock indices like the Dow Jones (DJIA), the S&P 500 and the Nasdaq 100.

For example, if one index moves up to a new 52-week high, but the other index remains below that high, then the bullish breakout in the first index is deemed not as strong and susceptible to reverse. Once the second index makes a new 52-week high, then the price action seems to have wider breadth and more likely to continue upwards. Vice versa for a move to new 52-week lows.

 

Tenet #5: Volume must confirm the trend

This is still the main way that volume data is used today. As a reminder, volume is how many trades took place or the value of the trades that took place over a certain period of time. Volume on a price chart will normally be plotted as a bar chart beneath the price plotted as a line or Japanese candlesticks.

Source: SmartyB

The most volume comes from the smart individuals that control billions of dollars so the idea is that if the volume is rising with the price trend, then it means that the smart individuals are buying into the trend. However, if the price is rising but the big volume happens in the declines, then it shows the smart individuals is selling into the uptrend in the expectation that it will reverse.

 

Tenet #6: Trends persist until there is a clear reversal

This if you like is the original ‘the trend is your friend until it ends’. The thing Charles Dow taught us to keep in mind is that the trend will always last longer than you think. So you need to be very clear that the trend has turned before you start trading against it.

This brings about the need to explain ‘How to identify a trend’ and ‘how to identify a trend reversal’. Dow does this via the idea of peaks & troughs. The idea is very simple but can be hard to implement without extensive practice trading.

 

Dow observed, as have we all, that market prices do not go up or down in a straight line – the trend is curvy. The top and the bottom of these curves are called peaks and troughs. A peak can also be termed a high and a trough can also be called a low. The thing to do is compare how each high compares to the previous high and how each low compares to the previous low. Is it higher or lower in price?

Now that we know the six tenets of the Dow Theory let’s look into what technical analysis is.



What is Technical Analysis?

Technical analysis is a tool, or method, used to predict the probable future price movement of a currency pair, cryptocurrency pair, or a stock.

Beyond simple or even advanced candlestick patterns on crypto charts, trend lines can be drawn across peaks and troughs or support and resistance to form shapes and patterns that can be used to predict price action.

Certain technical indicators and oscillators also exist that can provide traders with a unique read in certain market conditions such as momentum, volatility, volume, and more. Indicators appear below or layered over the trading activity on a crypto price chart.




6 Crypto Chart Patterns You Need to Know

An important factor in how to analyze cryptocurrency price movements involves drawing trendlines across various crypto chart patterns to form shapes such as triangles or wedges.

When a visible trend line with multiple touches has been established, closing price outside the trend line will confirm the pattern as valid. Chart patterns can help predict future price action, and is a critical cornerstone of technical analysis crypto trading.  Here are some examples of chart patterns:

 

Term #1: Head and Shoulders

Head and shoulders are reversal patterns and can appear at the bottom or top of a trend. When they appear at the bottom of a trend, they are called an inverse head and shoulders.

Source: CryptoProx

These patterns represent a visible tug of war happening between buyers and sellers (Not a moving average), with one side eventually overwhelming the other, and causing a bigger push or pull back as a result.

 

Term #2: Triangles

Source: CryptoProx

Triangles are increasingly tightening shapes that feature a sloped top or bottom trendline. When the opposing trendline is flat, the pattern is an ascending or descending triangle, as pictured below. Two converging sloped lines form a symmetrical triangle, not pictured here.

 

Term #3: Wedges

Source: CryptoProx

Wedges show a trend running out of steam in action, ultimately leading to a breakdown or breakout in the opposite direction of the prevailing trend. Sideways markets tend to wedge back and forth until a direction is chosen.

 

Pattern #4: Support levels

Support levels are areas where orders exist on exchange and could result in buy orders triggering with enough strength to cause a reversal.  Support levels exist where price action took place before, such as former resistance. Support levels can fail, ultimately establishing support even lower, as pictured below.

 

Pattern #5: Resistance levels

Resistance works similar to support, but instead prevents price action from moving higher instead of lower. Sell orders are responsible for resistance areas.

As pictured in the example below, once price passes through resistance (or support), it often comes back to retest and confirm resistance as support or vice versa.

 

Pattern #6: Bullish and Bearish Flag

Source: MindTrader

Flag patterns can be either upward trending (bullish flag) or downward trending (bearish flag). The Flag pattern is among the most reliable continuation patterns that traders use because it generates a setup for entering an existing trend that is ready to continue.





6 Terms to Know When Reading Crypto Charts

Pattern #1: Breakout

A term used to describe a powerful price move out of a well-defined consolidation zone or chart pattern. Confirmed violations of trendlines or key support/resistance levels are also considered breakouts.

Pattern #2: Consolidation

A trading range marked by well-defined, low-volatility price swings. Occurs as a ‘pause’ pattern in a strong trend and can also occur at market tops and bottoms. Chart patterns such as pennants, wedges, and rectangles all depict consolidations. The longer the consolidation time period, the more powerful the eventual breakout may be.

Pattern #3: Cycles

Repetitive patterns of buying and selling pressure that manifest as oscillating waves (price swings) in all liquid markets. Calculating the average cycle length (measured trough to trough) can provide traders with advanced knowledge of high-probability swing termination and/or reversal zones.

Term #4: Fibonacci retracement

A mathematical formula employed by traders to forecast high-probability support/resistance zones in liquid markets. Measures the most likely retracement levels of a developing market swing in relation to the size (distance in points or length of time) of a previous market swing.

Term #5: Swing

A sustained bullish/bearish price movement and short term holding. In bullish trends, price swings spend more time rising than falling, and vice-versa for bearish trends. In trendless markets, price swings are less directionally biased. A series of connected market swings can help confirm trend strength, trend reversals, and price/momentum divergences.

Term #6: Stop loss

An instruction (to a broker or exchange) to exit a long position if it declines to a predetermined price (vice-versa for short positions). The purpose is to limit losses from a losing trade or lock in gains on a winning trade. Often entered as a ‘GTC’ (good-til-canceled’) and/or as a ‘market order.’

 

Now Over to You

Reading crypto charts is a practical skill that everyone needs to acquire if you want to strive in today’s challenging cryptocurrency market. They can look intimidating, but time spent studying them is undoubtedly worth it. The best resource investors have is the history of the market and the ability to identify trends.

These skills take time to learn but should be a priority for beginning and newer investors. Take time to get comfortable with crypto charts and you’ll be glad you did. If you’re serious about cryptocurrency investing, then having a better understanding of the way crypto prices move is a huge reward for the time put into studying these sorts of charts.

We hope you enjoyed this edition of the knowledge crunch blog just as much as we enjoy writing them! Stay tuned for more and be sure to check out our other helpful blogs with advice and tips to reach your investment goals with ZuluTrade. 

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