CHART ANANLYSIS
How to Read Crypto Charts?
Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.
Everyone who has made any kind of cryptocurrency investment has seen how quickly and frequently a cryptocurrency chart moves in real-time. The huge price fluctuations caused by the asset’s famed volatility might be breathtaking, but relatively few people understand how to interpret cryptocurrency charts. Even fewer fully grasp crypto charts and how to act or, more precisely, capitalize on their cues.
What is a chart?
For those who are new to trading, crypto charts are a set of lines and candlestick patterns that depict a cryptocurrency’s historical price performance. They can assist you in forecasting future trends and changes in market circumstances, allowing you to make smarter investing decisions along the road.
It is a snapshot of the historical and present price movement occurring over a specified duration, ranging from seconds to minutes, days to weeks, and even months, years, and more. Because crypto charts might appear too intricate to the untrained eye, it’s best to understand the basics concepts.
Cryptocurrency charts indicate the trading pair, period, and trading platform. Typically, charts also indicate each timeframe’s market price’s open, high, low, and close. At the bottom and on the side, dates and price increments are accessible. The Cryptocurrency chart example below illustrates all of the components mentioned above.
Source: Tradingview.
Based on the chart, technical indicators such as volume or moving averages will be visible and move together with each trading session’s open and close.
Japanese Candlestick Chart
The Japanese candlestick chart (seen on the right in the second image below) is the second most frequent form after the line chart. Analysts typically favor Japanese candlesticks due to the additional data they can offer.
Candles are most commonly two colors, Red and Green.
When a candle is red, it means that the closing price was lower than the starting price of a said timeframe. This means the price of the asset fell during this time period.
When a candle turns green, it means that the closing price was greater than the starting price, indicating that the asset’s price rose. The image below illustrates this:
Source: Quadency
Source: Tradingview.
For example, each candle’s open, high, low, and closure might reveal additional information. If the price movement during the candle exceeds the open or close, a shadow or candle “wick” is left behind.
The size, shape, duration, and color of these candlesticks, as well as the patterns they produce, can provide analysts, buyers, and traders hints about future price action, allowing them to take positions or make changes based on probability.
Japanese candlesticks may convey a great deal of information with a single candle. However, when particular candles are paired in a specific sequence, it can provide an accurate prediction of future price movements.
These are commonly classified into two categories:
- Bullish Reversal Patterns
- Bearish Reversal Patterns
The following are some of the most prevalent and potent bullish reversal signs.
Hammer Candle Pattern
A “bullish hammer” is a reversal pattern that frequently occurs at the bottom of a downtrend. The long bottom wick depicts the handle of the hammer, while the entire candle body represents the head of the hammer. Green hammers are more powerful than red hammers, but as the example of Bitcoin’s bottom in 2015 demonstrates, they may also be powerful in their own right.
This pattern depicts a strong bear push down that was met with and finally overpowered by buying strength. For the pattern to be legitimate, it must follow through.
Bullish Engulfing Candle Pattern
A bullish engulfing candle is a reversal pattern in which the whole green candle body completely engulfs the previous candle body. This indicates that sellers were tired, and buying jumped in with even greater vigor, resulting in a trend reversal. For instance, the bullish engulfing in the chart below was a hint of the incoming uptrend.
Morning Star Candle Pattern
A morning star candle forms when a Doji appears at the bottom of a move and is followed by a strong upward advance. A Doji candle has little to no body and few wicks or shadows. This demonstrates a powerful downward surge by sellers, followed by a period of hesitation before the trend eventually reverses.
Bearish Reversal Patterns
There is a bearish reversal pattern for every bullish reversal pattern. Patterns such as this occur at the height of a rally before reversing down. The following are some of the most typical and potent bearish reversal patterns:
Shooting Star Candle Pattern
A shooting star candle pattern consists of a candle with a long upper wick and a small candle body with little or no bottom wick. It emerges at the peak of an upward trend before the market action reverses.
This candle symbolizes a powerful drive by buyers that is met with strong resistance, leaving an extended wick in its wake.
Bearish Engulfing Candle Pattern
A bearish engulfing candle happens when the next red candle body completely engulfs the entire green bullish candle body. These may be highly significant bearish reversal signs. For example, this was the signal for Bitcoin’s previous three-year bear market.
Evening Star Candle Pattern
An evening star pattern occurs at the peak of a bullish advance and consists of a Doji followed by a sharp decline.
Importance of Technical Analysis
Besides the simple or advanced candlestick patterns on crypto charts, traders often draw trend lines across tops and bottoms of the candles or across support and resistances to construct shapes and patterns that are then used to predict price action.
Some technical indicators and oscillators may provide traders a unique perspective on market circumstances such as momentum, volatility, volume, and more. On most trading platforms, indicators usually appear below the chart to be used together with the price action graph.
Popular Chart Patterns for Technical Analysis
Drawing trendlines over various crypto chart patterns to generate shapes such as triangles or wedges is important for understanding crypto price movements.
After establishing a clear trend line with multiple touches, closing price outside the trend line confirms the pattern as valid. Chart patterns may help anticipate future price action and are an essential part of technical analysis in crypto trading.
Head and Shoulders
Head and shoulders patterns are reversal patterns that can emerge at the peak or bottom of a trend. They are known as an inverted head and shoulders pattern when they emerge near the bottom of a trend.
These patterns depict a visible tug of war between buyers and sellers, with one side finally overwhelming the other, resulting in a bigger push or pullback.
Triangles
Triangles are steadily tightening patterns that feature a sloped top or bottom trendline when looking at a certain timeline. When the opposing trendline is flat, as seen below, the pattern is an ascending or descending triangle. Two converging sloping lines create a symmetrical triangle.
Wedges
Wedges demonstrate a trend losing momentum in action, eventually resulting in a breakdown or breakout in the opposite direction of the dominant trend. Markets that are moving sideways tend to wedge back and forth until the trend moves towards a certain direction.
Support and Resistance
Support and resistance levels are important components of understanding any cryptocurrency price chart, and they are also critical components of technical analysis. Both of these can be horizontal, diagonal, rising, descending, or even psychological levels.
Support
Support levels are areas on the exchange where orders exist that might result in buy orders triggering with appropriate strength to induce a reversal.
Support levels are those areas that have previously seen price action multiple times, such as previous resistances. Support levels often fail to hold, resulting in the establishment of support at even lower levels, as seen below.
Resistance
Similar to support, resistance stops price action from going higher (as shown below) rather than lower. Sell orders cause resistance areas. As seen above, after price breaks through resistance (or support), it sometimes returns to retest and re-establish a former resistance as the new support area, or vice versa.
Source: Tradingview
Technical Indicators
Technical indicators are technical analysis tools that are used to acquire additional data about the market’s activity and underlying price movement. For instance, the MACD focuses on momentum and trend shifts, whereas the RSI alerts traders to overbought or oversold conditions. When used in conjunction with price patterns and crypto candlestick charts, this strategy may be highly lucrative.
Moving Average Convergence Divergence (MACD)
The MACD indicator, which stands for Moving Average Convergence Divergence, is frequently seen as a lagging indicator. The MACD indicator employs two converging and diverging moving averages to indicate whether an asset is overbought or oversold. Additionally, the two lines reflect momentum, and their crossing over or under might indicate that the trend has shifted.
Relative Strength Index (RSI)
The Relative Strength Index, or RSI, is a trend strength indicator that also indicates whether an asset is overbought or oversold. Due to the fact that Cryptocurrency acts differently than other assets, the RSI responds differently.
The RSI can often indicate when a correction is coming. For instance, if an asset stays overbought for a long period of time, it is often indicative of a downward correction. However, one cannot solely rely on this indicator. It is mostly used together with other indicators to get enough information to predict a trader’s next move.
Bollinger Bands
The Bollinger Bands are a moving average, and its two standard deviations are used to chart a crypto asset’s volatility.
Passage of the price through the middle-BB is a strong buy or sell signal. Closes outside of the bands result in either “riding the bands” or a reversal. The middle-BB was the level at which Bitcoin corrected during the 2017 bull market and can guide when to buy the dip.
If the price action breaks through the middle-BB, it indicates a bearish sentiment.
Fibonacci Retracement and Extension Levels
The Fibonacci retracement and extension levels are specific mathematical ratios derived from the Fibonacci sequence.
Popular retracement levels to watch for include 0.618 or 0.5, as well as 1.618, 2.618, and even higher when using Fibonacci extensions – which traders use to determine how far the price can travel after a pullback. Although the exact mechanism by which these levels operate as support and resistance is unknown, these ratios are present throughout nature and are extremely powerful.
The Cryptocurrency Market Cap Chart
The cryptocurrency market capitalization is an aggregation of all digital asset trading platforms and the assets they represent. Apart from charting Bitcoin, it is the king of cryptocurrency technical analysis charts since it provides a picture of the whole cryptocurrency market’s sentiments.
Bitcoin has the lion’s share of the market, with Ethereum close behind. The top 10 cryptocurrencies by market capitalization are among the most renowned and valued cryptocurrencies, although the ranking is always changing.
Conclusion
The components mentioned above, when used in unison, benefit traders in the long run. However, in the end, trading is all about being disciplined, patient, and aware. While these indicators and patterns will help you to plan your investments better, you still need to choose a safe and efficient trading platform, like the popular crypto exchange WazirX, which provides all the indicators mentioned above and much more.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
nicely explained