Reading Cryptocurrency charts can feel like a difficult or daunting task for beginners and professional traders. Large-cap cryptocurrencies like $BTC and $ETH are notoriously volatile, resulting in overwhelming charts.
Have you ever looked at a Cryptocurrency Chart and felt like you were reading a foreign language? The more you looked at it, the more confused you became. If you have ever found yourself in this situation and you're looking for a way to develop your crypto trading chart reading skills, this guide is for you.
In this article, you will be provided with the necessary skills and knowledge to start reading charts like a professional, even on the most volatile trading days.
Key Takeaways
- Crypto Trading Charts represent Cryptocurrency's historical prices, price movements, volumes, and time intervals.
- Reading Charts using indicators such as Relative Strength Index and Moving Averages are popular among traders.
- Various Candlestick Patterns can be used to evaluate possible future price movements.
- Professional traders use Technical Analysis to predict crypto price movements and trends.
- It's important to understand Technical Analysis and Candlesticks before viewing patterns and reading charts.
What are Crypto Trading Charts
Crypto trading charts are visual representations of the price movements of cryptocurrencies. They are tools that display relevant data (historical price, volumes, time intervals, etc.) in such a manner that helps investors and traders understand cryptocurrency price movements.
Crypto Trading Charts aid investors in identifying patterns and trends in price movements to enable them to make more informed trading decisions. These charts form patterns based on past digital currency price movements and are used to spot investment opportunities.
The way the data is plotted can help you see patterns in the market, identify trends as they form, and help you paint a picture of the overall momentum of the market, whether bullish (people are buying, and the price is going up) or bearish (people are selling and the price is going down).
Crypto Trading Charts also aid in predicting the direction the market is going and what the price will be in the future, so you know when to buy, when to sell, and when to hold on.
Types of Crypto Trading Charts
Crypto trading charts are crucial for traders to analyze market trends and make informed decisions. Here's a detailed look at the main types of charts used in cryptocurrency trading:
1. Line Chart
This is the simplest form of trading chart, showing just the closing prices over a specified time period. It's beneficial for a quick overview of market trends.
2. Bar Chart (OHLC)
This chart provides more data than the line chart, including the open, high, low, and close prices for each time period. Each bar represents one period (like a day or an hour), showing the highest and lowest prices, with ticks on the sides indicating the opening and closing prices.
3. Candlestick Chart
Like the bar chart, candlesticks display the open, high, low, and close prices but are easier to read and more visually informative. Each candlestick has a body that shows the opening and closing prices and wicks that depict the high and low. The candle's color indicates whether the closing price was higher or lower than the opening price.
4. Heikin-Ashi Chart
A variation of the candlestick chart, the Heikin-Ashi chart uses a different formula for calculating each bar, providing a smoother look that helps spot trends more clearly and filter out noise.
5. Point and Figure Chart
This chart type focuses solely on price movements, ignoring time. Prices are marked with Xs and Os, where Xs represent rising prices, and Os represents falling prices. This helps traders focus on significant price moves and filter out minor fluctuations.
6. Renko Chart
Like point and figure charts, Renko charts focus on price movement and filter out minor price changes and time factors. A new "brick" is added to the chart only when the price moves by a predefined amount, which makes it easier to see the trend direction.
7. Volume Charts
These charts incorporate volume data along with price data. Volume is often represented as bars below the price chart, indicating the amount of cryptocurrency traded during a given time period, which helps traders understand the strength of a price move.
8. Depth Chart
This chart displays the buy and sell orders for a cryptocurrency at different price levels at a particular moment. It's used to understand the supply and demand dynamics at different prices and is often utilized in cryptocurrency exchanges.
Popular Chart and Candlestick Patterns for Crypto Trading
Traders use a plethora of different patterns when reading charts, but the most widely used ones are:
- Ascending Triangle: The Ascending Triangle is a bullish chart pattern represented by a stable upper resistance trend line and a consistently rising support line. Crypto Traders usually see the Ascending Triangle as evidence of bullish consolidation and expect it to break prices above the support line and make new heights.
- Descending Triangle: The Descending Triangle is a bearish chart pattern that shows a consistently declining upper resistance line along a flat support level. Crypto traders see this pattern as an example of bearish consolidation, meaning they usually predict that the price will move downward. This prediction makes them either sell or take up a short position.
- Head & Shoulders Pattern: This is a bearish reversal pattern comprising three peaks on a price chart. The three peaks resemble a head with two shoulders, hence the name. This pattern suggests that a trend is about to be reversed from bullish to bearish. Crypto traders often use this to either sell or go short.
- Bullish Engulfing Pattern: The Bullish Engulfing Pattern comprises two Candlesticks. The pattern develops following a downtrend when the body of the following green candle entirely engulfs the final red candle. Some traders interpret this pattern as a bullish reversal, potentially creating an opportunity to buy.
The Parts Of A Crypto Trading Chart
Cryptocurrency exchanges typically show an always-updating price chart for any particular trading pair. The trading pair often consists of the user’s desired cryptocurrency paired with USD, but users can also pair with other currencies or cryptos.
The chart above shows the key data points that serve as the basis for the numerous indicators a market participant can use for trading cryptocurrencies. A crypto trading chart usually contains seven key data points viz:
Trading Pair
This indicates the base currency (e.g., BTC) and the quote currency (e.g., USDT) used in a particular market.
24H Vol
This shows how much of a certain crypto asset\cryptocurrency has been traded over the past 24 hours. This volume is expressed in the form of the quote currency.
Current Price
This shows the prevailing price for the base currency being bought or sold in exchange for the quoted currency. It also has indicators that show how much the price has increased compared to the past 24 hours. Depending on the activeness of the market, the figures can change rapidly.
High\Low
This indicates an asset's highest and lowest prices over a 24-hour period.
Unit of Time
Users can select the time increments they want to reflect in a trading market. Increments range from as short as one minute to as long as one month.
Price Chart
This visualizes the rise and fall of the currency’s price over a period of time. A candle usually indicates the price movement for an individual unit of time in cryptocurrency markets. The assortment of candles in the chart would show the overall recent price trend for a crypto asset, and users can set the time frame from 24 hours to months and years.
Trading Volume
This is a smaller crypto trading chart with individual bars indicating an asset's trading volume corresponding to the candle being shown. It is usually found below the main chart showing price movement.
Longer bars indicate higher trading volumes compared to other periods. A green bar often indicates a price increase, while a red one shows a decrease.
How To Read Crypto Trading Charts
Reading crypto trading charts is a critical skill for any trader or investor in the cryptocurrency market. Here's a guide on how to read some of the most common types of crypto trading charts:
1. Understanding Line Charts
- Purpose: Line charts are straightforward and are primarily used to get a quick overview of price movements over a period.
- Reading the Chart: Identify the timeline at the bottom of the chart and follow the single line that connects the closing prices of the cryptocurrency for each time period. The slope of the line indicates whether the market is trending up or down.
2. Decoding Bar Charts (OHLC)
- Purpose: Bar charts provide more detailed information about trading during a specific period than line charts.
- Reading the Chart:
- Each vertical bar represents trading activity for a specific time period.
- The top and bottom of the bar show the highest and lowest traded prices, respectively.
- The left horizontal dash on the bar indicates the opening price and the right dash shows the closing price.
- Analyze the bars to see if the closing prices are generally higher or lower than the opening prices, which can indicate market trends.
3. Interpreting Candlestick Charts
- Purpose: Candlestick charts are popular because they provide much visual and intuitive information.
- Reading the Chart:
- Each candlestick has a wide part called the "body" (which shows the range between the opening and closing prices) and thin lines called "wicks" or "shadows" (which represent the high and low prices).
- If the body is filled or dark, the closing price is lower than the opening price. If the body is empty or light-colored, the closing price is higher.
- The length of the wicks shows the volatility during the trading period. Longer wicks indicate greater price movement within the trading period.
4. Heikin-Ashi Chart
- Purpose: Heikin-Ashi charts filter out market noise and identify clearer trends and reversal patterns.
- Reading the Chart:
- Like candlestick charts, each candlestick is calculated using a formula that averages the previous candlestick's open, closed, high, and low prices.
- This smoothing technique makes it easier to identify trends and potential reversals.
5. Point and Figure Chart
- Purpose: Point and Figure charts help traders focus on significant price movements and disregard minor fluctuations.
- Reading the Chart:
- X's represent rising prices, while O's represent falling prices.
- The chart advances in columns based on significant price changes rather than time, making it good for long-term trend analysis.
6. Renko Chart
- Purpose: Like Point and Figure charts, Renko charts focus on price movement, ignoring time and volume.
- Reading the Chart:
- Bricks are added in the direction of the trend but only when the price moves by a predetermined amount.
- Consecutive bricks in the same direction indicate a strong trend, while changes in the direction of the bricks indicate potential reversals.
7. Volume Charts
- Purpose: Volume charts are used to validate price movements and patterns.
- Reading the Chart:
- Look at the volume bars below the price chart. High volume during a price increase suggests strong buyer interest, whereas high volume during a price decrease indicates strong selling pressure.
- Comparing volume patterns with price movements provides insights into potential price changes.
8. Depth Chart
- Purpose: Depth charts visualize the demand (buy orders) and supply (sell orders) at different price levels.
- Reading the Chart:
- The y-axis represents the price, and the x-axis represents the quantity of the cryptocurrency.
- The buy-side (usually green) shows cumulative order volume as prices descend, and the sell-side (usually red) shows volume as prices ascend.
- Look for where the buy and sell lines meet, indicating potential support or resistance levels.
Final Thought
As a basic part of Technical Analysis, reading charts serves as an introduction and a basis for understanding the crypto market better. Reading Cryptocurrency Charts is essential for traders to find the best opportunities in the market.
However, it's crucial to note that even the best traders can’t predict the future.
