How To Read Crypto Charts: Day Trading Basics

If you’ve jumped on the crypto bandwagon and want to start trading crypto and turning your Bitcoin into cash, you’ll need to learn how to read crypto charts.

Have you ever glanced at a crypto chart and pondered whether it was better to buy or sell cryptocurrency? If you answered yes, this post is for you. We show you how to read charts so you can make informed investment decisions.

how to read crypto charts - two men analyzing a chart in a monitor

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Why is it important for traders to study crypto charts?

Reading crypto charts is critical for traders looking for the greatest chances in the market, as technical analysis may assist investors in identifying market trends and forecasting future price movements of an asset.

Technical analysis is the study of statistical trends over time to determine how supply and demand for a certain asset influence future price movements. Reading cryptocurrency market charts can help investors make well-informed selections depending on when bullish and bearish moves are expected to finish.

Charles Dow, the co-founder of Dow Jones & Company and the founder and editor of the Wall Street Journal, was the first to offer technical analysis.

Dow’s theories were articulated in a series of Wall Street Journal editorials, and after his death, they were collected to form what is now known as the Dow theory. It’s worth mentioning that technical analysis has subsequently expanded through years of research to include the patterns and signals we know today.

What exactly is the Dow Theory?

Dow Theory, at a high level, describes market movements and how they normally act. It sends out indications that can be utilized to determine the principal market trend. Trading decisions are then made based on the primary market trend.

The Dow Theory can be applied to the cryptocurrency market as well.

According to the Dow Theory, the market takes everything into account when pricing. The current asset values reflect all existing, historical, and upcoming stock data. This means that a market analyst can concentrate on the price of a coin rather than every single aspect that affects its price.

Crypto markets rise and fall in predictable patterns. The ability to discern market trends allows one to forecast market behavior.

Dow Theory’s Six Tenets

The Dow Theory is founded on six fundamental tenets:

  1. There are three market movements.
  2. The primary market trends are divided into three stages.
  3. As soon as new information becomes available, it is incorporated into the market.
  4. The stock market averages must agree.
  5. Volume reinforces trends.
  6. Trends exist until it is demonstrated that they have ended.

The theory has six main components known as the six tenets of Dow theory. Let’s go over them one by one in the sections below.

There are three market movements

The major movement of a market is its main movement. It is the market’s dominant trend and can last anywhere from a year to several years. The primary movement might be either bullish or negative.

The medium swing refers to a market’s secondary or intermediate movement. This is what happens throughout a medium time period, which might range from 10 days to three months. The primary price change is used to measure trends in the medium swing.

The short swing refers to a market’s modest shift. The brief swing is the market’s short-term speculation.

The primary market trends are divided into three stages

The three stages of a market trend are as follows:

  1. The accumulation phase is when skilled investors begin buying or selling the coin against the market’s general impression.
  2. The public participation phase, also known as the absorption phase, is when the rest of the market begins to follow experienced investors.
  3. The distribution phase occurs following the absorption phase conjecture. Knowledgeable investors begin to transfer their market holdings.

As soon as new information becomes available, it is incorporated into the market

The asset’s price changes to reflect any new information. Asset prices accurately represent market participants’ aspirations, concerns, and expectations. Interest rate fluctuations, profit estimates, sales projections, significant elections, product developments, and other factors are all factored into the market price.

The stock market averages must agree

If two companies or organizations are causally related, growth in one should result in an increase in the other. If one company’s performance improves while the other’s declines, it could indicate that a market trend is about to reverse.

Volume reinforces trends

During an advance, the volume of shares stranded should rise in tandem with the price. During a decline, the volume should decrease in tandem with the price.

Trends exist until it is demonstrated that they have ended

Despite “market noise,” the market remains in a bullish trend. Finding definitive confirmation of a trend reversal is difficult.


The Components of a Crypto Chart

Cryptocurrency exchanges usually provide a continually updating price chart for each trading pair. By default, the trading pair is usually set to USD/the cryptocurrency under consideration. You can, however, change it to another currency or cryptocurrency.

This chart displays the key data elements that serve as the foundation for the different indicators available for trading cryptocurrency. The following can be seen in the chart above for the BITCOIN/US DOLLAR INDEX trading pair on the Tradingview Exchange:

  • Trading Pair: This refers to the base currency (BTC) and the quote currency (USDT) utilized in this market.
  • Current Price: This section displays the current price for the base currency (BTC) being purchased or sold in exchange for the quote currency (USDT). There are other indications that show how much the price has risen in the last 24 hours. These values fluctuate frequently depending on how busy a certain market is.
  • High/Low: These values represent the asset’s peak and lowest prices during a 24-hour period.
  • 24H Vol: This indicator displays how much of a specific asset (BTC) has been exchanged in the previous 24 hours. This volume is expressed in the quote currency (USDT).
  • Unit of Time: You can choose which time increments to reflect in a trading market. Increments might be as small as one minute or as large as one month.
  • Trading Volume: Below the main chart, which displays price movement, is a smaller trading volume chart, with individual bars displaying the trading volume of an asset, corresponding to the candle displayed. Longer bars suggest bigger trading volumes than shorter bars. Typically, a green bar denotes a price increase, while a red candle suggests a price fall, though you can change this color to your liking.
  • Price Chart: This chart depicts the rise and fall of the currency’s price over time. In cryptocurrency markets, the price movement for a single unit of time is typically represented as a candle. The arrangement of candles in the chart would represent the asset’s overall recent price trend. The timeframe can be set from 24 hours to months and years.

Related: Tradingview Review

Here’s my video explaining how to read crypto charts by getting to know it components:


Japanese Candlestick Charts

The Japanese candlestick chart is the most widely used cryptocurrency chart.

On a candlestick chart, each candle represents the asset’s price movement over a given period of time. They have a similar logic and are shaped like box-and-whisker charts.

The asset’s peak price throughout the time period is shown by the top whisker, sometimes referred to as a shadow. The asset’s price difference between its opening and closing prices throughout the time period is displayed in the box, also known as the body.

The bottom whisker, sometimes referred to as a shadow, displays the asset’s lowest price within the specified period.

A bullish candlestick and a bearish candlestick are the two varieties of candlesticks.

  • The green candlestick represents a bullish candlestick. A bullish candlestick has a closing price that is higher than the asset’s initial price.
  • A bearish candlestick will be displayed in red. A bearish candlestick has an initial price that is higher than the asset’s ending price.

Candlesticks, when read correctly, may clearly show you where the market turned. They can assist you in identifying various patterns that can help you predict how the market will behave.


Common Chart and Candlestick Patterns: The Fundamentals

Typically, candlestick patterns are divided into bullish and bearish patterns.

A bullish pattern frequently predicts future positive price movement for an asset, alerting a trader to buy in hope that the token’s value would rise. A bearish pattern, on the other hand, recommends that traders sell before the market swings lower and they incur a loss.

Shooting Star Candlestick

image by: Bybit Learn

A bearish candlestick pattern known as the shooting star candlestick typically appears at the peak of an upward price trend. This candlestick has a long wick that rises upward from a short body that is located at the bottom. Its red color denotes that even if the price reached higher values along the road, it slightly declined towards the end of the trading period.

Analysts take this as a signal that a sell-down is about to occur and that there is resistance to future price growth. In other words, many traders opt to sell now rather than wait for prices to fall.

Inverted Hammer Candlestick

The inverted hammer candlestick resembles a shooting star candlestick, however, due to its green color, it is bullish rather than bearish. This time, the candlestick indicates that the price reached higher prices along the way and then marginally increased by the end of the trading period.

Analysts believe that the appearance of this candlestick after a price decline is a sign that the price is set to rise again since it shows that there is a strong buying demand at that particular time. In other words, think about buying since the asset might be rising.


Popular patterns for technical analysis

Head and Shoulders

The second peak or valley in this pattern resembles a “head” that casts a shadow over its neighbors on both sides, or the “shoulders,” giving rise to the pattern’s Head and Shoulders name. These patterns reflect a struggle between buyers and sellers, with one side ultimately succeeding and causing further pushback or pullback.

image by: Investopedia

The green “bullish head and shoulders” pattern on the chart’s left suggests that the price of cryptocurrencies is about to increase.

A bearish “head and shoulders” pattern, such as the one outlined in red on the right, may, however, come before a downward price trend.

Wedges

Similar to “head and shoulders,” Wedges are patterns in cryptocurrency charts that incorporate a broader perspective.

By drawing a line connecting the low points of price movement over a period of time and another line tracing the price peaks, you may visualize “wedges” in a cryptocurrency chart. You now have a wedge if the two lines intersect from left to right.

They emerge as a trend begins to level off and eventually breaks out. Markets frequently oscillate until they take a firm direction by moving sideways.

image by: Bybit Learn

Two lines with downward slopes that resemble a triangle with a downward slant, as seen on the left, define a bullish wedge (falling wedge). This pattern can suggest that the asset will soon move in a more positive direction as the price’s up-and-down action stabilizes towards the bottom.

A bearish wedge (rising wedge), meanwhile, displays two lines with ascending inclinations and close convergence at a high point. This could occur before the price of cryptocurrencies peaks and a sell-off follows.


Support and Resistance levels

One of the most important aspects of interpreting a cryptocurrency chart is comprehending support and resistance.

Support levels refers to a price level that the asset does not drop below for a predetermined amount of time. The price at which it is not anticipated that the asset would increase any higher is referred to as the resistance level.

At this price, the market for a specific digital asset is oversupplied with sellers. When traders are taking positions in cryptocurrencies, experts are known to offer support and resistance levels as a guide.

Trendlines can be used to determine support and resistance levels since they make it simpler to spot patterns on cryptocurrency charts. The lowest and second-lowest lows of a cryptocurrency over a specific period of time are used to build an uptrend line. This trendline-touching levels are considered to be supportive.


Conclusion: How to Read Crypto Charts

As with many aspects of cryptocurrency, it is critical to conduct your own study on a variety of subjects, including trading indicators and methods. This is not hard and fast advice, but rather a primer on trading fundamentals. There is no single indication, approach, or procedure that can accurately predict market direction. This is particularly true for candlestick and cryptocurrency chart patterns.

Chart-reading, as a fundamental component of technical analysis, should serve as an introduction to better understanding the crypto market by learning new methodologies and crypto market aspects.

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