How To Read Crypto Charts?

Cryptocurrency is an extremely volatile form of investment. Everyone who invests in cryptocurrency knows that it is a gamble. Relying on intuition and subjective feeling is not the best way of making decisions. Being able to analyze market trends is a very useful skill for a cryptocurrency trader. This is done by looking at a cryptocurrency chart.

Read more: How To Read Crypto Charts

What is a crypto chart?

A crypto chart gives you an objective view of the market for a particular cryptocurrency like Bitcoin or Ethereum. Let us start by clarifying the basics of reading a cryptocurrency chart.

Opening and closing:

When you buy a financial instrument, it is called ‘opening your position’ in the market. When you sell it, it is called your ‘closing position’.

Bullish and Bearish movement

A bullish movement is an upward, positive movement. A bearish movement is a downward, negative movement.

Time frame

When you are looking at fluctuations in price, you need to be clear on what time frame you are considering. You may look at data in a 15 minute, 1 hour, 4 hour or 24-hour time frame. What time frame will suit you depends on your trading habits.

If you are an intraday trader who opens and closes within the same day, you would prefer a 15 minute or 5-minute time frame. If you are a long-term holder who holds on to your opening position for weeks, months or years before selling, you would prefer a longer time frame.

Market cap

Market cap is the total value of all the circulating coins of a particular cryptocurrency. It is calculated by multiplying the price of one coin by the total number of coins in circulation. It is a useful indicator of the stability of a cryptocurrency.

How to read bitcoin charts?

Now that you are familiar with the basic terms, you can learn to read Bitcoin charts by looking at the candlestick movements. 

The Candlestick chart

The candlestick chart shows prices of cryptocurrency in a given time frame in the form of candlesticks placed one after another. The candlesticks on this chart have a body with two wicks- one above and one below. A green candle is one where the closing price is higher than the opening price. A red candle is one where the opening price is higher than the closing price. 

Relative Strength Index (RSI)

The RSI measures the strength and speed of changes in the price of a cryptocurrency by comparing them to the previous year’s prices. It indicates whether the cryptocurrency has been overbought or oversold. 

The RSI is represented on an optional graph under the main chart. RSI ranges from 0 to 100. It is checked daily. When it reaches or crosses 70, we can say that the coin is being overbought, overvalued. So the price may soon go down. If it is 30 or below, it means the coin is undervalued, and the price may go up soon. The RSI, however, is not immune to false alarms.

Trend lines

Trend lines are diagonal lines drawn to connect price points for a better visual representation. Uptrend or ascending lines are drawn from a lower to higher position on the chart. Downtrend or descending lines are drawn from a higher to a lower chart position. 

If a trend line is not broken and connects at least three price points, it is valid enough to make reasonable predictions about future prices. They are used to identify resistance and support levels.

Support and Resistance

Support and resistance are points on the chart where there is massive buying and selling activity. The resistance point is where the price stops rising; the support point is where it stops falling. This happens because of the emotions of market participants and their resulting actions.

There are three kinds of traders in the market- those who are going long, i.e., waiting for the price to rise so that they can sell; those who are going short, i.e., waiting for the price to fall so that they can buy; and those who don’t know what they are doing. 

These three types of participants have different reactions to support and resistance levels. But generally, when the price falls to support level, people start buying out of optimism, and the price goes up. Now that the price is high, traders feel pessimistic and sell off to avoid losses. 

How to predict cryptocurrency charts?

People predict future prices by looking at certain patterns in candlesticks. Some of them are bullish patterns. For example,

• Hammer shows a small candle with a tiny upper wick indicating a low closing price and a longer lower wick indicating a high opening price. It is seen after a decline in price.
• The inverted hammer has a long upper wick indicating a high closing price and a tiny lower wick indicating a low opening price. It indicates the beginning of an uptrend.
• Bullish engulfing is made up of two candlesticks at the bottom of a downtrend. A red candlestick is engulfed by a green one with a larger body. It indicates the beginning of an uptrend.

Other bullish patterns include the piercing line, morning star, and three white soldiers.

Some of them are bearish patterns. For example,

• Hanging man is a pattern where the candlestick has a small body and long lower wick. It forms at the end of an uptrend, indicating a fall in price in the future.
• The shooting star is a pattern where a candlestick has a small body and a small lower wick. It is seen at the top of an uptrend and signals a strong decline in price in the future.
• Bearish engulfing is a pattern where a green candle is engulfed by a red one. It occurs at the top of an uptrend and signals the beginning of a downtrend.

Other bearish patterns include the evening star, three black crows and dark cloud cover.

However, it is important to remember that crypto charts cannot predict factors like hacking attacks, government regulations, news stories, etc., that can cause sudden, unexpected changes in price. Hence, besides technical analysis, staying abreast of the news is necessary.