A How-to Guide For Reading Crypto Charts

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A How-to Guide For Reading Crypto Charts

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Being able to read and understand trading charts is an essential skill if you plan to trade Bitcoin successfully. However, the terminology and analysis which is required can be daunting, especially to less-experienced traders. This guide aims to simplify the process so you can better understand what crypto charts are showing you.

The Dow Theory

One of the first principles which you should become accustomed to is the Dow Theory, which will help you analyse chart movements. According to this theory:

  • The value of a currency is determined by the market, which is affected by multiple external forces.
  • The value of crypto is impacted by several variables, including the past, present, and predicted demands as well as other popularity and legislation.
  • Generally, price movements are less random and more prone to following trends, both in the short and long terms.
  • Ultimately, market analysts focus their attention on the price of the crypto coin instead of chasing individual variables which create a difference in price.

Cryptocurrencies, although decentralised, and often thought to act differently from traditional markets, actually have a lot in common. Commonly, traders react in the same way to the same set of circumstances, leading to history repeating itself, creating trends which are clearly visible in crypto charts.

Dow Theory Tenents

The Dow Theory consists of six tenants as follows:

Movements of the Market

The primary movement in any crypto chart shows a major trend which could last from just under a year to any number of years. This movement is called a bullish (upward) or bearish (downward) trend. Within this primary movement, there are generally several smaller swings, which are short-term market reactions which could last for days or even months. Called medium swings, these movements normally vary between 33% to 66% of the primary price change.

Crypto charts also include short swings, which are small movements taking place over a matter of hours or up to a month or so. Medium and short swings can happen simultaneously or independently of each other, and one single day of trading could easily witness both a bearish primary movement and a bullish secondary one.

Three Phases of Market Trends

Market trends normally experience three distinct phases:

  1. Accumulation – informed and experienced investors trade crypto basing their decisions on their perception of the market. This group of investors is normally small, so this does not have a great impact on the currency’s price.
  2. Absorption – the point at which the general market catches onto the actions of the more experienced investors, following their actions. At this point, price speculation begins and normally grows exponentially.
  3. Distribution – the market moves in the direction of the speculators, leading back to the accumulation phase.

News and the Market

The price of any given asset, such as cryptocurrency, incorporates within it the sum of fear and hope of the traders. The market, and ultimately the cost of each coin, is affected by cryptocurrency news, including the release of new projects and new coins.

Market Averages Confirm Each Other

Linked assets tend to perform in symmetry of each other, so if Asset A is falling then Asset B should be falling too. Sometimes, this doesn’t happen immediately and can give savvy investors an opportunity to identify an upcoming market trend reverse.

Trends Confirmed by Volume

During a bull market, an increase in price should lead to an increase in trading volume. Similarly, during a bear market, the trading volume should decrease as the price of the crypto asset decreases.

Trends Exist until they don’t.

Trends tend to be very difficult to reverse and continue even when there are several secondary price changes. It is very difficult to predict a trend reversal until you can clearly see one on a chart.

Japanese Candlestick Charts

These are the most popular crypto chart types you will encounter in your trades. The chart is made up of red and green candlesticks, with each one showing a price movement during a specific time interval. As a result, you are able to see both the opening and closing prices of that particular interval.

Each candle has a body and shadows coming out of it. The body shows the difference between the open and close prices, whilst the shadows depict how low or high these prices have gone. A green candle’s upper shadow is the close price and its lower shadow is the open price. Naturally, the opposite is true for a red candle.

Japenese Candlestick Charts are great for understanding when and how a market has reversed, and you can also use them to quickly identify both primary and secondary patterns. As a result, you can use them to visually predict the direction of the market, and plan trades accordingly.

Relative Strength Index

Relative Strength Index (RSI) is the measurement of the speed and strength of a price movement. Through a simple formula, you can compare the current price of a cryptocurrency with its past performance to determine whether that currency has been oversold or overbought.

The RSI formula is: 100-(100/(1-RS))

RS is the ratio between the average of the days the coin was up and the average of the days that it was down. The best cryptocurrency exchange platforms, including Binance and Coinbase Pro provide you with this value immediately.

When reading RSI charts, here is what you need to keep in mind:

  • The RSI values range from 0 to 100
  • When the RSI value is close to or over 70, it is considered to be overbought, and the price will probably drop
  • When the RSI value is close to or less than 30, the currency is underbought, and there is a greater likelihood that the price will increase

RSI values, whilst helpful and popular amongst margin traders and those trading Bitcoin CFDs, are not infallible. You should use them as a guide when you make decisions, but you must also get comfortable reading and understanding crypto charts and being aware of what is going in the industry.

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