How to read crypto charts and understand crypto chart patterns

Jump to page contents

How to read crypto charts and understand crypto chart patterns

Being able to read and understand crypto chart patterns 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 charts are showing you and how to read crypto chart patterns.

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 that are clearly visible in crypto chart patterns.

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.

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.

How to read crypto charts and patterns?

When it comes to reading crypto chart patterns, there are 3 important metrics to pay attention to:

  1. Key level breakout – for a breakout to happen, the price must go above or below the key levels. In trading, it is called the resistance and support level. Depending on a crypto trading strategy, you can either wait for a breakout or pullback to happen. Breakouts mean that there is enough force coming from bulls for a price to finally break free from the ceiling and go upwards. Whereas a pullback happens when the bears keep the price in the zone, so it bounces back. When it comes to reading crypto chart patterns note the low & high price where cryptocurrency has stayed for a longer time and these can be the basis of determining the key price levels.
  2. Emerging chart patterns – full-formed price patterns like up trending or down trending. Unlike the breakout chart pattern, an emerging strategy is easier to recognize.
  3. Bounce chart pattern – is more similar to day trading as traders can buy low and sell high.

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.

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 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 the crypto chart patterns and being aware of what is going in the industry.

Ready to join our tribe?

We respect your email privacy

Subscribe now to recieve exclusive updates and offers!

Recently Similar Guides

Latest Guides

Crypto Mining,Mining

CPU vs GPU Mining at Home: Which is Better?

As cryptocurrency becomes mainstream, more and more people are getting involved in the crypto-world. This has also raised curiosity on how to mine cryptocurrencies and not just exchange and purchase them. As exciting as this sounds, crypto-mining is not easy to achieve, as it requires deep technical knowledge. If mining cryptos is something you are […]

15 June, 2021
Crypto Wallets,DogeCoin,Ethereum,Litecoin,Ripple

Best Ways for Coin Storage to Protect Your Cryptocurrency

As the price of Bitcoin and other cryptocurrencies continues to soar, news of people who have lost access to their crypto stash is always hitting the headlines. Recently, Stefan Thomas, a German-born crypto enthusiast, made news when he had only two attempts to his password for him to access his 7,002 Bitcoins worth millions of […]

9 June, 2021
Crypto Mining,Mining,Monero

How To Mine Monero (XMR) In 2021

In this how to mine Monero guide, we will provide you with the important information you need to know before you mine this cryptocurrency. We will also offer guidance on building your Monero mining rig and where you can sell your coins for a profit. What is Monero? Monero is an open-source digital currency that […]

6 June, 2021
Bitcoin,Crypto Mining,Crypto Wallets,Litecoin

How to Mine Litecoin in 2021?

Although Bitcoin is seen as the “gold” of cryptocurrencies and a value for long-term purposes, Litecoin is seen as the “silver” of cryptocurrencies and a trading tool for cheaper and daily purposes. Litecoin was released on October 7, 2011, through an open-source client on GitHub. The Litecoin network was launched on October 13, 2011. It […]

2 June, 2021
Altcoins,Cryptocurrency,Exchange Platforms,Investment

Open Source Cryptocurrency Exchange Explained

Cryptocurrencies are turning the Fintech world upside down. As the immense power of Blockchain technology continues to unfold, it comes with limitless opportunities that are transforming the global economy. Apart from the decentralized nature of crypto, there’s one fundamental aspect of this mind-boggling technology: the open source aspect of cryptocurrencies. To understand how crypto works, […]

19 May, 2021

Cryptocurrency Liquidity And The Importance Of It

The worldwide recognition of cryptocurrency has drawn people’s attention to certain terms like market capitalization, staking, harvesting, NFT, liquidity, and many more. Cryptocurrency traders know that they have no other option than to learn these terms if they want to succeed in the crypto market. This is because such terms make it easier for them […]

17 May, 2021
Bitcoin,Bitcoin Cash,Litecoin

Litecoin vs Bitcoin Cash – Which is better?

Bitcoin is considered one of the biggest innovations of the recent past. However, the rapid development also brought problems that were not expected so soon. Scalability, in particular, has become a challenge. In response, a hard fork of Bitcoin eventually created Litecoin and Bitcoin Cash. Litecoin (LTC) was launched in 2011, making it one of […]

14 May, 2021
simulated trading,Trading,virtual trading

How To Automate Bitcoin Trading?

Bitcoin is the most accepted, traded, and valuable cryptocurrency. It has come a long way since its launch in 2009 and virtually all crypto exchanges offer bitcoin on their platform. If you’re looking to trade bitcoin, you should consider using crypto trading bots. This article will touch on what trading bots are and will provide […]

11 May, 2021