Why Reading Cryptocurrency Charts Is Essential For Traders
Reading cryptocurrency charts is essential for traders to find the best opportunities in the market as technical analysis can help investors identify the best opportunities in the market. market trends and predict future price movements of an asset.
Technical analysis refers to the analysis of statistical trends collected over time to understand how the supply and demand for a specific asset influence future price changes. Reading cryptocurrency market charts can help investors make well-informed decisions based on when they expect bullish and bearish moves to end.
A bull move refers to a bullish price move driven by bulls, who are the buyers of an asset. A bear move is a downward price move that is trampled on by bears, who are the sellers of the asset. Technical analysis can help traders assess price trends and patterns on charts to find trading opportunities. The best crypto charts help monitor market movements, but they do have a few caveats.
What is technical analysis?
“Technical” refers to the analysis of past trading activity and price movements of an asset, which technical analysts believe may be useful in predicting future price movements of an asset. It can be used for any asset with historical trading data, which means stocks, futures, commodities, forex, and cryptocurrencies.
Technical analysis was first introduced by Charles Dow, the founder and publisher of the Wall Street Journal and co-founder of Dow Jones & Company. Dow was partly responsible for the creation of the first stock market index, which was the Dow Jones Transportation Index (DJT).
Dow’s ideas were written up in a series of editorials published in the Wall Street Journal and, after his death, were compiled to create what is now known as the Dow Theory. Technical analysis, it’s worth noting, has since evolved through years of research to include the patterns and signals we know now.
The validity of technical analysis depends on whether the market has priced in all known information about a given asset, implying that the asset is fairly valued based on that information. Traders who use technical analysis employing market psychology believe that history will eventually repeat itself.
Technical analysts can incorporate fundamental analysis into their trading strategy to determine if an asset is worth approaching and complement their decisions with analysis of trading signals to know when to buy and when to sell to maximize profits. Fundamental analysis is the study of financial information that affects the price of an asset in order to predict its potential growth. For a company’s stock, fundamental analysis may include looking at its earnings, industry performance, and brand value.
As technical analysts they seek to identify bullish and bearish price movements to help traders make more informed decisions.
The Dow Theory and the Six Principles of the Dow Theory
Charles Dow helped create the first stock index in 1884. The creation of this index was followed by the creation of the Dow Jones Industrial Average (DJIA), which is a tracking index. weighted prices. the 30 largest publicly traded companies in the United States. Dow believed that the stock market was a reliable way of measuring business conditions within the economy and that by analyzing it, major market trends could be identified.
The Dow Theory has undergone some changes thanks to the contributions of several other analysts, including William Hamilton, Robert Thea, and Richard Russell. Over time, some aspects of the Dow Theory lost emphasis, including its focus on the transportation sector. While the DJT is still tracked by traders, it is not considered a primary market index, while the DJIA is.
The theory has six main components known as the six principles of Dow Theory. We will go through them one by one in the sections below.
The Market Reflects Everything
The first principle of Dow Theory is one of the basic tenets of technical analysis: that the market reflects all available information in asset prices and values that information accordingly. For example, if a company is expected to report positive earnings, the market values the asset higher.
The principle is close to what is now known as the Efficient Market Hypothesis (EMH), which states that asset prices reflect all available information and trade at fair value on stock exchanges.
There are three types of trends in the market
The Dow Theory also suggests that markets experience three types of trends. Primary trends are the major movements in the market and tend to last for months or years. Primary trends can be a bull market, which means asset prices go up over time, or a bear market, which means they go down over time.
Within these primary trends, there are other secondary ones, which can go against the primary trend. Secondary trends can be pullbacks in bull markets, where asset prices temporarily recede, or rallies in bear markets, where prices rise temporarily before continuing their downtrend.
There are also tertiary trends, which tend to last a week or a little over a week and are often considered market noise that could be ignored as it will not affect long-term movements.
Primary Trends Have Three Phases
Traders can find opportunities by examining different trends. For example, during a primary uptrend, traders can take advantage of a secondary downtrend to buy an asset at a lower price before it continues to rise. Recognizing these trends is difficult, especially given the Dow Theory, which says that primary trends have three phases.
The first phase, the accumulation phase for a bull market and the distribution phase for a bear market, precedes a reverse trend and occurs when market sentiment remains predominantly negative in a bull market or positive during a bear market. During this phase, smart traders understand that a new trend is starting and accumulate before a move higher or distribute before a move in a downward direction.
The second phase is called the public participation phase. During this phase, the market generally realizes that a new primary trend has started and begins to buy more assets to take advantage of upward price movements or sell to cut losses on downward movements. In the second phase, prices rise or fall rapidly.
The final phase is called the excess phase during bull markets and the panic phase during bear markets. During the excess or panic phase, the general public continues to speculate as the trend is about to end. Market participants who understand this phase start selling in anticipation of a bearish primary phase or buying in anticipation of a bullish primary phase.
While there is no guarantee on the consistency of these trends, many investors consider them before making their decisions.
Indices Should Correlate
The fourth principle of Dow Theory suggests that a market trend is only confirmed when both indices indicate that a new trend is beginning. According to the theory, if one index confirms a new primary uptrend while another remains in a primary downtrend, traders should not assume that a new primary uptrend is starting.
Here, it is worth noting that the main Dow indices at the time were the Dow Jones Industrial Average and the Dow Jones Transportation Average, which would naturally tend to correlate, as industrial activity was heavily tied to the transportation market at the time. .
volume confirms trends
The fifth principle of Dow Theory says that trading volume should increase if an asset’s price moves in the direction of its main trend and decrease if it moves against it. Trading volume is a measure of how much an asset has been traded during a specific period and is considered a secondary indicator, with low volume indicating that a trend is weak, while high trading volume indicates that a trend is weak. strong.
If the market sees a secondary downtrend on low volume during a primary uptrend, it means that the secondary trend is relatively weak. If the trading volume is significant during the secondary trend, it shows that more market participants are starting to sell.
Trends are valid until a reversal is clear
. Finally, the sixth principle of Dow Theory suggests that trend reversals should be treated with suspicion and caution, as reversals in primary trends can simply be mistaken for secondary trends.
What are candlestick charts?
Cryptocurrency market trends can be viewed and analyzed in many ways, with various types of charts available to traders. Crypto candlestick charts offer more information due to the nature of Japanese candlesticks.
Crypto candlestick charts show time on the horizontal access and private data on the vertical axis, just like line and bar charts. The main difference is that candlesticks show whether the market price movement was positive or negative in a given period and to what extent.
Crypto market charts can be set to different time frames, with candlesticks representing that time frame. If a crypto trading chart is set to a four-hour time frame, for example, each candle will represent four hours of trading activity. The trading period chosen depends on the style and strategy of the traders.
A candlestick is essentially made up of a body and wicks. The body of each candlestick represents its opening and closing prices, while the top wick represents how high the price of a cryptocurrency rose during that time period, and the bottom wick represents how low it got.
Similarly, candle holders can have two different colors: green or red. The green candles show that the price went up during the considered period, while the red candles show that the price went down.
The simple structure of Japanese candlesticks can offer users a lot of information. Technical analysts can use Japanese candlestick patterns to, for example, identify potential trend changes. Cryptocurrency traders need to be aware of bullish and bearish candlestick patterns.
A long wick at the top of a candlestick’s body can, for example, suggest that traders are making a profit and a sell-off is coming soon. Conversely, a long wick at the bottom could mean that traders are buying the asset every time the price drops.
Similarly, a candle where the body takes up almost all of the space and has very short wicks, can mean strong bullish sentiment if it is green or strong bearish sentiment if it is red. On the other hand, a nearly flat candle with long wicks indicates that neither buyers nor sellers are in control.
Support and Resistance Levels
Reading live crypto candlestick charts is made easier by using support and resistance levels, which can be identified with the use of trend lines. Trend lines are lines drawn on charts by connecting a series of prices.
Support levels are price points during pullbacks where cryptocurrencies or any other asset is expected to stop due to a concentration of buying interest at that level. Resistance levels are price points where there is concentrated selling interest. Concentrated buying and selling interests make it difficult to break through these levels.
Support and resistance levels can be identified through trend lines as they make it easy to identify crypto chart patterns. An uptrend line is drawn using the lowest lows and second lowest of a cryptocurrency in a given time period. Levels that touch this trend line are considered support.
A downtrend line is drawn using the highest highs and second highest of the crypto, and levels touching this line are seen as resistance levels. As the name suggests, downtrend lines are used during downtrends, while uptrend lines are used. Various strategies can be used based on trend lines and support and resistance levels. For example, some technical analysts simply buy near the support of the uptrend lines and sell near the resistance of the downtrend lines.
Often the price of a cryptocurrency can move sideways in a somewhat stable range. Between September and November 2018, for example, Bitcoin (BTC) traded between $6,000 and $6,500 before falling to $3,200 in December 2018. In this case, the resistance levels are at the top of the range, while the support are at the bottom of the range. . A breakout can occur if the price of the cryptocurrency drops below that range with a strong move, or a breakout if it rises with a strong price move.
Support and resistance levels can also be determined using long-term moving averages. These are common technical indicators that smooth price data by creating a constantly updated price average.
What are moving averages?
A moving average (MA) is one of the most widely used types of technical indicators and essentially cuts out the noise by generating an average price for a given cryptocurrency. Moving averages can be adjusted to periods and offer useful signals when trading crypto charts in real time.
The most used moving averages are used for periods of 10, 20, 50, 100 or even 200 days. This makes market trends more visible, with a 200-day moving average being considered a support level during an uptrend and a resistance level during a downtrend.
There are different types of moving averages used by traders. A simple moving average (SMA) simply adds up the average price of an asset over a given period and divides it by the number of periods.
A Weighted Moving Average (WMA) gives more weight to recent prices so they are more responsive to new changes. Similarly, an exponential moving average (EMA) gives more weight to recent prices, but is inconsistent with the rate of decline between a price and the previous price.
Moving averages are lagging indicators as they are based on past prices. Traders often use moving averages as signals to buy and sell assets, with periods determined by their time frames.
The 50-day and 200-day moving averages are closely watched on cryptocurrency trading charts, as when the 50-day SMA crosses below the 200-day SMA, the so-called cross of death forms, suggesting an imminent drop in price. When the 50-day SMA crosses above the 200-day SMA, a golden cross forms, suggesting a price increase.
Other Top Technical Indicators
Here, we’ll take a look at several other popular technical indicators out there.
On Balance Volume (OBV)
Indicator The On Balance Volume Indicator is a technical indicator that focuses on the trading volume of a cryptocurrency. It was created by Joseph Granville in the belief that trading volume was an important factor in price movements in the markets.
OBV is a cumulative indicator that rises and falls based on the trading volume of the days included within a specified period. It is used to confirm trends, as when looking at live crypto charts, traders should see rising prices accompanied by a rising OBV. The price drop should be accompanied by a drop in OBV.
The OBV is calculated in several ways, as follows:
Moving Average Convergence Divergence (MACD)
The Moving Average Convergence Divergence is an indicator that measures the difference between the 12 and 26 day EMAs to form the MACD line and is used to identify both. Buy and sell signals. It is an oscillator, which means that it is an indicator that fluctuates above and below a centered line.
When the 12-day EMA crosses below the 26-day EMA, the MACD shows a sell signal, while the opposite indicates that it is time to buy the asset under consideration. The greater the distance between both lines, the stronger the MACD reading will be!
The indicator also has a signal line, which is a 9-day EMA. The MACD crossing above the signal often implies that it is time to buy, while crossing below it implies that it is time to sell. The MACD indicator also includes a histogram to measure the difference between the MACD and the signal line.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator used to measure whether an asset is being overbought or oversold. The RSI is displayed as an oscillator, which means a line between two extremes, and can range from 0 to 100.
The indicator uses a 14-day time frame and a cryptocurrency is considered oversold when its value drops below 30 and it is considered overbought when its value moves above 70. Overbought is a sell signal, while oversold is a buy signal.
Developed by John Bollinger, Bollinger Bands help traders identify short-term price movements in asset prices, including cryptocurrencies. Bollinger Bands are created by using a 20-day moving average and adding and subtracting one standard deviation from the moving average.
Bollinger bands parameters can be customized, and the bands expand and contract based on the price of the cryptocurrency. The bands show periods of higher or lower volatility and are not meant to be used alone, but also with other indicators.
When the price of a cryptocurrency moves above the upper band, it is considered overbought, while a move below the lower band is considered oversold. Bollinger bands are based on the concept that periods of low volatility are followed by periods of high volatility, which implies that when the bands break apart during periods of high volatility, the current trend may be coming to an end. . Similarly, when the bands are close together, the asset can expire during a period of high volatility.