Knowing how to read cryptocurrency price charts is essential if you want to get into crypto trading. The Technical Analyses (TA) that come with these charts can be quite cumbersome for newbies.
That’s why we created this guide on how to read candlestick charts, what are the different elements in a price chart, and the technical analyses we can draw from them.
How to read candlestick charts
Candlestick charts give you all the crypto price information required to trade. Using such charts, you can speculate the proper entry and exit points and also perform technical analysis. These candlestick charts form different shapes and patterns that help to predict future market trends.
What are candlesticks?
Before we dive into the different things you can derive from candlestick charts, here’s what you can see from the candlesticks themselves.
Short answer: A candlestick on a price chart shows an asset’s opening, closing, high and low price in a given period of time, often daily.
Candlesticks are plot points – shapes – on price charts that can show a myriad of things about an asset. They’re composed of a body and wicks, usually called “shadows”.
Candlestick bodies:
The candlestick’s body – the rectangular bit – shows an asset’s opening and closing price.
Opening Price: The price at that an asset starts trading when the exchange opens.
Closing Price: The final price at that an asset is traded when the exchange closes.
Bearish and Bullish Indicators:
There are two types of candlesticks – Bearish and Bullish.
Bullish (green) candles show an increase in price at the selected time frame. The top part of the candle represents the closing price, and the bottom part denotes the opening price.
Bearish (red) candlesticks show a decrease in price. The top part of the candle represents the opening price, and the bottom part denotes the closing price.
Candlestick wicks (shadows):
Shadows, or “wicks” show assets’ price fluctuation in relation to the daily opening and closing prices
High Price: The highest price at which an asset is traded within a day.
Low Price: The lowest price at which an asset is traded within a day.
What’s on a candlestick price chart?
Now that we know what candlesticks on a price chart can show us, here’s a run-down of the other elements on a candlestick chart.
1. Time selection
The crypto candlestick charts allow you to select the right time frame you want to display. You can choose from a default time frame – 1 hour, 6 hours, daily, weekly, monthly, or even all-time. You can even customize the time frame to your requirements and zoom in to see price fluctuations within the past 15 minutes.
Time Frames for crypto charts
A technical analyst looks at crypto charts along with their technical tools and also considers time frames. The popular time frames that an analyst looks for are:
- 15-minute chart
- Hourly chart
- 4-hour chart
- Daily chart
The time frame that any trader looks for is dependent on their trading style. There are generally two types of traders.
Intra-day traders
Intra-day traders generally open and close their positions within a day. Such traders prefer short time frames such as hourly, 15-minute, or even 5-minute charts.
Long-term traders
Long-term traders hold their position for weeks, months, and even years. They find hourly, 4-hours, daily, or weekly charts more useful.
The shorter time frame charts, such as 15-minute charts will only be useful for an intra-day trader and not a long-term trader.
2. Volume
Any standard crypto chart will display the volume of cryptocurrency trading at a particular time. The volume shows how much crypto was traded in the selected time frame. The higher the volume bar, the more people are buying or selling.
A green volume bar indicates increased interest in buying the cryptocurrency and buying pressure, and the red bar indicates a decrease in the interest in the coin and selling pressure.
What is Technical Analysis?
Technical Analysis is a method used to predict the future movements of a cryptocurrency pair, or a stock. To perform technical analysis, traders use technical indicators.
Technical indicators on a candlestick chart
In addition to assets’ prices, price charts also provide technical indicators that can help traders determine patterns and potential movements. Examples include support and resistance levels, and moving averages.
What is a technical indicator?: The different lines on a price chart, known as technical indicators, are calculated forecasts made based on an assets’ price history and external factors like news and macroeconomic policies.
1. Support and Resistance Levels
Support and Resistance levels are crucial to interpreting cryptocurrency charts. These are some predetermined levels that denote the reversal of trends. Traders generally buy at support levels and sell at resistance levels.
The support and resistance levels are quite significant and attract a lot of attention and speculations.
Support Level
A support level is formed when the price of the crypto asset stops declining after a certain limit. However, if the sellers carry more momentum, a new support level will be formed as the price breaches the previous support level.
Resistance Level
The resistance level is formed at a point when the price of the crypto asset stops rising. If the buyers bring enough momentum, the resistance level can be breached.
There is an increase in prices when the price bounces off a support level. This occurs when:
- The long traders bring more money to the market to improve their position
- The short traders also try to buy-in
- The newer traders who haven’t entered yet might wait for a breach in the support level
When the price dips below the support level and decreases further:
- The long traders wait for the market to recover to minimize their losses.
- The short traders are in control and try to add more to their position.
- The newer traders might buy in at this point.
2. Moving average
The moving average line moves across the price chart and is calculated by averaging daily prices over a given period of time. Moving averages do not typically factor in short-term price fluctuations.
3. Market capitalization (market cap)
The market cap of any coin is generally the product of the coins in supply and the price of the coin. This is an excellent indicator of the stability of the coin.
While these are not always present on the chart, it’s still an important factor to take note of.
The following formula calculates the market cap of any coin:
Market Cap = Total Circulating Supply x Price of each coin
Are you just starting to trade crypto? If so, we totally get it if this information and terms are a little overwhelming.
Read more: What Is Market Capitalization? Why Are They Important In Crypto?
To make it a little easier, we’d suggest looking through our Blog page for some more beginner-friendly resources.
In fact, we even have a guide for those who are fresh to the crypto-scene.
Not-so-technical indicator: Market Emotions
The price movements in the crypto industry are also affected by the fear, greed, optimism, and pessimism of the market participants.
- When the price falls below the support level, greed or optimism takes over, and all traders buy in.
- Due to this, a herd mentality sets in, and the price goes way beyond the support line.
- As the price increases, fear and pessimism set in. Traders begin to sell their assets to avoid incurring any losses.
Read more: Crypto Fear & Greed Index – A Measure of The Crypto Market Sentiment
So, in summary, understanding the Technical Analysis of any asset is beneficial to your overall success. If you are starting for the first time, we encourage taking a reserved approach. Remember the price will always go up and down. There will always be positions to enter the market, so don’t feel like you need to rush in to start.
Bearish reversal patterns
Just like there are bullish reversal patterns, here are some bearish reversal patterns.
Shooting Star
The shooting start is a single candle bearish reversal pattern which indicates that the sellers are coming in strong to the market.
- Will appear to show little or no lower shadow
- The price closes at the bottom quarter of the range
- The upper shadow is 2-3 times the size of the candle body
The shooting star denotes that the buyers took control of the market and pushed the price to increase. However, the selling pressure increased, and the market was overwhelmed by the bulls.
Bearish Engulfing Pattern
These two candle patterns can be recognized when:
- The first candle is bullish
- The second candle is bullish and more substantial than the first candle
This pattern denotes the following:
- The buyers were in control of the first candle.
- The sellers take over in the second candle, and the closing price is lower than the previous candle’s low.
Evening Star
The evening star is a 3-candle bearish reversal candle pattern which shows that the buyers are exhausted, and the sellers are temporarily in control. It can be easily identified by:
- The first candle closes in a bullish position
- The range of the second candle is small
- And finally, there is an aggressive bearish close for the third candle
After identifying an evening star candle, it should tell you the following:
- The buyers have taken control of the first candle
- When the second candle appears, there should be a deadlock between the bulls and bears
- The third candle shows that the sellers have taken over and that the bulls are exhausted.
Now that we’ve covered the different patterns and technical indicators on a price chart, it’s time to see where the rationale comes from.
Most of these technical analyses are rooted in Dow Theory.
What is Dow Theory?
Short answer: A financial theory and framework used to predict whether the market is showing an upward trend based on one of the Dao averages e.g. Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA).
To have a better understanding of price movements and technical analysis, it’s critical to become familiar with Dow Theory.
The fundamental ideas of Dow Theory are given below:
- When determining an asset’s price, the market considers every possible factor: all current, previous, and upcoming news
- The crypto market is affected by quite a lot of factors and variables such as current, past, and future demands or any regulations that are in place.
- The price movements are not exactly random; they tend to follow trends in both the long and short term.
- Market analysts are more focused on the price of the coin rather than what variable is moving the price.
- History also tends to repeat itself, which makes the market behavior more predictable for traders, and they react the same way on seeing such patterns.
The Dow Theory has six core principles:
- The market has three movements
- Each market trend has three phases
- The stock market takes every piece of news into account
- Market averages must confirm each other
- Volumes must confirm trends
- Trends will continue until there is a clear reversal
Here’s an explanation of each principle.
1. The market has three movements
Three market movements: Primary (lasts for 1-3 years), secondary (lasts 3 weeks – 3 months) and minor (last less than 3 weeks)
- The primary (main) movement is a significant trend that lasts for one to three years. This can refer to bullish (upwards movement) or bearish (downwards movement) trends.
- Secondary (intermediate) movements may last for three weeks to three months. They’re often said to be corrections – think: reversals – to primary trends.
- The minor movements are classified as trends that last for less than three weeks.
Note: The three movements listed above may happen simultaneously.
2. Market trends have three phases
Accumulation Phase
This is the phase where knowledgeable investors come together and start buying or selling the asset based on their market perceptions. The cryptocurrency price isn’t likely to be affected much during this phase because the volume of investors is relatively low compared to the total market.
Absorption Phase
The absorption phase is where the market catches on to the intelligent investors’ moves, and the public participates. More people begin following the trend.
Distribution Phase
After all the speculation, the limited supply of assets limits the market price as knowledgeable investors begin to sell their holdings to the market.
3. The stock market takes all news into account
The stock market reflects new information as soon as it becomes available. It incorporates the sum of all hopes, fears, and expectations of the market participants. Once the news is out, the price of the asset is subject to change to reflect the news.
Various factors, such as interest rate movements, earnings expectations, major elections, and much more get included in the market price.
4. Market averages must confirm each other
The performance of the stock market depends on the overall performance of market participants. If one portion of market participants is interested in investing, the other part should also be interested to confirm a trend.
Any diverging views or performance can lead to a market trend reversal.
5. Volumes have to confirm market trends
The upwards trend should be accompanied by an increase in the volume as well as the prices, and downward trends should lead to a volume decrease with the decrease in the price.
6. Trends will continue until there is a clear reversal
The Dow theory suggests that the market will follow a specific trend until some external force affects it, much like Newton’s first law of motion.
And there you have it. While they look intimidating at first, cryptocurrency price charts can actually make forecasting price trends and trading easier. Once you figure out how to use technical indicators, you can start making predictions on cryptos’ prices.
Before you know it, you’ll be using your own analysis to trade crypto. When you’re ready, we’d suggest using Zipmex. Our platform lets you sell and buy Bitcoin, Ethereum, Ripple, Litecoin, USDT, USDC, Chainlink, Swipe, Maker Koin, Enjin Coin, and other crypto assets in Zipmex, with the best prices and low spread. Sign up now here and download the app.
Disclaimer:
All investments are speculative and have risks and substantial uncertainty. Investors must understand digital assets characteristics including refund terms and asset risks. We encourage investors to fully understand assets and risks before doing any investment.
