Getting started in the world of cryptocurrency can be overwhelming, with a plethora of buzzwords and an onslaught of charts. However, for those aspiring to become successful crypto traders, charts can serve as a powerful tool when utilized effectively. Armed with knowledge, many traders rely on charts to inform their decision-making processes.
What is a crypto chart?
So, what exactly is a crypto chart? Essentially, it is a visual representation of relevant data that helps users understand the movements of cryptocurrency prices. By plotting data in specific ways, charts enable users to identify patterns, spot emerging trends, and gain insight into the overall momentum of the market. This information can then be used to make predictions about future market directions, price fluctuations, and determine optimal times to buy, sell, or hold assets.
There are two primary types of charts commonly used in cryptocurrency trading: line charts and candlestick charts. Let's start with line charts.
What are crypto line charts?
Line charts are the simplest form of crypto charts, displaying historical price points of an asset. These charts typically show a green line, representing the price of the cryptocurrency in a specific currency (often USD). They are usually composed of daily closing prices within a selected time frame, which can range from minutes and hours for experienced traders to monthly intervals for long-term investors.
It's important to note that line charts can be displayed in two different scales: linear and logarithmic. The linear scale divides the price axis into equal segments, while the logarithmic scale adjusts the price according to percentage changes. The linear chart allows for better assessment of the speed of price changes, whereas logarithmic charts facilitate trend identification.
What are crypto candlestick charts?
Moving on to candlestick charts, which are more advanced and widely used in technical analysis by crypto traders. Candlestick charts may seem daunting at first, but they become easier to interpret with practice. The x-axis represents time, while the y-axis represents price. The distinctive feature of candlestick charts is the presence of candlestick-shaped data points, which provide valuable information.
Each candlestick represents a specific time period and displays a rectangular body that illustrates the price range between the opening and closing values for that period. Green candlesticks indicate an increase in value, where the opening price is at the bottom and the closing price is at the top. Conversely, red or pink candlesticks represent a decrease in value, with the opening price at the top and the closing price at the bottom. A doji is a cross or plus sign-shaped symbol in candlestick charts that indicates when the opening and closing prices are the same for a given day. Candlesticks also have lines, called wicks, extending from the top and bottom of the rectangle. The wicks in candlestick charts represent the highest and lowest price levels reached within the chosen time period. They offer valuable insights into market volatility, with wider wicks indicating more significant price fluctuations. According to proponents of technical analysis, high volatility suggests that price trends are more likely to continue or be corrected in subsequent trading sessions.
For instance, a short wick at the top suggests that the coin performed well, closing close to its highest price of the day. Conversely, a long top wick indicates that the price briefly reached higher levels but experienced selling pressure, potentially signaling a bearish market. On the other hand, a short bottom wick suggests ongoing selling pressure, indicating a potential further decline in price. However, a long bottom wick suggests that the price has already dipped and rebounded, possibly leading to an upward movement.
What are moving averages?
Moving averages are another significant aspect of analyzing crypto charts. These lines are based on the average closing price of a coin over a specified period. They assist in identifying patterns, determining trends, and providing signals for entering or exiting positions. For example, a 50-day moving average is calculated by adding up the closing prices of a coin for the preceding 50 trading days and dividing the sum by 50.
Understanding Time Frames
Understanding time frames is crucial in trading as it provides insights into an asset's trend and helps traders choose the appropriate trading pace. Different time frames can reveal varying trends for the same asset. For example, Bitcoin may be in a downtrend on a weekly time frame but in an uptrend on a yearly time frame.
Time frames allow traders to align their trading style with the desired pace. Day traders who execute quick trades prefer lower time frames (LTFs), while long-term investors focus on higher time frames (HTFs) and are less concerned with short-term price fluctuations.
Lower time frames include intervals such as 5 minutes, 15 minutes, 30 minutes, and 1 hour. On the other hand, higher time frames consist of intervals like 4 hours, 1 day, 1 week, and 1 month. HTFs are generally considered more reliable as they provide a broader view of an asset's price action.
It's important for traders to consider both the chosen time frame and the adjacent time frame. While sticking to one time frame is preferable, observing the time frame above or below can provide valuable context and complement the analysis. Neglecting to do so may result in overlooking important market events. For instance, a 4-hour candle that appears bullish on the HTF might reveal a bearish trend on the LTF if its momentum has slowed down towards the close.
By understanding and analyzing multiple time frames, traders can gain a more comprehensive perspective on market trends and make more informed trading decisions.
Reading Crypto Charts: Putting It All Together
In conclusion, understanding cryptocurrency charts is essential for crypto traders. Line charts provide a basic overview of historical prices, while candlestick charts offer more detailed insights into price movements, market sentiment, and volatility. Moving averages further enhance analysis by revealing trends and potential trading signals. By mastering these charting techniques, traders can gain a deeper understanding of cryptocurrency markets and make informed decisions based on technical analysis. Stay tuned for our next blog, where we'll delve into using these charts for predicting future price movements using techniques such as trend lines and resistance levels.
