Reading a crypto chart is quintessential for both beginners and experienced traders of the crypto world. Crypto charts are used to help cryptocurrency traders make better investment and trading decisions when it comes to cryptocurrencies. They are similar to other technical charts that help traders choose equity. But for the uninitiated, crypto charts are graphical representations of the price, volume, and time frames relative to the crypto market. But do you know how to read a cryptographic chart like a pro? Let’s start with the basics, then.
Dow’s theory: the foundation of technical analysis
Before starting to read a cryptographic chart, it is inevitable that every trader is familiar with Dow’s theory. Charles Dow pioneered technical analysis. He co-founded Dow Jones & Company. He was also the founder and editor of the Wall Street Journal. Dow’s ideas were developed in a series of Wall Street Journal editorials. After his death, other publishers, such as William Hamilton, perfected these ideas and picked up what is now known as Dow’s theory from his editorials. Dow’s theory can be called a framework for technical analysis. It enumerates 6 fundamental principles. The Dow Principles can be seen as the preamble for traders looking to identify and follow a crypto trend.
1. The market reflects everything
Dow’s theory is based on the hypothesis of efficient markets (EMH). It claims that asset prices reflect all available information and trade on cryptocurrencies or stock exchanges at their fair value. In other words, this strategy is the exact opposite of behavioral economics. For example, if an organization’s earnings are widely expected to improve, the market will reflect potential improvements even before they occur. Demand for the company’s stock will increase prior to the release of the enhancement report. Furthermore, the price may not change significantly after the release of the expected positive report.
2. There are three market trends
This theory was the first to propose that the market moves in three directions:
- Primary trend: Primary trends can last for months or years and be either upward or downward trends. This is the most significant market movement. Primary trends can be a bull market, where asset prices rise over time, or a bear market, where asset prices fall over time.
- Secondary trend: Secondary trends are considered corrections of a primary trend. These trends can work in opposition to the primary trend. Secondary trends can be withdrawals in bull markets. In these cases, asset prices drop temporarily. Secondary trends can also be bullish in bear markets. In these cases, prices rise temporarily before continuing to fall. These trends can last anywhere from a few weeks to a few months.
- Tertiary trend: Tertiary tendencies usually die in less than a week or less than ten days. They are often dismissed as market rumors that can be ignored. Tertiary trends can be defined as daily fluctuations in market movements. Some analysts believe that tertiary trends reflect market chatter.
Investors can find opportunities by examining these various trends. For example, reading a crypto chart, you might find a crypto that has a positive primary trend but a negative secondary trend. In this scenario, you may be able to buy the cryptocurrency at a low price and sell it once its value has increased.
3. Trends have three stages
According to Dow’s theory, there are 3 stages for each primary trend:
- Accumulation phase: The accumulation phase is the beginning of a primary upward (or downward) trend in a bullish (or bearish) market. During this phase, smart traders recognize the start of a new trend and either accumulate before an upward move or distribute before a downward move.
- Public participation phase: At this stage, the broader market recognizes the opportunity that smart traders have already identified. Due to this, the public becomes more active in buying. This causes market prices to rise or fall.
- Panic phase: The panic phase is characterized by excessive purchases by investors. Market participants begin to distribute their holdings. This means that they sell their holdings to other participants who have yet to acknowledge that the trend is about to reverse.
4. The indices must confirm each other
Dow believed that primary market trends observed on one index should be confirmed by trends observed on another. According to the theory, traders should not assume that a new primary uptrend is starting if one index confirms a new primary uptrend while another remains in a primary downtrend. For example, if India experiences an uptrend, all indices like Nifty, Sensex, Nifty Midcap, Nifty Smallcap and others are expected to rise, confirming the mutually observed trend. Similarly, for a bearish trend, all indices should move lower.
5. Trends are confirmed by the volume
If the price is moving in the direction of the primary trend, the volume should increase. On the other hand, if it is moving against it, the volume should decrease. The higher the volume, the more likely the movement is to reflect the true trend of the market. When the trading volume is low, price action may not accurately reflect the market trend. In an uptrend, for example, the volume increases with an increase in the price and decreases with a decrease in the price. In a downtrend, the volume increases as the price falls and decreases as the price rises.
6. Trends will persist until definitive signals indicate otherwise
Dow believed that if the market was trending, it would stay trending. For example, if a cryptocurrency starts growing in response to good news, it will continue to grow until a clear reversal occurs. Primary trend reversals can be confused with secondary trend reversals. As a result, Dow suggested treating trend reversals with suspicion and caution.
How to read cryptographic charts?
In most cryptocurrency price charts, the main price indicator is a candlestick. Candlestick charts are easy to read. They provide a direct representation of price action. In practice, the cryptocurrency market charts can be configured to display different time frames. Here the candlesticks represent each time interval. For example, suppose a cryptocurrency trading chart is set to a four hour time frame. In that chart, each candle represents four hours of trading activity. The trading period chosen is determined by the trader’s style and strategy.
A candlestick consists of two main bars:
- The thickest part is called “Body”. Shows the opening and closing prices of the asset.
- The thinnest part is called the “wick”. Show the highest and lowest price points.
On most crypto charts, a green candle indicates a bullish move or a rise in price. Meanwhile, a red candle indicates a bearish move or a decrease in the price. An almost bodyless candlestick and long wicks, on the other hand, indicates that neither buyers nor sellers are in control. The size, shape, durability and color of these candlesticks, as well as the patterns they produce, can provide hints for future price action. They allow analysts, buyers and traders to take positions or make changes based on probability.
Basic indicators and patterns for reading a cryptographic chart
There are many technical indicators to help traders read a crypto chart. Let’s discuss two popular technical indicators:
The moving average (MA) line is calculated by averaging the daily prices over a given period of time. This line moves on the price chart. When trading crypto charts in real time, moving averages can be adjusted to provide useful signals. Short-term price fluctuations are generally not considered by MA.
Support and resistance level
Support and resistance levels are key in interpreting crypto charts. During a pullback, support levels are price points where cryptocurrencies or any other assets are expected to stop due to a concentration of buying interest at that level. On the other hand, the price levels at which selling interest is concentrated are referred to as resistance levels. Traders often buy at support levels and sell at resistance levels.
Traders can deduce potential price movements from patterns formed on cryptocurrency charts, as well as technical indicators. Let’s take a look at 3 popular encryption models:
Hammer candle model
The “bullish hammer” is a type of reversal pattern. They typically form as a result of a drop in price at the bottom of a downtrend. It also indicates that buyers are flooding the market. The long lower wick represents the hammer handle. And the whole body of the candle represents the head of the hammer.
Head and shoulders
The head and shoulders models are trend reversal models. They can appear at the top or bottom of a trend. A bullish “head and shoulders” pattern may indicate that the price of cryptocurrencies is about to rise. Meanwhile, a bearish “head and shoulders” pattern may precede a price decline. These models show a clear tug-of-war between buyers and sellers.
Wedges demonstrate a trend that is losing traction in action. In a cryptographic chart, you can draw “wedges” by connecting the low points of the price movement over time and another line that plots the price peaks. When these two lines intersect left to right, you have a wedge. A bullish wedge can indicate that the asset is about to take a positive turn. Meanwhile, a bearish wedge may precede a cryptocurrency price spike and subsequent sell-off.
Cryptocurrency price charts can help you predict price trends and trade more easily. Reading the charts should be used to better understand the cryptocurrency market by learning more techniques and supported by a strong grasp on the fundamentals of the cryptocurrency market. However, reading the charts is not the only criterion of cryptocurrency trading. A thorough examination of crypto charts and patterns, combined with an analytical mindset and sufficient practice, could possibly provide traders with a competitive edge.
Read also | A beginner’s guide to blockchain technology