Charts are important in showing price action and providing insight into how the markets are trending and what to expect in the potential future actions of price, allowing both traders and investors to make information-based decisions. 

This blog takes you through the various essential components to be considered in the interpretation of crypto charts.

Types of Crypto Charts

When monitoring the flow of cryptocurrency prices, you’ll primarily experience the following three types of charts:

Line Chart

A line chart is one of the most simple types and represents price action over time. Closing prices are connected by a continuous line, thus clearly visualizing price action trends. Such a chart is useful for a general view of the price action but can lack the detail needed for further investigation.

Bar Charts

A bar graph is used to represent the period of movement of prices in terms of vertical bars. Each bar represents a specific time, for instance, one hour, one day, or one week, and four significant price prices are represented inside it:

Open Price: The price at the beginning of the specified time.

Close Price: The price at the end of the specified time period.

High Price: The highest price earned in that particular specified time.

Lowest Price: The lowest price that was recorded during that period.

The length of the bar shows the range of price for that period and hence makes it easier to observe volatilities and price movements.

Candlestick Chart

The Candlestick chart is quite similar to the bar chart but provides more visual information. Each candlestick has a body and wicks or shadows:

The body represents the range between the open and closed prices. If the close price is greater than the open price, the body is generally filled (or green-colored). If the close price is less, the body is usually hollow (or red-colored).

The wicks indicate the extreme prices during the period.

Candlestick charts give a trader a tremendous amount of information at one glance, so they are used often in technical analysis.

Time Frames and Trends

Time Frames

Charts can depict data about prices across any timeframe, for example:

Minutes: Useful for day traders who aim to take advantage of short-term price fluctuations.

Hours: Good for swing traders targeting a trend that lasts for several days.

Days: Good for trend-following long-term investors who are interested in the broader market trends.

The time frame you choose will determine your analysis and trading strategy; hence you need to settle on one that will suit your goals.

Trends

There are three categories of trends

Uptrend: More high highs and high lows, where the prices are rising.

Downtrend: Low high and low low, whereby the prices are dropping.

Sideways/Range: Levels continue trading within a horizontal range, which means indecision within the market.

Knowing trends lets the trader know exactly where they could enter or exit a trade.

Key Indicators and Tools

Moving Averages

Moving Averages is a technique to smooth out price data over a given period.

Simple Moving Average, or SMA: It is the average of a period set with regard to the price, and can be a lagging indicator regarding the price direction.

Exponential Moving Average, or EMA: It has more emphasis and weightage on the recent prices, hence it’s sensitive to price changes.

Relative Strength Index (RSI)

The RSI is a momentum indicator that measures the speed and change of price movements. It ranges between 0 and 100, and it is mainly used to identify if the security is overbought or oversold. 

The overbought level is indicated when the RSI level is above 70, while an oversold condition is indicated when the RSI level drops below 30. Both these are extreme values and signal a shift in trend in the opposite direction.

Volume

Volume refers to the quantity of coins being traded during a given period. Heavy trading volumes suggest that the market is highly interested in a price movement and could even strengthen it.

Bollinger Bands

Bollinger Bands comprises three brands, which are: the middle band, (SMA), and two outer bands that reflect the price’s volatility. 

When a price reaches near the higher band, the asset might be overbought while touching the lower band would indicate it is being oversold. The same applies to the lower band but in the opposite direction. Traders use Bollinger Bands to gauge potential reversal points.

Interpreting Patterns

There are other ways beyond using indicators that as reading chart patterns that will offer insight into anticipating potential price actions. Some of the common ones are:

Head and Shoulders

https://www.fastex.com/fs/userFiles-v2/fastex-18748580/images/7192-head-and-shoulders-17024457747242.webp

The head and shoulders is a trend reversal that indicates a probable pattern reversal. Here, the left shoulder, the head, and the right shoulder form an upward trend, hence indicating a potential trend reversal from a bullish to a bearish trend.

A double top after a bull trend means that when the price fails to break a previous high, it presents a possible reversal. A double bottom after a bear trend means that when the price fails to break a previous low, it predicts a bullish reversal.

Flags and Pennants

Flags and pennants are continuation patterns that indicate a brief consolidation before the trend resumes. 

Flags are rectangular-shaped, and pennants take the shape of a triangle. Both patterns indicate that the traders ought to look for possible continuation in the prevailing trend.

Putting It All Together

Reading crypto charts involves analysing various elements and indicators to develop a comprehensive view of the market. Here are some steps to follow:

1. Select Chart Type: Prefer the trading analysis style to use line, bar, or candlestick charts.
2. Timeframe Selection: Set up your trading strategy and premise regarding your timeframe; it can be short-term, medium-term, or long-term.
3. Identify Trend Type: Determine uptrends, downtrends, or sideways trends, a means to know the market psychology.
4. Indicators Use: Utilize moving average indicators, RSI, and volume by applying them to your analysis.
5. Identify Patterns: Watch for patterns that charts are known to follow in order to foretell the future price actions.

Be updated on news and events in the crypto world, and given how deep the impact of external factors can be on prices, one needs to be abreast of this.

Conclusion

Understanding the crypto charts is a very important thing every person who has anything to do with trades or investments in cryptos has to learn. Being able to recognize the different types of charts, time frames, and indicators used together with all the possible patterns will make one better at decision-making and improve trading.

⚠️ Disclaimer:
Crypto Land is an impartial marketing and educational platform, not a financial advice service. Therefore any content provided, hosted, or expressed by Crypto Land does not constitute financial advice or recommendation, and as such Crypto Land will not be liable for any losses incurred during trading or investing.