Trading and Investing

How to Read Crypto Charts? The Basics of Reading Charts Covered

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July 21, 2022
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    If you are a trader looking to dip your toe into the cryptocurrency market, it is extremely important that you learn how to read crypto charts. It is a crucial skill that will help you find the best opportunities in the crypto market to make money or at least not lose the money you invest. 

    In other words, you should know how to conduct technical analysis as it can help you make well-informed decisions and know when the market is expected to go bullish or bearish. A bullish market denotes the upward movement in the market pushed by the bulls and a bearish market means the market is in a downward trend, stomped by bears. 

    But, before we get into how to read crypto charts, let’s quickly understand what technical analysis is.

    What is Technical Analysis?

    First introduced by Charles Dow, technical analysis is a study of past trading activity and statistical trends of an asset. According to technical analysis, analyzing historical data might be a useful predictor of future price movements. It is helpful in almost all asset classes such as futures, stocks, currencies, commodities, and cryptocurrencies. 

    The technical analysis of an asset is only valid if the said asset is valued fairly based on the information provided by the market. Traders that use market psychology as a part of their technical analysis always believe that history eventually repeats itself. 

    Sometimes, the technical analysis incorporates fundamental analysis (takes a deep dive into the available information about a financial asset) into their trading strategy to ensure that they maximize their profit when they buy or sell an asset. Traders dealing with stocks use fundamental analysis to look into a company’s earnings, brand value, and industry performance. 

    What are Candlestick Charts?

    There are many ways to analyze crypto market trends and several types of charts to look at an asset. However, candlestick charts are one of the most used because they offer more information to the traders due to their nature. 

    On the horizontal axis, candlestick charts show time; on the vertical axis, it shows private data. It is just like bar graphs but the main difference is that they display positive or negative price movement in the market in a given period. 

    Candlesticks can show different timeframes based on the timeframe you set. For instance, if you set a four-hour timeframe, every candlestick will show the trading activity of the past four hours. You can choose the trading period based on your style and strategy. 

    As the name implies, a candlestick is made of a body and a wick. The body of a candlestick specifies the closing and opening prices of an asset. The top wick shows how high the price of a cryptocurrency went and the bottom wick shows how low the price went during a specific time frame. 

    Other than that, the candlesticks have two colors. The candle with a green color shows the prices going up and red candles show the prices going down. This simple nature of candlesticks exhibits a lot of information. For instance, traders use candlesticks to determine potential trend reversal.

    A long wick at the top indicates that traders selling the tokens for a profit and sell-off might occur soon. On the other hand, a long wick at the bottom denotes that traders are buying assets every time the price of token drops. 

    Likewise, if a candlestick has short wicks on both ends and it is green in color, it means the market has a strong bullish sentiment. On the contrary, if the candlestick is red in color, it means that the market has strong bearish sentiment. If a candlestick has almost no body but long wicks on both ends, it denotes that the market is neither bullish nor bearish. 

    Since we have covered the basics of how to read crypto charts with a candlestick pattern, let’s understand what support and resistance levels mean in a candlestick chart. 

    Support and Resistance Levels

    Support and resistance levels come in handy while reading live candlestick charts for crypto trading. And, trendlines are mighty helpful when it comes to identifying these levels. Trendlines connect a series of prices by drawing lines on charts. 

    The support level is the point where prices stop falling and bounce back up, while the resistance level is where prices stop going up and dips down. Trendlines make it easy to identify support and resistance levels as it is easy to recognize crypto chart patterns

    Most of the time, the price of cryptocurrencies moves sideways and is somewhat stable. Another way to determine support and resistance levels is to use a long-term moving average. It is a common technical indicator that points out price data by constantly updating the price average. 

    Moving averages are a great indicator in learning how to read crypto charts. Let’s see how they can help in reading crypto charts. 

    What are Moving Averages?

    It is one of the most common technical indicators used in reading crypto trading charts as it cuts out the noise and determines an average price of a crypto token. You can adjust timeframes to find moving averages and other indicators while trading in real-time. 

    Traders usually consider 10,20, 50, 100, or even 200-day periods. With a 200-day period, market trends just pop out as it is seen as a support level during an uptrend and a resistance level during a downtrend. 

    Traders use different types of moving averages such as a simple moving average, which adds the average price of an asset at a predetermined time frame and divides it by the number of periods. A weighted moving average, on the other hand, inclines toward recent prices and makes them more responsive to new changes. 

    How to Read a Crypto Depth Chart?

    Depth in a crypto chart refers to the ability of a market to sustain large orders of a specific asset without moving the price of the asset significantly. If an asset has more open limit orders on both sides of an orderbook, it will have more depth. 

    A crypto depth chart represents buy and sell orders of a specific asset at different prices, graphically. So, how to read a crypto depth chart? One of the main characteristics of a depth chart is the “wall” as it can form on the sell or buy sides of the chart. It indicates price levels where the asking value or cumulative bid increases significantly.  A standard chart doesn’t show this data, but with a depth chart, you can see how many traders are reacting to ever-changing conditions. 

    To Summarize 

    If you want to learn how to read crypto charts, it is important that you learn the basics of a crypto chart such as candlesticks, moving averages, and support and resistance levels. Mastering the basics makes a trader proficient in making profitable trades.

    How to Read Crypto Charts- FAQs

    1. How do you analyze crypto trends?

    To analyze crypto trends, you must learn the basics of reading a crypto chart. There are many ways to analyze crypto market trends and several types of charts to look at an asset. However, candlestick charts are one of the most used because they offer more information to the traders due to their nature.

    2. How do you read a cryptocurrency chart for beginners?

    To read a cryptocurrency chart, a beginner must be affluent in the basics of a crypto chart such as candlesticks, moving averages, and support and resistance levels. Mastering the basics makes a trader proficient in making profitable trades.

    3. What is the best crypto indicator?

    One of the best crypto indicators is moving average convergence/divergence (MACD). It is one of the most commonly used indicators for crypto trading. It is because it provides strong crypto trading signals and it is easy to use.
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