How to Read Crypto Charts

Posted by in Investing | Updated on November 15, 2022
At a Glance: Reading crypto charts is a complex, but not necessarily difficult, task. It requires an understanding of Dow Theory and techinical analysis, among other key knowledge, to get the most out of the charts.

If you’ve joined the crypto trend and you’re planning to start trading in cryptocurrencies and turn your Bitcoin into cash, you need to know how to read crypto charts. If you want to make good crypto trades, you also need to be able to do a sound technical analysis supported by the Dow Theory. And what about Japanese candlestick charts? Are those important too? 

If you want to understand the basics of how to read crypto charts and the technicalities that go with them, take a look below.  

What is the Dow Theory?

At a high level, Dow Theory describes market trends and how they typically behave. It provides signals that can be used to identify the primary market trend. The primary market trend is then used to make trading decisions. 

The Dow Theory can also be applied to the crypto market.

According to the Dow Theory, the market considers everything during its pricing. The current asset prices are a reflection of all existing, prior, and upcoming details of the stock. This means that a market analyst can focus on the price of a coin, rather than every single variable that moves the price of a coin.

Crypto markets go up and down in particular patterns. Being able to recognize the patterns of the market makes it possible to predict market behavior.

6 Tenets of Dow Theory

The Dow Theory rests on six essential tenets:

  1. The market has three movements
  2. The major market trends have three phases
  3. The market incorporates new information as soon as it becomes available
  4. Stock market averages must confirm each other
  5. Trends get confirmed by volume
  6. Trends exist until it is shown that they have ended

Read on to learn more about each of the tenets.

The market has three movements

The main movement of a market is called the primary movement. It is the major trend in the market and can last anywhere between a year and several years. The main movement can be bullish or bearish.

The secondary or intermediate movement of a market is called the medium swing. This is what happens in a medium time frame – anywhere from ten days to three months. Trends in the medium swing are measured in terms of primary price change. 

The minor movement of a market is called the short swing. The short swing is the short-term speculation in the market.

The major market trends have three phases

The three phases of a market trend are 

  1. The accumulation phase – The accumulation phase is when knowledgeable investors start buying or selling the coin against the general perception of the market. 
  2. The public participation phase – The public participation phase, also known as the absorption phase, is when the rest of the market starts following knowledgeable investors.  
  3. The distribution phase – The distribution phase happens after the speculation of the absorption phase. Knowledgeable investors begin to redistribute their holdings in the market.

The market incorporates new information as soon as it becomes available

The price of the asset changes to take any new news into account. Asset price is an accurate reflection of the hopes, fears, and expectations of the market participants. The market price integrates factors such as interest rate movements, earnings expectations, revenue projections, major elections, product initiatives, etc.

Stock market averages must confirm each other

If two companies or sectors are causally linked, an increase in one company should increase the other company. If one company’s performance improves while the other decreases, then it might be a sign that a market trend may be reversing soon.

Trends get confirmed by volume

During an uptrend, the volume of shares stranded should increase with a price increase. During a downtrend, the volume should decrease with a price decrease.

Trends exist until it is shown that they have ended

The market remains in trend despite “market noise”. Finding definitive proof for the reversal of a trend is not easy.

What is Technical Analysis?

Technical analysis is a tool or method used to predict a cryptocurrency pair’s probable future price movement. The better the technical analysis, the better the reading of the market. 

To do technical analysis, you need to examine crypto charts. The following sections describe the elements of the crypto charts that you should take into account.

Different Time Frames for Crypto Charts

When you look at a crypto price chart, different time frames can give you different information. You can get many different time frames for crypto charts. Some traders look to 15-minute charts, the hourly chart, a 4-hour chart, or the 1-day chart.

If you want to open and close your position in a single day, you would look at the short timeframe charts. If you are a long-term holder, you would look at long timeframe charts. 

Cryptocurrency Market Cap

The market cap of a coin is a good indicator of the stability of a cryptocurrency. 

The market cap of a cryptocurrency is calculated by taking the total circulating supply of the currency and multiplying that number by the price of each coin.

The more consistent the market cap value, the more stable the coin.

Japanese Candlestick Charts

The most popular crypto chart is the Japanese candlestick chart.

Each candle on a candlestick chart shows the price movement of the asset during a specific time interval. They are shaped like box-and-whisker charts and follow the same logic.

The top whisker (also known as a shadow) shows the highest price that the asset reached during the time interval. The box (also known as the body) shows the difference between the opening and closing price of the asset during the time interval.

The bottom whisker (also known as a shadow) shows the lowest price the asset reached during the time interval.

There are two types of candlesticks – a bullish candlestick and a bearish candlestick. The bullish candlestick will be shown in green. In a bullish candlestick, the closing price will be higher than the opening price of the asset. The bearish candlestick will be shown in red. In a bearish candlestick, the opening price will be higher than the closing price of the asset. 

If read correctly, candlesticks can clearly show you where the market turned. They can help you identify different patterns that may help you predict how the market will act.

Relative Strength Index

The Relative Strength Index (RSI) measures the strength and speed of a cryptocurrency’s market price. It is a comparison of the current price of a cryptocurrency to its past performance.

When reading the RSI graph of a given coin, remember that the RSI ranges from 0 to 100. Broadly speaking, when the RSI of a particular coin approaches or crosses 70, it is considered to be overbought, or overvalued. On the other hand, if RSI approaches 30, the crypto is undervalued.

What are Support and Resistance?

A support level is where the assets tend to stop falling. This is a predetermined level at which the price of an asset tends to reverse its trend. Traders often buy at the support level.

In the image below, the support level was determined to be $3800. This is where an experienced trader would buy.

The resistance level is the opposite of the support level. It is the level where the asset tends to stop increasing. Traders often sell at the resistance level.

In the image below, the resistance level was determined to be $4250. This is where an experienced trader would sell.

Participants in the Market

The support and resistance levels are determined by the participants in the market. In a market, there are typically three types of participants:

  1. Traders who are going long and waiting for the price to rise.
  2. Traders who are going short and waiting for the price to fall.
  3. Traders who don’t know which way to go.

When the price of the asset reaches the support level, all three participants buy-in. The long traders are happy with the state of the market and may try to add to their position, the short traders buy more to breakeven, and the undecided trader’s buy-in at the support level. 

Market Emotions

The price chart is a graphical representation of the emotions of the participants in the market. When the price falls to the support level, emotions like greed or optimism kick in for the long traders, whereas when the price goes up, fear and pessimism kick in. 

Market emotions are reflected in support and resistance levels. It is important to be able to read these levels from a crypto chart because they attract a lot of attention and create anticipation. This attention attracts a large number of volume and traders. 

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Final Thoughts

Knowing how to read crypto charts is an important skill if you want to trade in cryptocurrencies

To make good crypto trades, you need to be able to do a sound technical analysis supported by the Dow Theory. The first step of sound technical analysis is knowing how to read crypto charts. 

You need to be able to read the Japanese candlestick charts to determine the support and resistance levels. Being able to read the market emotions in this way will give you the best chance of predicting the market trends.


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