How to Read Crypto Charts

Updated on April 9, 2024

At a Glance

  • The Dow Theory is a framework that analyzes market trends and provides signals for identifying the primary trend, applicable to both traditional and crypto markets.
  • The theory consists of six tenets describing market movements, phases of trends, incorporation of new information, confirmation through volume and stock market averages, and the persistence of trends until proven otherwise.
  • Technical analysis is a method used to predict future price movements by analyzing crypto charts, considering different time frames, market cap, Japanese candlestick charts, relative strength index (RSI), support and resistance levels, and market participant emotions.

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 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.

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.

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.

How to Read Crypto Charts FAQ

What are crypto charts, and why are they important for cryptocurrency trading?

Crypto charts are visual representations of the price movements and trading activity of cryptocurrencies over a specified period. They are essential for cryptocurrency trading and investing as they provide valuable insights into market trends, price history, and potential future price movements.

What are the key components of a crypto chart?

A typical crypto chart contains the following key components:

  1. Price Chart: The main area of the chart displays the historical price movements of the cryptocurrency. It is usually depicted as candlesticks or lines.
  2. Timeframe Selector: You can choose different timeframes (e.g., 1-hour, 4-hour, daily) to view price data over various periods, from minutes to years.
  3. Price Scale: The vertical axis on the left side of the chart represents the price scale, indicating the cryptocurrency’s price levels.
  4. Volume Indicator: Below the price chart, you often find a volume indicator that shows the trading volume over the selected timeframe.

What are candlestick charts, and how do I interpret them?

Candlestick charts are commonly used in crypto trading. Each candlestick represents a specific timeframe (e.g., 1 hour) and displays the open, high, low, and close prices for that period. Here’s how to interpret candlestick charts:

  • Body: The rectangular area of the candlestick represents the price range between the open and close prices. If the close price is higher than the open price, the body is often filled or colored green. If the close is lower, it may be unfilled or colored red.
  • Wicks (or Shadows): The thin lines extending above and below the body, known as wicks or shadows, show the highest and lowest prices reached during the timeframe.
  • Bullish vs. Bearish: A green (or filled) candlestick indicates a bullish period, meaning the price closed higher than it opened. A red (or unfilled) candlestick suggests a bearish period, where the price closed lower than it opened.
  • Patterns: Traders often look for candlestick patterns, such as doji, hammer, or engulfing patterns, to make trading decisions based on price trends.

How do I use support and resistance levels on a crypto chart?

Support and resistance levels are key concepts in technical analysis. They represent price levels where a cryptocurrency tends to find buying support (at support) or selling pressure (at resistance). Here’s how to use them:

  • Support: Support levels are price points where the cryptocurrency has historically found buyers, preventing it from falling further. Traders often see support levels as potential entry points for long positions.
  • Resistance: Resistance levels are price points where the cryptocurrency has faced selling pressure, preventing it from rising further. Traders may view resistance levels as potential exit points for long positions or entry points for short positions.
  • Identifying Levels: To identify support and resistance levels, look for areas on the chart where the price has reversed direction multiple times, forming horizontal lines or zones.

What are moving averages, and how can I use them on a crypto chart?

Moving averages (MAs) are indicators that smooth out price data by calculating the average price over a specified number of periods. Two commonly used MAs are the simple moving average (SMA) and the exponential moving average (EMA). Traders use MAs to:

  • Trend Identification: MAs help identify the overall trend direction. When the price is above an MA, it may indicate an uptrend, and when below, a downtrend.
  • Crossovers: Moving average crossovers occur when a shorter-term MA crosses above or below a longer-term MA, signaling potential buy or sell signals.
  • Support and Resistance: MAs can act as dynamic support or resistance levels, with the price often bouncing off them.

How do I analyze other indicators and overlays on a crypto chart?

Crypto charts often offer a range of technical indicators and overlays, such as Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Bollinger Bands, and Fibonacci retracement levels. To analyze these indicators:

  • RSI: RSI measures overbought and oversold conditions. Values above 70 may indicate overbought, while values below 30 may suggest oversold.
  • MACD: MACD helps identify changes in trend momentum. It consists of a MACD line and a signal line. Crossovers and divergences between these lines can signal buy or sell opportunities.
  • Bollinger Bands: Bollinger Bands consist of a middle line (SMA) and two outer bands. They help identify volatility and potential price reversals when the price touches or crosses the bands.
  • Fibonacci Retracement: Fibonacci retracement levels are used to identify potential support and resistance levels based on key Fibonacci ratios. Traders often use these levels to set entry and exit points.

It’s essential to study and understand each indicator’s interpretation and use in trading to make informed decisions.

Are there online resources or courses to learn more about reading crypto charts?

Yes, there are various online resources and courses that can help you learn more about reading crypto charts and technical analysis. You can find articles, tutorials, YouTube channels, and online courses on platforms like Udemy, Coursera, and LinkedIn Learning that cover chart analysis and trading strategies for cryptocurrencies.

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Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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