Skip to content

How to Read Cryptocurrency Charts

How to Read Cryptocurrency Charts

01 July 2020 zipmexteam Opinions EN

The art of reading cryptocurrency charts is essential if you want to get into crypto trading. The Technical Analysis (TA) that comes with these charts can be quite cumbersome for newbies. However, this guide will help you read candlestick charts on Zipmex and explain the technical analysis so you can make better choices in crypto trading.

Dow Theory

To have a better understanding of the technical analysis, it’s critical to become familiar with Dow Theory. The fundamental ideas of Dow theory are given below: 

  • During the pricing, the market considers every possible factor, all current, previous, and upcoming news will be integrated into the current prices.
  • The crypto market is affected by quite a lot of factors and variables such as current, past, and future demands or any regulations that are in place.
  • The price movements are not exactly random; they tend to follow trends for a long or short term.
  • Market analysts are more focused on the price of the coin rather than one variable that moves the price.

History also tends to repeat itself, which makes the market behaviour quite predictable for traders, and they react the same way on seeing such patterns.

The Dow theory has six tenets; they are:

The Three Movements of the Market

  • The main movement or primary movement is a significant trend that may last for less than a year or continue for several years. This can be generally bullish (upwards movement) or bearish (downwards movement).
  • The secondary or intermediate section may last for ten days or go up to three months, and it retraces from 33% to 66% of the primary price change since the start of the primary movement.
  • The short swing or minor movements vary based on market speculation and can last for hours or go on for months.

Note: The three movements listed above may happen simultaneously.

Three Phases of Market Trends

Accumulation Phase

This is the phase where knowledgeable investors come together and start buying or selling the asset based on their market perceptions. The cryptocurrency price won’t be affected much during this phase because the investors are in the minority.

Absorption Phase

The absorption phase is where the market catches on to the intelligent investors, and the public participates. More people begin following the trend.

Distribution Phase

After all the huge speculation, the limited supply of assets limits the market price as knowledgeable investors begin to sell their holdings to the market.

The Stock Market Discounts All News

The stock market reflects new information as soon as it becomes available. It incorporates the sum of all hopes, fears, and expectations of the market participants. Once the news is out, the price of the asset is subject to change to reflect the news.

Various factors, such as interest rate movements, earning expectations, major elections, and much more get included in the market price.

There Must Be Confirmation from Stock Market Averages

The performance of the stock market depends on the overall performance of the market participants. If one part of the market participants are interested in investing the other part should also be interested. 

Any diverging views or performance can lead to a market trend reversal.

Trends get Confirmed by Volume

The upwards trend should be accompanied by an increase in the volume as well as the prices, and downward trends should lead to a volume decrease with the decrease in the price.

Definitive Signals Will Prove How Long Trends Will Exist

The Dow theory suggests that the market will follow a specific trend until some external force affects it, much like Newton’s first law of motion. 

What is Technical Analysis?

Now that you are familiar with the Dow Theory let’s have a look at what technical analysis is. Technical Analysis is a method used to predict the future movements of a cryptocurrency pair, or a stock.

Time Frames for Crypto Charts

A technical analyst looks at crypto charts along with their technical tools and also considers time frames. The popular time frames that an analyst looks for are: 

  • 15-minute chart
  • Hourly chart
  • 4-hour chart
  • Daily chart

The time frame that any trader looks for is dependent on their trading style. There are generally two types of traders.

Intra-day Traders

Intra-day traders generally open and close their positions within a day. Such traders prefer short time frames such as hourly, 15-minute, or even 5-minute charts.

Long-term Traders

Long-term traders hold their position for weeks, months, and even years. They find hourly, 4-hours, daily or weekly charts more useful.

The shorter time frame charts, such as 15-minute charts will only be useful for an intra-day trader and not a long-term trader.

Cryptocurrency Market Cap

The following formula calculates the market cap of any coin: 

Market Cap = Total Circulating Supply x Price of each coin

The market cap of any coin is generally the product of the coins in supply and the price of the coin. This is an excellent indicator of the stability of the coin.

Reading Zipmex Candlestick Charts

The candlestick charts give you all the crypto price information required to trade. Using such charts, you can set the proper entry and exit points and also perform technical analysis. These candlestick charts form different shapes and patterns that help to predict future market trends.

Let’s look at the key features of the candlestick charts:

Time selection

The crypto candlestick charts allow you to select the right time frame you want to display. You can choose from a default time frame – 5-minutes, 15-minutes, 1 hour, 4 hours, daily, weekly, or monthly. You can even customise the time frame to your requirements.

Volume

Any standard crypto chart will display the volume of cryptocurrency traded at a particular time. The volume shows how much crypto was traded in the selected time frame. The higher the volume bar, the more the people are buying or selling.

A green volume bar indicates increased interest in buying the cryptocurrency and buying pressure, and the red bar indicates a decrease in the interest in the coin and selling pressure.

Bearish and Bullish Indicators

There are two types of candlesticks – Bearish and Bullish.

Green candles are representative of bullish candlesticks which show an increase in price at the selected time frame. The top part of the candle represents the closing price, and the bottom part denotes the opening price.

The bearish candlesticks are represented by red candles to show a decrease in the price. The top part of the candle represents the opening price, and the bottom part denotes the closing price.

Bullish Reversal Patterns

Hammer

The hammer is a single candle pattern with: 

  • A little or no upper shadow
  • Price closing at the quarter of the candle range
  • The lower shadow generally appears two to three times in length of the candle

You can find hammer patterns as a bullish reversal pattern. They generally form after a decline in the price. It also signifies that the buyers are coming in strong to the market.

The hammer candle shows that: 

  • The sellers took control and decreased the price
  • However, the buying momentum came back in and pushed the price higher until the closing price became higher than the opening price.

Bullish Engulfing Pattern

The bullish engulfing pattern has a 2-candle pattern where the first candle is bearish, and the second candle is bullish. The bullish candle is bigger than the bearish candle.

  • The bearish candle denotes the sellers in control
  • However, the bulls hit back and overwhelmed the bears

Morning Star

A morning start is a 3-candle pattern that forms after a decline in the price.

  • The first candle is bearish
  • The second candle has a minimal range
  • The third candle shows an aggressive increase in price.

The sellers take control and lower the closing price in the first candle. The second candle is where the buyers and sellers cancel each other. In the third candle, the buyers take over, and the closing price increases.

Bearish Reversal Patterns

Shooting Star

The shooting start is a single candle bearish reversal pattern which indicates that the sellers are coming in strong to the market.

  • Will appear to show little or no lower shadow
  • The price closes at the bottom quarter of the range
  • The upper shadow is 2-3 times the size of the candle body

The shooting star denotes that the buyers took control of the market and pushed the price to increase. However, the selling pressure increased, and the market was overwhelmed by the bulls.

Bearish Engulfing Pattern

This two candle pattern can be recognised when: 

  • The first candle is bullish
  • The second candle is bullish and more substantial than the first candle

This pattern denotes the following:

  • The buyers were in control in the first candle.
  • The sellers take over in the second candle, and the closing price is lower than the previous candle’s low.

Evening Star

The evening star is a 3-candle bearish reversal candle pattern which shows that the buyers are exhausted, and the sellers are temporarily in control. It can be easily identified by:

  • The first candle closes in a bullish position
  • The range of the second candle is small
  • And finally, there is an aggressive bearish close for the third candle

After identifying an evening star candle, it should tell you the following:

  • The buyers have taken control of the first candle
  • When the second candle appears, there should be a deadlock between the bulls and bears
  • The third candle shows that the sellers have taken over and that the bulls are exhausted.

Support and Resistance Levels

  • Support and Resistance levels are crucial to interpret cryptocurrency charts. These are some predetermined levels that denote the reversal of trends. Traders generally buy at support levels and sell at resistance levels.

Support Level

A support level is formed when the price of the crypto asset stops to decline after a certain limit. However, if the sellers carry more momentum, a new support level will be formed as the price breaches the previous support level.

Resistance Level

The resistance level is formed at a point when the price of the crypto asset stops rising. If the buyers bring enough momentum, the resistance level can be breached.

There is an increase in prices when the price bounces off a support level. This occurs when:

  • The long traders bring more money to the market to improve their position
  • The short traders also try to buy-in
  • The newer traders who haven’t entered yet might wait for a breach in the support level

When the price breaches the support level and decreases further: 

  • The long traders wait for the market to recover to minimise their losses.
  • The short traders are in control and try to add more to their position.
  • The newer traders might buy-in at this point.

Market Emotions

The price movements in the crypto industry are also affected by the fear, greed, optimism, and pessimism of the market participants.

  • When the price falls below the support level, greed or optimism takes over, and all traders buy-in.
  • Due to this, a herd mentality sets in, and the price goes way beyond the support line.
  • As the price increases, fear and pessimism set in. Traders begin to sell their assets to avoid incurring any losses.

The support and resistance levels are quite significant and attract a lot of attention and speculations. 

So, in summary, understanding the Technical Analysis of any asset is beneficial to your overall success. If you are starting for the first time, we encourage taking a reserved approach. Remember the price will always go up and down. There will always be positions to enter the market, so don’t feel like you need to rush in to start. Once you become more familiar with trading on Zipmex, then you can step up your trades to higher positions.