Owning crypto is one thing, but maximizing your assets’ potential for growth is another. A crypto owner committed to making smarter investments must take the time to learn how to better manage their assets and, in the same way that reading charts in traditional finance informs a trader’s actions, learning how to read crypto charts will also enable you to make better crypto investment decisions.
In this article, we’ll go over the basic concepts of reading crypto charts and try to ease you into the often-intimidating area of technical analysis.
Crypto Charts and Technical Analysis
Crypto charts are graphical representations of the movement of crypto volumes and prices over indicated periods of time. These charts in turn reveal patterns in which investors are able to spot the best time to make investments in a given digital currency, and the data these patterns provide are then used to predict future trends in a process called technical analysis.
Technical analysis employs the theory that markets moving along certain established patterns often tend to stay headed towards the same direction for some time. Which is to say, a declining market most likely will stay on a decline for a while (a bear market), and one that consistently experiences growth will likely keep growing (a bull market).
Bull and Bear Markets
We are naturally persuaded to join a venture that is visibly succeeding and dissuaded to join one that we know is experiencing failure. This is why a knowledge of the bull and bear markets is indispensable in your beginnings in chart-reading and technical analysis.
Traditional financial markets use the terms bull and bear to define market movements that head toward a given direction over an extended period of time. These terms have both been adopted by cryptocurrency markets as well, enabling a smoother experience for investors from traditional finance to transition into the crypto world.
Like a bull charging towards its target, a bull market, which may also be referred to as ‘peak’, is one that trends upward, whose assets consistently experience growth in value. Meanwhile, as though slumbering through winter, a bear market, or a ‘trough’, is one that consistently trends downward or experiences a decline in volume and value. However, markets do not officially reach a bull or bear status until it reaches a 20% change from its peak or its trough. Bull and bear markets can last from just a few months to even years. And while it may refer to the market of just one or a few assets, bull and bear are often used to refer to financial markets or even entire economies as a whole.
While line graphs and bar graphs are still used in crypto markets, it is impossible to go into technical analysis or learn how to read a crypto chart without having encounters with candlestick charts.
A candlestick is a type of price chart used in technical analysis where each candlestick displays the high, low, opening, and closing prices of an asset within a given day. Invented by Japanese rice merchants, the candlestick has been used for centuries before it was adopted by American traditional financial markets and, now, in cryptocurrency markets.
The visual of a candlestick couldn’t be truer to its name as it looks just like a candlestick but with two wicks — one above and one below, respectively representing an asset’s high price and low price at the indicated time frame. Meanwhile, the length of a candlestick’s body indicates the change in the asset’s price, and its colors indicate whether its closing price that day is lower or higher than its opening:
If the body is black or red, this is a “bearish” candlestick and it means that the asset’s price closed lower than its opening. If the body is white or green, this is a “bullish” candlestick and it means that its closing price is higher than its opening.
Therefore, a long green candlestick indicates a big increase in an asset’s value, while a long red one indicates a big decrease in it. And in a chart where multiple candlesticks of differing colors and lengths are visible to represent the movements made by a cryptocurrency throughout a specified amount of time, technical analysts then are able to anticipate the price movement of a market and become more equipped in making better informed decisions on which is the best time to enter this trade or to exit it with the most advantageous gains or the least harmful blows.
What is a one-candle signal?
While a more accurate reading of a market definitely requires a broader view of its movement throughout a long period of time, traders who must operate within a very limited time frame sometimes opt to focus on a single candlestick and take it as an indicator of a market’s health — a one-candle signal. Whereas reading an entire chart gives you a more detailed picture of a market’s history, a one-candle signal focuses on just one particular movement and allows you to dive into a market with an informed decision still, albeit without a complete understanding of its patterns.
Timeframes for Technical Analysis
A timeframe is a crucial variable in technical analysis as it sets the breadth and limits of the market movement you wish to consider before making your trade. Crypto charts may be set to different timeframes and some of the most popular timeframes that technical analysts use are the 5-minute chart, 15-minute chart, hourly chart, 4-hour chart, and daily chart.
But what is the best timeframe for you? Well, that really depends on your style, strategy, and even availability.
For example, those who have day jobs and cannot watch the market all day favor shorter time frame charts for analysis like the 5-minute or 15-minute charts, as those are more conducive for traders who open and close trades in the span of a day. Meanwhile, traders who are able to watch the market for a longer period of time are likely to use the hourly, daily, or even weekly charts. This is good, because longer time frames provide a broader, more reliable trend of the asset they are trading and weeds out the noise and unnecessary price movements charted in shorter time frames. However, not everyone is able or even interested to spend this much time in trading. For those, price movements within a 5-minute timeframe could still prove themselves beneficial for a day trader looking to profit from such fluctuations within one single trading day.