How To Read Crypto Charts — Cubebit Guide.

Technical Analysis is a must-know tool for creating a strategy for crypto trading. It may seem intimidating for beginners, but once you learn how to read crypto charts and apply indicators, it will help you avoid losses due to unexpected market turns and also be able to capture price swings.

The first step to interpreting crypto charts is to understand the Dow Theory. It helps you understand price trends in different time-frames. Over time, the vocabulary of the market has evolved. Let’s discuss some of the terms that you will need to better understand crypto charts.

• Trend

The trend stands for the behavior pattern, followed by the price of an asset, over a short or long frame of time. You need to spot trends from a crypto chart to decide the best entry and exit points to trade in a given coin.

A positive slope with a steep line represents a strong positive trend, which means that more traders are buying. A negative steep slope represents a strong negative trend, which means more traders are selling.

• Support and Resistance

In technical analysis, these are specific points in the chart which reflect a trend reversal. For instance, if the price has been rising for some time and suddenly it starts to go down; this is the beginning of a negative trend.

A straight horizontal line that touches multiple such points is called the support line or the resistance line based on whether it passes through the initial point of an upward trend or a downward trend.

Another way to look at this is, a resistance level is a point at which the price stops rising. Often the price of an asset may have enough momentum that it can pass well beyond a resistance level. The support level is at a distance below the resistance level and it marks the point below which the price tends to stop falling.

• Market Emotions

Support and Resistance tell you about market emotions. When the price falls to the support level, traders start buying expecting that the price will now begin to rise. The greed, hope, and the need to compensate for their losses drive the initial uptrend, and then the herd mentality kicks in letting it rise further.

Similarly, when the price has touched the resistance level, it’s then that the traders’ fear of losing or not making enough profits kicks in and they start selling.

The Components of Dow Theory

The purpose of the Dow Theory is to make sense of all kinds of fluctuations in the market and to understand price trends. This theory is the first step to interpreting crypto chart patterns.

• Three types of movements
• Primary Movement — Some people tend to ignore the long-term trend, but it is important when you are investing a large amount. The primary movement tells you whether the overall trend is bullish (uptrend) or bearish (downtrend).
• Mid-term movement — This trend usually lasts from 10 days to 3 months. It typically retraces thirty to sixty percent of the price in the primary movement.
• Minor movement — This occurs in a very short term. The trend typically lasts from a few hours to a month. Intraday traders and swing traders need to carefully follow this movement.
• Three phases of the market

The phases of price trends are categorized based on the collective behavior of the traders. This theory believes that a new trend for an asset price is started by ‘knowledgeable investors’. In other words, a new trend is set by those who conduct fundamental analysis as well as technical analysis before investing.

Then due to the herd mentality, those who are drawn to this sudden uptrend would join in and start investing. This gives further momentum to the new trend. Let’s see the terminology used to mention these phases.

• Accumulation Phase

Knowledgeable investors are the major players in this phase. Based on their insight and study about an asset, they start putting money and as a result, the price starts rising. The minority of investors act against the general perception of the market. This phase observes only a slight change in the trend.

• Absorption Phase

This phase begins when other traders catch up to the change in movement introduced by knowledgeable investors.

• Distribution Phase

Finally, the price begins to go down again as the knowledgeable investors start to reallocate funds to other assets with the potential to rise. This distribution of the holdings to the market triggers a trend reversal.

• Volume should follow the trend

Dow Jones also states that an increase in volume should follow the increase in price and vice versa. The relationship between the price and volume is critical to making a trade decision.

If the number of shares traded is increasing but the price does not go up, this means that the distribution now started and the resistance would kick in leading to a trend reversal.

An increase in price with a gradual increase in volume is generally a good sign. This marks a strong uptrend. Slowing down the price hike with a decrease in volume is also a safe place for those who have bought the asset.

• Trends exist despite the market noise

Some people find it hard to believe in trends, considering that the investors and traders may be fickle-minded and the contradictory opinion and changing perceptions won’t let a trend survive. This statement of Dow’s Theory, however, asserts that trends do exist.

Unless some external event causes a massive impact on the price of an asset, a trend usually continues to hold on to a specific pattern. This is because the three phases of the market usually repeat themselves. The long-established trends usually continue until there are definite signals that they have ended.

• All news events contribute to the market price

Any new information is integrated into the market price of an asset. The change in price reflects the new information that has been made publicly available. Any news that can affect public perception about the asset will have a definite impact on the price. The market price of an asset reflects the overall trader’s emotion for the asset.

Candlestick Charts

Among different ways of looking at the crypto charts, the candlestick is one of the most popular ones. Bullish candlesticks are usually represented by green while bearish with red color. In a candlestick chart, bullish and bearish movements are clearly separated.

It is easier to identify when more traders were selling an asset than people buying it.

A candlestick displays four values; High Price, Low Price, Open Price, Close Price. It makes it easier for traders to identify price trends and determine the best entry and exit points.

Conclusion

The crypto charts may not make any sense to you at the first glance if you are new to trading. But with this information, you can start to interpret trends, trend reversals, support and resistance levels, primary and short term movements, etc.

Once you begin to feel comfortable reading a crypto chart, you can move on to more mature knowledge, like, indicators that help you predict the future trends based on past patterns. Learning how to read crypto charts is essential to technical analysis. After reading this, take a look at the crypto charts and see if they now make more sense to you.