How to Read Crypto Charts
Understanding charts of cryptocurrency tokens is one of the essential skills for cryptocurrency traders. Dow Theory-based technical analysis is crucial to understand for effective crypto trading. If you’re interested in studying the foundations of crypto chart reading and the underlying mechanics, this video is for you.
What is Dow Theory?
Dow Theory gives an overview of how market patterns often evolve. These indicators can be used to pinpoint the market’s primary movement. Investors look to the market’s dominant trend when executing trades for direction. Using the Dow Theory, one can also analyze cryptocurrency prices.
According to the Dow Theory, the market considers all essential aspects when establishing prices. The current asset prices reflect the stock’s past, present, and future information.
This enables market analysts to hone down on the coin’s price instead of keeping track of all the things that can impact it. The ups and downs of the cryptocurrency market follow predictable cycles. Recognizing the market’s recurrent trends enables the capacity to forecast market movement.
Six Pillars of Dow Theory
The six pillars that support Dow’s theory are:
- There are three distinctive market trends.
- There are three distinct phases to the most significant market trends.
- As soon as new information becomes available, the market reacts accordingly.
- The stock market’s averages must be consistent with one another.
- Volume is an indicator of a trend’s reliability.
- To demonstrate that a trend has ended, one must stop following it.
1. There are three distinctive market trends.
The term “primary movement” describes a market’s dominant trend. This primary market trend can persist for a year or longer. Both bullish and bearish primary trends are possible.
Medium swing is the secondary or intermediate movement of a market. This occurs for approximately one to three months. Medium swing trends are determined based on the primary price change.
The term “short swing” is used to describe minor market fluctuations. The brief phrase swing describes short-term market speculation.
2. There are three distinct phases to the most significant market trends.
Each market trend can be divided into three distinct phases.
● Accumulation Phase
In the accumulation phase, investors with insider knowledge begin to purchase and sell the currency in opposition to the prevalent market sentiment.
● Public Involvement Phase
The public involvement phase, also known as the absorption phase, is when the rest of the market begins to follow the informed investors’ lead.
● Distribution phase
Once the speculation of the absorption phase has subsided, then the distribution phase commences. Traders with experience are beginning to re-balance their portfolios.
3. The market adapts to new information as soon as it becomes available.
The price of the asset adjusts to reflect the influence of recent events. An asset’s value reflects its traders’ hopes, fears, and expectations. Changes in interest rates, profit projections, revenue estimates, significant elections, the introduction of new products, and other variables are incorporated into the market price.
4. The stock market’s averages must be consistent with one another.
If there is a causal relationship between two industries, then the growth of one should result in the expansion of the other. If one company’s performance improves while another decline, this can indicate that the market is about to reverse course.
5. Volume is an indicator of a trend’s reliability.
When the price of a stock is increasing, there should be a corresponding increase in the number of unsold shares. In a downward price trend, the volume should also decrease.
6. To demonstrate that a trend has ended, one must stop following it.
Despite “market commotion,” the market’s trajectory has continued. Finding conclusive evidence of a trend reversal is challenging.
Summary of Technical Analysis
If you want to predict the future direction of the price of a cryptocurrency pair, you can use a technique known as technical analysis. The precision of a market forecast is contingent on the quality of the technical analysis underlying the forecast.
Any serious technical analyst is required to view cryptocurrency charts. The following sections detail the aspects of cryptographic charting that you should consider.
What To Look For In Crypto Charts?
There are a few things to keep in mind and become accustomed to when examining cryptographic charts.
1. Observe the price trend of crypto
Keeping a close eye on pricing for a considerable time can allow us to determine this. A bull market is characterized by sustained price growth in the cryptocurrency market. A bear market develops if cryptocurrency prices are falling.
2. Focus on the volume of crypto
The sum of all cryptocurrency transactions over a given period can be an indicator of market activity. Consistently high volume indicates that cryptocurrencies are in high demand. This coin’s lack of trading activity is indicated by its low volume.
3. Ensure to be aware of what is occurring in the crypto world.
Using this strategy, it is possible to isolate potential factors influencing the value of cryptocurrencies. For instance, the value of cryptocurrencies typically increases in response to positive crypto related news. Nonetheless, asset prices are likely to decline if negative crypto news emerges.
Multiple -Time frame of Cryptocurrencies
Changing the chart’s time period can assist in gaining a better understanding of the crypto market’s movements. Numerous time intervals are provided by blockchain graphs. Traders use several time frames, including as 15-minute charts, 1-hour charts, 4-hour charts, and daily charts. If you wish to initiate and exit a trade on the same trading day, you should examine short-term charts. A long-term investor would examine many time periods on the charts.
Capitalization for Cryptocurrencies
A crypto coin’s market capitalization is a strong measure of its security. A cryptocurrency’s market value is determined by multiplying its supply by its price per coin. It is claimed that a currency’s value is steady if its market capitalization remains generally consistent.
Understand Candlestick
The primary price indicator on most bitcoin price charts is a candlestick. Each candlestick on the accompanying graph represents the price change over a specific time. The candlestick’s body represents an asset’s opening and closing prices, whereas the wick represents the asset’s price range.
On most charts, if the price of a cryptocurrency rises, the candle will be colored green, and if it falls, it will be red. Technical analysts make predictions about the potential future value of the traded assets based on the market’s daily price and volume data. The indicators can range from simple evaluations of patterns comprised of many candles to more complex trend lines or metrics based on price movements.
Candlesticks Patterns
Traders analyze candlestick patterns and assign bullish or bearish labels accordingly. Traders should purchase when they observe a bullish pattern, as it indicates that the asset’s price will likely increase soon. While, a bearish pattern alerts investors to sell before the price decreases and they lose money.
Other traders can employ anti-cyclical strategies, such as increasing purchases as prices decline, in anticipation of a future price increase known as “buying the dip.” Ultimately, the decision to engage in commerce is a voluntary one. In three distinct circumstances, accurate price predictions were made using candlesticks and other chart patterns.
Shooting Star Candlestick
The bearish shooting star candlestick pattern typically indicates that a current uptrend is about to end. The tall wick on this candlestick stands out against the candlestick’s small body and broad base. Even though the price reached new highs throughout the session, the red indicates a price decline.
Observers of the market interpreted this as proof that buyers have grown weary of the current price increase and that a sale is imminent. In other words, many investors are currently selling because they anticipate a price decline.
Inverted Hammer Candlestick
A green inverted hammer candlestick signifies a bullish market trend. Still, to the untrained eye, it appears very similar to a red shooting star candlestick, which signifies a bearish market trend. After reaching new highs and lows during the session, this candlestick depicts a slight price increase at the end of trading.
Following a price decline, the formation of this candlestick pattern indicates that buyers are poised to push the market back up. There is a chance the asset’s value will increase, so you should consider purchasing it.
Head and Shoulders
When analyzing crypto charts as a whole, as opposed to just the candlesticks, you can be able to identify numerous additional patterns. Consider the “head and shoulders” layout as an illustration. There are three mountains or valleys that are close to one another. It derives its name from the fact that the second valley or mountain range towers over its two smaller counterparts in the shape.
The green ‘head-and-shoulders’ pattern on the left side of the chart is potentially bullish for the future price of cryptocurrencies. On the other hand, a bearish ‘head and shoulders pattern, such as the one depicted in red on the right, can signal the beginning of a market decline.
Wedges in Charts
To gain a broader perspective on crypto charts, you can search for patterns such as “wedges,” which resemble “head and shoulders.” Cryptographic “wedges” are created by connecting the lowest points of price movement over a given period with a line and then drawing a second line to represent the highest points of price movement over the same period. A wedge is produced when the two lines meet from left to right.
On the left is depicted a bullish wedge, consisting of two lines, one sloping up and one sloping down, forming a triangle with the point pointing down. This pattern can indicate that the asset’s price has reached its lowest point and will soon begin to rise. In contrast, a bearish wedge consists of two lines that rise to a point near the confluence. If this occurs, there can be a price peak and subsequent sell-off in cryptocurrencies.
Patterns reveal not absolute truths but probabilities.
Researching diverse topics, such as trading signals and methods, is essential, as is the case with many other facets of cryptocurrency. The market’s direction cannot be predicted with precision using a single indicator, strategy, or method. The most obvious examples of this are the candlestick and cryptocurrency chart patterns.
Reading charts is a fundamental aspect of technical analysis and can help you gain a general understanding of the crypto market after you’ve studied other strategies and fundamentals. You should not base your entire trading strategy on candlesticks and charts.
Related Article: Guide on How to Trade Cryptocurrencies
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