Master the art of decoding crypto charts with our comprehensive guide! Learn how to read crypto charts like a pro and make informed investment decisions.
Key Points:
Pro traders use technical analysis to predict crypto price movements and trends.
Reading charts using indicators such as moving averages and the Relative Strength Index are popular among traders.
Various candlestick patterns can be used to evaluate possible future price movements.
Reading cryptocurrency charts can feel daunting for both beginners and seasoned traders. Even large-cap cryptocurrencies like $BTC and $ETH are notoriously volatile, resulting in overwhelming charts. This article will provide you with the necessary skills and knowledge to start reading charts like a pro, even on the most volatile trading days.
Before looking at chart patterns, it's important to understand technical analysis and candlesticks. Once you've understood these two basics, we can move on to reading charts.
How To Use Technical Analysis to Read Crypto Charts?
Technical analysis is the process of analyzing charts in financial markets to predict future price movements and trends. This form of analysis often takes into account a variety of data points, including historical price movements, trading volumes, moving averages and the Relative Strength Index (RSI).
Through the meticulous analysis of charts and indicators, pro-crypto traders attempt to make informed predictions about buying, selling and shorting the market. It’s important to note that no one can predict the future; good technical analysis simply helps us make better estimations of what could happen.
Moving Averages: The Moving Averages plots average prices over a specific period. For example, a 20-day MA shows the average price of crypto over 20 days. Pro traders use MAs to identify support and resistance levels representing price points where an asset has typically moved higher (support) or has been forced lower (resistance).
Relative Strength Index: The RSI is a momentum indicator that measures the speed and change of price experienced by an asset. The indicator oscillates between 0-100, and traders use it to identify overbought or oversold cryptos. Anything above 70 is generally considered overbought, and under 30 is considered oversold.
Understanding Candlesticks
Candlesticks represent various price movements on crypto charts, such as opening and closing price points and highs and lows within a specific time frame. A candlestick is composed of a body and a wick. The body shows the range between opening and closing prices, while the wick represents the full price range during the time frame. Candlesticks and wicks allow you to uncover an asset's price range within specific time frames, which is crucial to identifying patterns.
Common Chart and Candlestick Patterns for Crypto Trading
Traders use dozens of different patterns when reading charts; here are four of the most widely used types.
1. Head and Shoulders Pattern
This is a bearish reversal pattern composed of three peaks on a price chart.
The three peaks resemble a head with two shoulders hence the name.
It suggests that a trend is about to be reversed from bullish to bearish, which some traders will use as an opportunity to either sell or even take up a short position.
2. Ascending Triangle
The ascending triangle is a bullish pattern represented by a stable upper resistance trend line and a consistently rising support line.
Crypto traders often see the ascending triangle as evidence of bullish consolidation and expect it to result in the price breaking above the support line and making new highs.
3. Descending Triangle
A descending triangle is a bearish pattern that shows a consistently declining upper resistance line along a flat support level.
Traders see this pattern as an example of bearish consolidation, meaning they predict that the price will move lower, so they will either sell or go short.
4. Bullish Engulfing Pattern
This bullish pattern comprises two candlesticks.
The pattern develops following a downtrend when the body of the following green candle entirely engulfs the final red candle.
Some traders interpret this pattern as a bullish reversal, potentially creating an opportunity to buy.
Do’s and Don’ts of Reading Crypto Charts
Mastering the art of reading crypto charts is essential for any crypto enthusiast. Learn the best practices to make informed decisions, and avoid common pitfalls in the volatile world of cryptocurrency trading.
Patterns Show Possibilities, Not Predictions
It’s always important to remember that patterns and indicators are only indicators of possibilities; they can’t predict the future. When considering how to read crypto charts, these patterns will certainly help, but they aren’t guaranteed to result in profits. External factors such as news, regulations and irrationality in the market often impact crypto and can completely undermine patterns.
Do Your Own Research
You should always do your own research when it comes to crypto trading. Blindly following what amature traders say on Twitter just because they attach a picture of a chart isn’t a good approach. Take your time to understand the basics of technical analysis and then practice identifying patterns such as those outlined in this article.
Do Charts Work for Crypto?
Mastering the art of reading charts like a pro requires a decent understanding of technical analysis, various indicators and candlestick patterns. Patterns such as the ascending triangle or head and shoulders can provide traders with important information about possible future price movements. However, even the best traders can’t predict the future, as technical analysis is about possibilities, not clairvoyance.
