- Date : 05/08/2021
- Read: 6 mins
All you need to know about deciphering charts in order to trade in crypto.
Technical analysis is a tool to analyse historical data and trends to predict future price movements. It is a 2D data set where the graphs project the price and time. Hence, it is a data analysis tool to study price patterns over a period of time.
The underlying asset for technical analysis could be anything: stocks, commodities, currencies or the hottest topic of the town and everyone’s favourite – cryptocurrencies. Cryptocurrencies are just a different type of asset class, but technical analysis works perfectly well.
Technical analysis as we know it today was first introduced by Charles Dow who postulated the Dow Theory in the late 1800s. It is very important to know the principles of Dow theory.
As mentioned earlier, technical analysis revolves around price and time.
Let us now understand the time aspect of technical analysis. The X-axis of the graphical representation of any chart denotes time. It is widely accepted that the long-term trendline of any asset is at 45 degrees; i.e. price and time move in sync.
A sudden rise in the price in a very short time causes a consolidation or a pullback before it starts a fresh bullish momentum.
What are crypto charts?
1. Line chart: A line chart is a graphical representation wherein the line connects the closing price of each day in a graphical representation. It is 2D chart with closing price as the single input across different timelines. A line chart is a way of representing price of assets using a single, continuous line.
Line chart was the first of the charts to be used in financial markets. Its only advantage is that it reduces the volatility of prices during the day and gives a very clear picture by depicting the closing price of the asset. The line chart is simple to understand and easy to use. Because of its simplicity, it has been widely used by many traders globally.
2. Candlestick chart: A candlestick chart is a graphical representation of four inputs – open, high, close, and low. It is much more informative and quite widely used by traders. The green coloured candle represents an up move where the bar will represent high, close, open, and low (in that order). The red coloured candle represents a bearish state where the candle represents high, open, close, and low (in that order).
Candlestick charts give a lot of information about the psychology of traders. The highs and lows of the trading period generally suggest the emotions of buyers and sellers in the market. There are different types of candlestick patterns used by professional traders to ascertain the market sentiment and predict asset prices.
The dark green colour (covering open and low) of the candlestick pattern is the body of the candlestick, whereas the thin black line above and below the open and close price is known as the wick of the candlestick. The wicks generally define the highs and lows of the trading day.
Bullish engulfing is one of the strongest bullish patterns which is generally a green candle galloping the previous red candle entirely i.e. a small red candlestick is followed by a large green candlestick on the next day and the body of the green candle completely overlaps or engulfs the body of the previous day’s candlestick.
A doji candle is generally a sign of indecisiveness in the market. This is formed when the opening and closing price of the asset is more or less the same for the trading day. The doji candle suggests that the buyers and sellers fought for the entire day but were not able to decide the move of the stock, either upside or downside. So, there is a lot of indecisiveness in the market, and markets may trade in a tight range (within the highs and lows of that doji candle).
Let us now understand the buying zone and selling zones with the help of support and resistance.
Supports and resistance are nothing but areas of value where large buyers and sellers have their buy and sell orders respectively, making it very difficult for the underlying asset to cross the price levels. This is very important to understand cryptocurrency.
It could be in the form of a static price level i.e. $20,000 levels for bitcoin or dynamic price levels in the form of a trendline.
What are supports?
A support level is formed when the price of the cryptocurrency fails to go below that level and bounces back from the same level.
What are resistances?
A resistance level is formed when the price of the cryptocurrency fails to cross higher than the price levels because of huge selling zone in the price band.
So far, we covered the basics of candlestick, charts, and technical analysis, but everything was related to price. Next, let us get to the second leg of charting – the time factor.
Time frames for technical analysis
The longer the time frame, the clearer the view of the market. This is because there is a lot of noise in the shorter-term timeframe in the market and hence the volatility may be higher.
The time frame for analysis will determine the type of trader you are. The time frame for any asset could be 15 minutes, 1 hour, daily, weekly, or monthly. The longer the time frame, the stronger the sustenance of any move. Depending on the use of the time frame, your nature of trading is decided – i.e. your timeframe on the charts defines the type of trader you are.
- Scalpers – Trade time is 10 minutes to 30 minutes
- Day trader – Buying and selling within the same day
- Swing trader – Buying and holding the trade for a few days to two weeks
- Positional trader – Buying and holding the trade for a few weeks to 6 months to 12 months
- Investors – Buying and holding for more than one year
Cryptocurrency is just another asset class and the price movements in this asset class is also driven by psychological emotions like greed and fear. Trading in cryptocurrency comes with inherent risks, so it is advisable to approach it with caution. Wait for the price to come down to your entry level rather than enter it just because of the fear of missing out (FOMO).
Learn first and then earn. There are umpteen number of opportunities every day, every week, every month, and every year. Just hold on to the analysis.