Cryptocurrency Chart Analysis | A Step By Step In-Depth Understanding

Cryptocurrency Chart Analysis

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The ability to read cryptocurrency charts is essential for traders to find the best opportunities on the market, as technical analysis is capable of identifying market trends and predicting the movement of an asset’s price in the future.

The term technical analysis refers to the process of analyzing statistical trends gathered over time in order to determine how the supply and demand of a particular asset influence its future price trends. Crypto market charts can assist investors in making well-informed decisions by indicating when bullish and bearish movements are expected to end.

The term “bullish movement” refers to an upward price movement driven by bulls, or the buyers of an asset. An asset’s bearish movement can be defined as a downward price movement caused by the bears, which are the asset’s sellers. Traders can use technical analysis to evaluate price trends and patterns on charts to identify trading opportunities. There are some caveats to the best crypto charts, but they can be useful in monitoring market movements.

The term ‘technical’ refers to the analysis of past trading activity and price variations of an asset, which, according to technical analysts, are useful predictors of future price movements. Any asset with historical trading data can be used, such as stocks, futures, commodities, currencies, and cryptocurrencies.

Charles Dow, the founder and editor of the Wall Street Journal as well as a co-founder of Dow Jones & Company, introduced technical analysis to the world. Dow Jones Transportation Index (DJT) was the first stock index created by Dow Jones.

Over the course of a series of editorials published in the Wall Street Journal, Dow’s ideas were compiled into what has become known as the Dow Theory. In recent years, technical analysis has evolved through years of research to include the patterns and signals we are familiar with today.

In order for a technical analysis to be valid, all known information about an asset must have been priced into the market, implying that the asset is fairly valued in light of that information. The majority of traders who use technical analysis and market psychology believe that history will repeat itself at some point in the future.

It is common for technical analysts to incorporate fundamental analysis into their trading strategy in order to determine whether an asset is worth approaching and to complement their decisions with an analysis of trading signals in order to determine when to buy and when to sell in order to maximize profits. In fundamental analysis, financial information is analyzed to predict the future value of an asset. An analysis of a company’s shares may include examining its earnings, industry performance, and brand value.

Traders can make more informed decisions by identifying bullish and bearish price movements.

In 1884, Charles Dow contributed to the creation of the first stock market index. Following the creation of this index, the Dow Jones Industrial Average (DJIA) was created, which is a price-weighted index that tracks the 30 largest publicly traded companies in the United States. By analyzing the stock market, Dow believed it was possible to identify major market trends by measuring the business conditions within the economy.

Several other analysts have contributed to Dow’s theory, including William Hamilton, Robert Thea, and Richard Russell. Some aspects of Dow’s theory have lost importance over time, including its focus on transportation. Although traders still follow the DJT, it is not considered a primary market index like the DJIA.

In Dow theory, there are six major components known as the six tenets. In the following sections, we will examine each one in turn.

Everything is reflected in the market
One of the core principles of technical analysis is the Dow theory. According to this theory, the market reflects all available information in the price of assets, and prices these assets accordingly. As an example, if a company is expected to report positive earnings, the market will increase its price.

According to this principle, asset prices reflect all available information and trade at their fair value on stock exchanges, which is known as the Efficient Market Hypothesis (EMH).

According to Dow theory, there are several types of trends

The market is characterized by three types of trends
Dow’s theory also suggests that markets exhibit three types of trends. Generally, primary trends last for months or years and are characterized by major market movements. A primary trend can be either a bull market in which the price of assets increases over time, or a bear market in which the price of assets decreases over time.

In addition to these primary trends, there are secondary ones that may work in opposition to them. A secondary trend may be a pullback in a bull market, where asset prices temporarily move back, or a rally in a bear market, where prices temporarily move up before continuing their downward movement.

In addition, there are tertiary trends, which tend to last one week or just a little longer and are often considered noise in the market that can be ignored because they will not affect long-term movement.

There are three phases to primary trends
It is possible for traders to identify opportunities by examining different trends. As an example, during a bullish primary trend, traders may take advantage of a bearish secondary trend to buy an asset at a lower price before it continues to rise. Identifying these trends is difficult, particularly when considering the Dow theory, which states that primary trends have three phases.

In a bull market, the accumulation phase precedes a contrary trend, whereas in a bear market, the distribution phase occurs when market sentiment is largely negative. During this phase, smart traders recognize that a new trend is developing and either accumulate prior to an upward movement or distribute prior to a downward movement.

The second phase is known as the public participation phase. As a result of the emergence of a new primary trend, the wider market either purchases additional assets to take advantage of upward price movements, or sells assets to minimize losses during downward price movements. In the second phase, prices increase or decrease rapidly.

During bull markets, this phase is referred to as the excess phase, and during bear markets, it is referred to as the panic phase. During the excess or panic phase, the general public continues to speculate while the trend is about to come to an end. Those who understand this phase begin selling in anticipation of a bearish primary phase or buying in anticipation of a bullish primary phase.

The difference between a bull market and a bear market

In spite of the fact that there is no guarantee regarding the consistency of these trends, several investors consider them when making their investment decisions.

Indices must correlate
According to Dow theory’s fourth tenet, market trends can only be confirmed when both indices indicate a new trend. A new primary upward trend should not be assumed by traders if one index confirms a new primary upward trend while another index remains in a primary downward trend.

Since the transportation sector was heavily dependent on industrial activity, Dow’s two main indices at the time were the Dow Jones Industrial Average and the Dow Jones Transportation Average, which would naturally tend to correlate.

Volume confirms trends
In accordance with the fifth tenet of Dow theory, trading volume should increase if the price of a security moves in the direction of its primary trend and decrease if it moves in the opposite direction. As a secondary indicator, trading volume serves as a measure of how much an asset has been traded over a given period, where low volume indicates a weak trend, while high volume indicates a strong trend.

During a bullish primary trend, a bearish secondary trend with low volume indicates that the secondary trend is relatively weak. A significant trading volume during the secondary trend indicates that more market participants are beginning to sell.

Trends are valid until a reversal is clear
As a final point, the sixth tenet of Dow theory suggests that trend reversals should be treated with suspicion and caution as reversals in primary trends can easily be misinterpreted as reversals in secondary trends.

What are candlestick charts?
In order to analyze cryptocurrency market trends, traders have access to several types of charts. As a result of the nature of candlestick charts, Cryptocurrency candlestick charts provide more information.

Bullish pattern vs Bearish pattern

Like line and bar graphs, crypto candlestick charts display time across the horizontal axis and private data on the vertical axis. The main difference is that candlesticks indicate whether a market’s price movement was positive or negative, and to what extent.

Crypto market charts can be set to a variety of timeframes, with candlesticks representing those timeframes. If a crypto trading chart is set to a four-hour timeframe, for example, each candlestick represents four hours of trading activity. Trading periods are determined by a trader’s style and strategy.

Candlesticks consist primarily of a body and wicks. In each candlestick, the body represents the opening and closing prices, whereas the top wick represents how high the price of a cryptocurrency reached during that time frame, and the bottom wick represents how low it reached.

Candlesticks may also be available in two different colors: green or red. During the period under consideration, green candles indicate an increase in price, while red candles indicate a decrease in price.

Candlesticks provide users with a great deal of information due to their simple structure. Candlestick patterns can be used by technical analysts to identify potential trend reversals, for example. It is important for cryptocurrency traders to be aware of the bullish and bearish candlestick patterns.

For example, a long wick at the top of a candle’s body may indicate traders are taking profits and a sell-off may be imminent. In contrast, a long wick at the bottom may indicate that traders are buying the asset whenever its price falls.

Also, a candlestick in which the body occupies most of the space and the wicks are short may indicate strong bullish sentiment if it is green, or strong bearish sentiment if it is red. A candlestick with almost no body and long wicks indicates that neither buyers nor sellers are in control.

Support and resistance levels
A trendline can be used to identify support and resistance levels on live crypto candlestick charts. A trendline is a line drawn on a chart that connects a series of prices.

In a pullback, support levels are price points at which cryptocurrencies or any other asset are expected to halt due to a concentration of buying interest at that level. A resistance level is a price point at which there is a concentration of selling activity. These levels are difficult to surpass due to concentrated buying and selling interests.

In order to identify crypto chart patterns, trendlines can be used to identify support and resistance levels. A cryptocurrency’s lowest and second-lowest lows in a given timeframe are used to draw an uptrend line. Support is provided by levels that touch this trendline.

Based on the crypto’s highest and second-highest highs, a downtrend line is drawn, with levels touching this line being considered resistance levels. Downtrend lines are used during downtrends, while uptrend lines are used during uptrends. Based on trendlines and support and resistance levels, a variety of strategies can be employed. It is not uncommon for some technical analysts to buy near the support of uptrend lines and sell near the resistance of downtrend lines, for example.

Often, a cryptocurrency’s price moves sideways within a relatively stable range. During September and November 2018, Bitcoin (BTC) traded between $6,500 and $6,500 before dropping to $3,200 by December 2018. Resistance levels are located at the top of the range, while support levels are located at the bottom of the range. There may be a breakdown if the price of the cryptocurrency drops below that range with a strong movement, or a breakout if the price moves upward with a strong movement.

Long-term moving averages can also be used to determine support and resistance levels. By creating a constantly updated price average, these indicators smooth price data.

A moving average (MA) is one of the most commonly used technical indicators, which essentially eliminates noise by generating an average price for a particular cryptocurrency. When trading crypto charts in real time, moving averages can provide useful signals.

Most commonly, moving averages are used for periods of 10, 20, 50, 100, or even 200 days. During an uptrend, a 200-day moving average is considered a support level, while during a downtrend, it is considered a resistance level.

Traders use a variety of moving averages. Using a simple moving average (SMA), you simply add up the average price of an asset over a defined period and divide it by the number of periods.

Simple moving average (SMA)

Weighted moving averages (WMAs) give greater weight to recent prices in order to make them more responsive to new developments. Similarly, an exponential moving average (EMA) gives more weight to recent prices but is not consistent with the rate of decline between one price and its preceding price.

Since moving averages are based on past prices, they are lagging indicators. Moving averages are often used by traders as signals for buying and selling assets, depending on the timeframe they are using.

In crypto trading charts, the 50-day and 200-day moving averages are closely monitored, as when the 50-day SMA crosses below the 200-day SMA, a death cross is formed, indicating that the price is about to drop. Golden crosses indicate a price rise when the 50-day SMA crosses above the 200-day SMA.

On-balance volume indicator (OBV)
On-balance volume is a technical indicator that measures the trading volume of a cryptocurrency. Developed by Joseph Granville, it is based on the belief that trading volume drives price movements in the markets.

As a cumulative indicator, the OBV rises and falls based on the trading volume of the days included within a given period. In order to confirm trends, traders should see rising prices accompanied by a rising OBV when viewing live crypto charts. A falling OBV should accompany a falling price.

Moving average convergence divergence (MACD)
The moving average convergence divergence (MACD) is an indicator that identifies both buy and sell signals based on the difference between the 12-day and 26-day exponential moving averages. As an oscillator, it fluctuates above and below a centered line.

When the 12-day EMA crosses below the 26-day EMA, the MACD signals a sell signal, while the opposite indicates a buy signal. The greater the distance between the two lines, the stronger the MACD’s reading.

There is also a signal line, which is a 9-day exponential moving average. When the MACD crosses above the signal, it usually indicates that it is time to buy, while when it crosses below it, it usually indicates that it is time to sell. In addition to the MACD indicator, a histogram is included to measure the difference between the MACD and the signal line.

Relative Strength Index (RSI)
The relative strength index (RSI) is a momentum indicator used to determine whether an asset is overbought or oversold. RSI is shown as an oscillator, which means a line between two extremes, and can range from 0 to 100.

The indicator uses a 14-day timeframe, and a cryptocurrency is considered oversold when its value drops below 30 and overbought when its value rises over 70. Overbought conditions indicate a sell signal, while oversold conditions indicate a buy signal.

Developed by John Bollinger, Bollinger bands are used by traders to identify short-term price movements in assets, including cryptocurrencies. Bollinger bands are calculated by adding and subtracting a standard deviation from a 20-day moving average.

Bollinger bands can be customized based on the cryptocurrency’s price, with the bands expanding and contracting according to that price. Bands indicate periods of higher or lower volatility and should not be used as a standalone indicator, but rather in conjunction with other indicators.

Cryptocurrency prices that move above the upper band are considered overbought, while those that move below the lower band are considered oversold. During periods of low volatility, Bollinger bands are followed by periods of high volatility, implying that when the bands separate during periods of high volatility, the trend may be coming to an end. When the bands are close together, the asset may be undergoing a period of high volatility.

 

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