Understanding how to read crypto charts is crucial for beginners diving into the trading realm. By recognizing chart patterns, traders can identify entry points, price movements, sell signals, and market trends. Crypto charts from advanced exchanges like FMCPAY even support overlays & indicators, which help traders refine their strategies and make more informed decisions. Mastering these tools is the key to becoming a successful crypto trader.
Join FMCPAY in this general guide to learn all you need about reading crypto charts.
1. Main Types of Crypto Charts
There are several types of charts used in crypto trading. The choice of chart depends on the exchange platform and the trader’s style. Most traders are familiar with candlestick charts due to their popularity and the valuable insights they provide. However, other chart types can also be highly effective if you understand how to read crypto charts in different scenarios.
Okay, let’s start by defining the main types of charts and their common uses.
1.1 Line Charts
Line charts are the simplest type of chart in crypto trading. They connect one closing price to the next over a specific period, making them ideal for spotting general trends and long-term price movements. However, they don’t provide much detail on intraday price fluctuations.
Take a look at the example chart below. The line’s movement reflects price changes, showing the overall trend over time.
1.2 Bar Charts
Bar charts provide more detailed information than line charts. Each bar indicates a specific period (one hour, one day,…) and displays the opening, closing, high, and low prices in that period. This type of chart is invaluable for those who know how to read crypto charts, as it helps analyze the strength and direction of price movements over time.
At the top of the bar, you’ll see the highest price, while the bottom shows the lowest price within that period. A small horizontal line on the left side indicates the opening price, and the line on the right represents the closing price.
1.3 Candlestick Charts
Candlestick charts provide the same information as bar charts but in a more intuitive format. Each candlestick shows the opening, closing, high, and low prices for a specific time period. The body is colored (typically) green for up periods and red for down periods, making it easier to check whether the price closed higher or lower than it opened.
The wicks at the bottom and top represent the lowest and highest prices in that period, respectively. Mastering how to read crypto charts, especially candlestick chart, is crucial as they are the most popular and widely used charts in cryptocurrency trading.
Trivia
Candlestick charts were first created in Japan during the 18th century by Munehisa Homma, a rice trader who used them to track rice prices. These charts visually depicted price trends and market sentiment, aiding traders in making better decisions. As candlestick charts gained popularity in the Western world, they became a fundamental tool in financial analysis. Knowing how to read crypto charts, particularly candlestick charts, is important for any modern traders.
2. Components of a Crypto Chart
To effectively trade cryptocurrencies, understanding the key components of a crypto chart is fundamental. Learning how to read cryptocurrency charts involves recognizing these essential elements and their functions.
2.1 Timeframe
The timeframe is a vital element of any crypto chart. It determines how frequently price data points are plotted, with common options including one minute, five minutes, one hour, one day, and one week.
Your choice of timeframe should align with your trading strategy. Short-term traders may use shorter timeframes for quick insights, while long-term investors often select broader timeframes. Mastering how to read crypto charts with the right timeframe helps in making right trading decisions that align with your strategy.
2.2 Price Axis and Volume Axis
The price axis, typically the vertical axis on the right, displays the price levels of the cryptocurrency. The volume axis, usually positioned on the left or at the bottom, shows the trading volume (the amount of cryptocurrency traded) within a specific timeframe. High trading volume can suggest strong market interest and potential price changes, whereas low volume may reflect market hesitation.
2.3 Overlays and Indicators
Indicators and overlays are tools that enhance the analysis of crypto charts. Overlays are applied directly on the price chart to adjust its visual aspects, while indicators appear in a separate pane below the main chart and provide additional insights based on price and volume data. Knowing how to read crypto charts with these tools can significantly improve your analysis and trading strategy.
2.4. Candlesticks
Candlesticks are commonly used in candlestick charts and serve as the primary price indicator. But since candlestick charts are highly popular in crypto trading, here we will introduce how to read crypto charts with candlesticks. Each candlestick consists of two main parts:
- The Body (the thicker part): shows the opening & closing prices of an asset within a specific timeframe.
- The Wick (the thinner part): shows the highest & lowest price points over that timeframe.
Candlesticks can be colored red or green to indicate a price decrease or increase. Longer candlesticks signify greater volatility, while shorter ones indicate less price movement.
Traders can use candlestick patterns to predict potential trend reversals. For example, a long wick above the body may signal that traders are taking profits and could suggest a sell-off soon. Conversely, a long wick below the body might signal strong buying interest during price drops.
3. How to read Crypto Charts for Beginners
By analyzing daily volume data and market price, technical analysts discover that some chart patterns hint the upcoming market trends and assist in forecasting price movements of the assets they’re trading. Learning how to read crypto charts effectively involves recognizing these patterns.
Here are examples of these popular chart patterns:
3.1. Shooting Star Pattern
The shooting star candlestick is a classic bearish pattern often seen at the end of an uptrend. It has a short body near the bottom with a long wick extending upward, showing that the price of the asset decreased slightly by the end of the trading period despite higher levels earlier, giving it a red color.
Shooting Star pattern is often recognized as a signal of impending resistance and potential sell-off when traders anticipate a price decline.
3.2. Inverted Hammer Pattern
The inverted hammer candlestick is similar in shape to the shooting star but is a bullish indicator, typically colored green. It shows a slight price increase by the end of the trading period, despite previous declines, signaling strong buying demand.
Recognizing this pattern in how to read crypto charts is vital, as it may suggest a rebound is near, with strong buying demand during a downtrend.
3.3. Head and Shoulders Pattern
Looking beyond individual candlesticks, traders can identify broader patterns like head and shoulders, defined by three peaks or valleys, with the central peak or valley resembling a “head” flanked by two “shoulders.”
This pattern can signal both bullish or bearish trend. Look at the picture below: the head and shoulders pattern on the left suggests a downtrend, while the right one may indicate an upswing.
3.4. Wedges Pattern
Wedges are patterns in crypto charts that become visible when taking a broader view, similar to the ‘head and shoulders’ pattern. To identify a wedge, draw a line connecting the lower points of price movements over time and another line connecting the price peaks. When these lines converge from left to right, it forms a wedge.
A bullish wedge, characterized by two downward-sloping lines forming a near-triangle shape, suggests that the price may stabilize and potentially rise. Conversely, a bearish wedge, with upward-sloping lines converging at a peak, could indicate an upcoming price decline and sell-off.
Knowing how to read crypto charts is key to recognizing these patterns and predicting potential market movements.
4. Most Used Chart Overlays
As mentioned, knowing how to read crypto charts with overlays can significantly enhance your crypto analysis and trading strategy. Now it’s time to dive a little into these powerful tools.
4.1. Moving Averages (MA)
The most notable usage of moving averages is for smoothing out price data and revealing trend directions. Traders often rely on moving averages to determine the overall trend and pinpoint potential reversal points.
Additionally, moving averages help in identifying support and resistance levels, which are key when learning how to read crypto charts. Understanding these averages is crucial for accurately predicting market movements and making informed trading decisions.
4.2. Bollinger Bands
Bollinger Bands are composed of three lines: a middle band (simple moving average, or SMA) and two outer bands representing standard deviations from this middle band. Typically, the middle band is set to a 20-period average, serving as a baseline. The outer bands, positioned at standard deviations above and below the middle band, measure price volatility.
When prices approach the upper band, the market might be overbought, while nearing the lower band could indicate an oversold condition. For traders learning how to read crypto charts, Bollinger Bands are indispensable for forecasting price reversals or continuations.
4.3. Fibonacci Retracement
Fibonacci retracement is a technique that uses horizontal lines to indicate potential support and resistance levels at key Fibonacci ratios like 23.6%, 38.2%, 50%, 61.8%, and 100%.
This tool helps traders predict where prices might find support or resistance after a significant move, guiding them to make entry or exit strategies. Mastering Fibonacci retracement is an essential part on reading crypto charts, as it provides insight into potential reversal points.
5. Most Used Chart Indicators
You have know about how to read crypto charts overlays? Then let’s keep up with the next 3 most popular chart indicators. Be note that indicators are different from overlays as they are always shown below the main crypto chart.
5.1. Relative Strength Index (RSI)
The RSI is a key tool for understanding how to read crypto charts, as it measures the speed and change of price movements to identify overbought or oversold conditions.
It provides a value between zero and 100. When the RSI surpasses 70, it signals that the market might be overbought; if it drops below 30, it suggests the market might be oversold. Traders use RSI to predict potential reversals and evaluate the strength of trends, which is important for accurate chart reading.
5.2. Moving Average Convergence Divergence (MACD)
For those mastering how to read crypto charts, the MACD is an essential momentum indicator. It consists of three components: the MACD line (the difference between the 12-day EMA and the 26-day EMA), the signal line (a 9-day EMA of the MACD line), and the histogram (which shows the difference between the MACD line and the signal line).
The MACD helps traders to identify trend direction and potential reversals, with a bullish signal occurring when the MACD line crosses above the signal line and a bearish signal when it crosses below. The histogram’s size reflects the trend’s strength, offering clear insights for traders.
5.3. Stochastic Oscillator
The stochastic oscillator is a momentum determiner that compares a specific closing price to a range of prices over a given period, making it a key indicator in learning how to read crypto charts.
Stochastic Oscillator range from zero 0 to 100, values above 80 suggest overbought conditions, while values below 20 indicate oversold conditions. Traders rely on this indicator to pinpoint potential reversal points, helping them decide the optimal moments to in or out the market.
Selecting the right indicators and overlays should align with your investment object, trading style, and preferred market analysis methods.
6. Advices for Beginners
Learning how to read crypto charts is important for anyone looking to engage in trading or investing in cryptocurrencies. However, to help you avoid common beginner mistakes, FMCPAY has some tips that might be very useful for you.
6.1. Patterns Show Possibilities, Not Predictions
Always keep in mind that patterns and indicators are not guaranteed predictors of market movements. While chart patterns and technical analysis can provide valuable insights, they should not be solely relied upon for making trading decisions.
The crypto market is unpredictable, and no single indicator or method can forecast its direction with absolute certainty. Instead, use chart reading as part of a broader strategy, combining it with other research and techniques to develop a well-rounded understanding of the market.
6.2. Choose the Right Platform
Selecting a reliable charting platform is essential for beginners learning how to read crypto charts. A strong platform should offer a variety of indicators, and customization options, enabling traders to perform thorough analyses. Platforms like FMCPAY exchange are popular choices due to our comprehensive features.
When choosing a platform, ensure it provides the tools necessary for both basic and advanced analysis, as this will help you better understand the market and make informed trading decisions.
6.3. Keep Your Trading Chart Clean
A clean and uncluttered chart is crucial for effective analysis, especially when you have learned how to read crypto charts. While using multiple indicators can provide a more comprehensive market view, overcrowding your chart with too many tools can lead to confusion and obscure vital price information.
For example, combining a trend indicator like a moving average with a momentum indicator like RSI can offer clearer signals. However, it’s important to strike a balance, ensuring your chart remains clear and focused on the most critical data.
6.4. Make a Checklist for Analyzing Charts
After you’ve known how to read crypto charts, developing a set of rules or a checklist to guide your analysis can help you save a tons of time. Start by identifying the overall trend direction, followed by checking support and resistance levels. Then, analyze the trading volume and use indicators to confirm potential signals.
This structured method helps ensure that you don’t overlook important factors and that your analysis remains consistent, improving your decision-making process.
6.5. Always Test Strategies with Historical Data
Backtesting is a vital practice for anyone learning how to read crypto charts and develop effective trading strategies. By using historical price data, you can simulate how a particular strategy would have performed in past market conditions.
Most charting platforms offer features that allow you to replay past market scenarios, giving you the opportunity to refine your strategy before applying it to live trading. This procedure helps you gain confidence in your approach and understand its strengths and weaknesses across different market environments.
Conclusion
Trading chart analysis is one of the important steps in crypto investment to help predict the price trend of your trading assets. While understanding how to read crypto charts can assist you to refine your strategy and make more informed decisions, it’s important to note that reading crypto charts alone cannot guarantee success.
Market volatility and other external factors can still impact outcomes, making it crucial to combine chart analysis with a careful approach. And always remember to stay updated with FMCPAY for more insights and guidance on crypto trading!