The crypto industry has boomed in recent years, attracting many investors who want to explore new ways to generate additional income. But as exciting as this new sector is, its complexity can overwhelm crypto newcomers. Many may consider it simple to enter this new space; after all, you buy bitcoin with credit card, and that’s the beginning of your journey throughout the crypto world. However, things can be a lot more complicated than they seem, so before trading digital assets, investors must take the time to get familiar with all the crypto-related concepts and understand their technicalities.
Why must traders learn to read crypto charts?
Understanding crypto charts plays a crucial role in finding the right market opportunities, as it helps investors predict price movements by evaluating current market trends. This process, known as technical analysis, involves looking at an asset’s past trading activity and price history to understand the impact of supply and demand on price changes. This helps investors make more informed decisions in their trading journey as they learn to predict when bullish and bearish markets will likely end.
Technical analysis is a method that applies to any asset as long as it has historical trading data, whether commodities, stocks, currencies, futures, and of course, cryptocurrencies. Charles Dow (Wall Street Journal’s founder and editor) was the one to introduce the concept of technical analysis, which he explained in a series of editorials posted in the newspaper. After he passed away, his ideas were compiled into what is now known as the Dow theory.
The six principles of Dow theory
The Dow theory is not new, but its principles are also relevant in today’s markets. These include the following:
- An asset’s price includes all information about the asset. All the information investors need to know about an asset, like its competitive edge and the potential for gains, is reflected in its price.
- The crypto market involves three movements. There are three movements in the market: the primary movement, which can be bullish or bearish and can last one year or more; the secondary movement (the medium swing), lasting between 3 days to 3 months; the minor movement, or the short swing which involves short-term speculations in the market.
- A market trend has three phases, namely the accumulation phase (when seasoned investors buy and sell the coin against the market’s general perception); the public participation phase (when the other crypto enthusiasts in the market follow seasoned investors); the distribution phase (when seasoned investors start redistributing their holdings).
- Market volumes and trends are interrelated. When the market is bullish, market volume increases, while in a bearish period, the market volume naturally decreases in time. Suppose the market volume reduces during a bull market; this predicts a bearish movement, and, in this case, investors expect a bear market.
- The market index confirms a trend. Signals from the market index are a great indicator of market trends. Let’s say one index indicates a primary downtrend, while the other signals an uptrend. This means that a market trend hasn’t yet started. On the other hand, if the two market indices show a downward or upward trend, this signals a new market trend.
- Market trends persist until there’s a reversal. No matter the fluctuations in an asset’s price movements, a market trend only ends when a definite reversal occurs – until then, it is continuous. Investors should treat reversals cautiously to avoid confusing primary trends with secondary trends.
Candlestick charts: how do they work?
Many charts are available to crypto traders, with the Japanese candlestick chart being the most popular, as it provides more information. Just like bar and line graphs, crypto candlestick charts have two axes: a horizontal one that shows time and a vertical one that shows private data. However, they are unique in the way that they indicate if the price movement of an asset was negative or positive in a specific period.
Crypto market charts can be set to various timeframes, with the candlestick symbolizing the timeframe. Suppose the chosen timeframe is four hours; in that case, each candlestick will indicate four hours of trading. The trading period can differ based on the style and strategy of each trader. Candlesticks consist of a body, which illustrates the opening and closing prices, and two wicks:
- the top wick, representing the highest price of the crypto during that specific time frame;
- the bottom wick, representing the lowest price of the crypto during that specific time frame.
Candlesticks can be green or red: the green ones indicate an asset’s price went up, and the red ones show a price decrease. Candlesticks’ structure provides a lot of useful information to technical analysts. For instance, they can help them determine potential trend reversals, thus identifying a bullish or bearish period.
Essential parameters to consider when evaluating an asset’s performance
When investing in digital assets, it is vital to understand what data to consider when reading a chart. Here are some critical parameters to keep in mind:
- Price. When evaluating the performance of an asset, price is the first important aspect to consider. Investors rely on technical indicators to determine current trends and compare them with price movements from past days, weeks, months, and even longer. Trading volume. A coin can change hands multiple times during a specific period. In case the trading volume expands, it means that more investors are purchasing the currency.
- Market cap. A digital asset’s market cap is calculated by multiplying each token’s price by how many coins are in circulation.
- Circulation supply. This refers to the number of tokens that people trade actively. Suppose an asset’s supply is high, and the demand is low; in this case, the coins’ price depreciates.
- Hashrate. This measures the speed of mining a digital asset. A high hashrate indicates that several miners verify transactions, ensuring the security of a cryptocurrency.
The bottom line
Understanding how crypto charts work is paramount if you want to invest in digital assets. Without technical analysis, identifying market movements and opportunities is pretty much impossible. Therefore, each investor should master the skill of reading crypto charts so they can make more informed decisions and have a successful investing journey.