Successful trading depends on the user’s ability to predict the rise or fall of quotations. Different methods of market analysis are used for this purpose. The first thing necessary to build an effective strategy is to read cryptocurrency charts correctly, that is, to see signs of trend continuation or reversal. This skill is called a basic skill, because with its help, one can quickly analyze the situation on the market of tokens and coins.
The concept of cryptography
Many traders use the methods of thehanalysis. This is a theory that assumes that the history of price movements contains complete information about future changes in quotations. Technical analysis is based on 3 basic rules:
- The price takes everything into account. The current rate of cryptocurrency predicts its rise or collapse.
- Prices are influenced by trends (bullish or bearish). Traders can read cryptocurrency charts and see which trend is dominating the market right now. A bullish trend means a rise in prices, while a bearish trend means a fall.
- History is cyclical. Knowing how the exchange rate of an asset changed in the past, we can expect the dynamics to repeat themselves.
The chart of a trading pair is the main tool of technical analysis. It is a chart that displays the movement of an asset’s rate over a unit of time. A line or candlestick chart shows how cryptocurrency quotations rose or fell over an hour, a week or a day. But traders also use other tools to visually display the situation on the exchange:
- Technical indicators (MACD, Ishimoku cloud, oscillators).
- Non-standard charts (bars, tic-tac-toe, Renko).
- Trend lines and tools for finding support or resistance zones.
Purpose and types of stock charts
The main purpose of the quote visualization is to help the trader to find patterns. These are recurring graphical patterns, on the basis of which one can determine how the price will change in the future. In addition, indicators – special formulas showing the strength of the trend, probability of reversal and other important indicators – are sometimes superimposed on the chart of the digital currency rate.
The easiest type of chart to build. Usually on a line chart, a time interval (timeframe) is selected, each point on which corresponds to the price of a cryptoasset at the end of a minute, hour or day. Then these marks are connected by one line. This way of visualization gives only a general idea about the market situation.
The line chart does not show how the quotes changed within the time interval. That’s why professional traders rarely use this tool.
The method is most popular among professionals. Similar to linear cryptography, each mark corresponds to a certain time interval. But not only the price is shown, but also its maximums and minimums for the specified interval. If the price of the asset has fallen in comparison to its initial value, the candlestick is painted black or red. In the case of growth of quotations the bar becomes white or green.
There are two parts to a Japanese candle:
- Body. Displays the difference between the price of the asset at the beginning and the end of the range.
- Shadow. Shows the maximum and minimum values of the quotations in the corresponding interval.
For beginners, this way of displaying the value of an asset may seem complicated. But in order to read cryptocurrency charts in the form of Japanese candlesticks, you need to follow 3 steps:
- View the color of the bar. Usually red indicates falling and green indicates rising.
- Analyze the size of the candlestick body. The larger it is, the more the value of the crypto-asset has changed in an hour or a day.
- Evaluate volatility (dynamics). Long shadows indicate that sharp fluctuations occurred in a certain period. If the bar is completely shaded, the value of the coin or token was steadily decreasing or increasing.
European modification of the Japanese candlesticks. Instead of shadows, this type of chart uses horizontal bars. The body of the bar is colored in green or red, depending on the growth or decline in quotations. Horizontal lines inside it indicate the value of the asset at the beginning and end of the time range.
Traders do not always care about the binding of quotes to time intervals. In some trading strategies it is enough to know the duration of the trend (how many points the price of an asset has changed). In this case, marks that indicate growth or decline in price are plotted on the chart. For example, if a crypto-asset has fallen in price, the trader draws a single cross. After the token or coin goes up by 30 points, a bar of 3 zeros is added to the right. This visualization format simplifies the analysis of trend movements. The user is not distracted by shadows, candlesticks and other tools, and assesses only the intensity of growth or decline in quotations.
A trend indicator for technical analysis based on moving averages. It consists of a candlestick chart, 3 colored lines and 2 shaded areas above and below the bars. The Ishimoku cloud helps users determine the beginning of a new trend. Most strategies based on this indicator involve opening trades depending on what is higher on the chart – candlesticks with quotes or lines (clouds) calculated using moving averages.
The profitability of trading depends on how accurately the trader can determine the trend reversal point. One of the appropriate techniques is drawing Fibonacci levels on the chart. These are the lines displaying the percentage change of quotations. The reversal most often occurs near the next level.
Harmonic price pattern
Some strategies have improved the use of Fibonacci numbers. Users do not just mark levels, but also find visual patterns (patterns) on the chart, which consist of several tops of a certain structure.
The price movement is believed to be wave-like. Each interval of growth or decline can be extended to the next Fibonacci level. Finding a harmonic price pattern makes it easier to analyze the future dynamics of quotations.
This tool shows the approximate range of crypto-asset rate changes. Andrews’ Pitchfork consists of 3 parallel lines:
- The central one shows the direction of the trend.
- The upper and lower ones indicate the nearest support or resistance levels.
For beginners, it’s easier to read cryptocurrency charts with Andrews Forks: as long as the rate of the asset is inside the indicator, the current dynamics of growth or decline will remain.
This tool helps to visually find patterns based on local price highs and lows. It is believed that the rate of crypto-asset will tend to cross past levels again. If the price reached a daily or weekly high, but then went back, a retest of the level is possible soon. The Fractals indicator marks important areas with triangle shapes. Users can open trades in the direction of these levels.
Many analysts use the terms “overbought” and “oversold. These are situations in which a coin is rising or falling too fast.
Oscillators are technical analysis indicators that help to recognize overbought crypto-assets. These tools are usually displayed under the trading pair chart. Such oscillators are available in most terminals:
- Relative Strength Index (RSI).
- Stochastic Oscillator.
- Convergence/divergence of moving averages (MACD).
How to learn to read charts on a cryptocurrency exchange
There are no infallible ways of market analysis. Any trading strategy can lead to opening the wrong trades. But in general, to learn how to read charts on a cryptocurrency exchange, you need to act according to this algorithm:
- Open a demo account. Beginners make mistakes more often, so during training it is better not to risk real money.
- Choose a timeframe for analysis. Scalpers usually set up the terminal so that each candle is created after 5 or 15 minutes. In long-term trading, the daily timeframe is more often used.
- Select and adjust indicators. Usually several tools are used, which allows you to choose the most accurate signals.
- Identify the current trend. This can be done by eye, but for beginners it is better to use Andrews Pitchfork or Ishimoku.
- Find visual signs of a reversal. Such patterns are called patterns.
- Identify possible reversal points. Fibonacci levels or support/resistance zone indicators, such as fractals, are mainly used for this purpose.
Patterns of shapes on cryptocurrency charts
At one time, traders noticed patterns in the dynamics of asset price increases or decreases. Some candlestick sequences signaled the continuation of the trend, while others warned of a reversal. That’s how pattern analysis – the repeating graphical formations – appeared. In general they can be divided into 3 categories:
The bottom line
Examples of figures
Continuing the trend
Predict a further rise or fall in the quotations of crypto-assets.
They signal that the mood of market participants will soon change.
“Double Top,” “Head and Shoulders”
They arise if the price remains stable. A sharp upward or downward movement of quotations serves as an indication of a future trend.
Predicts the continuation of the current trend. Visually it looks like a triangle, inside which the price gradually freezes on one marker. After that there is a breakdown of the pattern line, most often in the direction of the trend.
If the user sees the “Triangle” pattern on the chart, it is necessary to wait for the growth of volatility. After that it is recommended to open a deal in the direction of the breakdown. In case of an error, a stop loss order should be placed at the level of the opposite edge of the pattern.
Reminds of the “Triangle” pattern, but both range lines are directed up or down. Indicates a change in the sentiment of other users. As uncertainty grows in the market, volatility gradually decreases. In this situation, large players can lock in profits, which will lead to a collapse. Therefore, when a Wedge appears, it is advisable to wait for the reversal and open a trade in the direction of the breakdown.
Head and shoulders
A reversal figure consisting of 3 vertices. The left and right “shoulders” look like mirror copies of each other. In the middle between them there is a point of price maximum. When the “Head and shoulders” figure is formed, one should consider selling the crypto-asset.
There is also an inverse modification of the pattern. “Inverted head and shoulders” indicates growing bullish sentiment.
This figure appears during correction – temporary stabilization of quotations. It is believed that after breaking the border of the “Flag” the current trend will continue. Experienced users recommend to pay attention to those formations, in which the price corridor is inclined. In this case a particularly sharp impulse to break the border of the channel is expected.
In general, cryptocurrencies are characterized by high volatility. But sometimes the rate of tokens and coins seems to freeze, and the chart remains in a narrow range. Exit from its borders indicates the beginning of a new trend movement.
A reliable and noticeable reversal formation. If the rate of crypto-asset touches the low point 2 times and then starts to increase, analysts talk about a “Double Bottom”. In this case, it is recommended to buy tokens or coins. The opposite pattern is “Double Top”. It is considered as a sign of the soonest collapse of quotations.
Adam and Eve
Visually, it resembles “Double Top”, but one side of the formation looks sharp, and the other – rounded. It is referred to the reversal patterns. But this figure is less often used by beginners. The reason is that sometimes sharp jerks on the chart occur due to technical failures, for example during the entrance of large players into the market. Therefore, “Double Top” is considered a more accurate sign of reversal.
The Real Use of Patterns and Texas Analysis
Experts and analysts have different opinions on the effectiveness of graphical figures. Some believe that this technique allows to quickly learn profitable trading. Others criticize the chart analysis for lack of mathematical reasoning and false signals.
The main argument for the effectiveness of patterns is that most crypto traders use the same trading strategies. In such a situation, when a pattern appears on the chart, we can expect a similar reaction from all participants.
For example, in the case of “Double Top” buyers will start to close trades, which will lead to a collapse of the quotes. If the candlesticks are in a “Rectangle” shape, most users will start creating orders in the direction of the trend after the breakdown of the boundary. This will strengthen the current trend.
Graphical formations are often used in crypto trading. This method of analysis can be considered on the example of the dynamics of Bitcoin quotes in June-July 2021. At that time, the BTC exchange rate was declining. The price of Bitcoin on June 22, 2021 was under $30,000. Then the quotes returned to the level of $35,000. At the end of July 2021, the BTC rate went down to $30,000 again. Thus, the formation of “Double Bottom” pattern took place.
In this situation, crypto traders should have opened long positions. One week later, the price of the main digital currency reached $42,000. Buying bitcoins based on the “Double Bottom” pattern could bring users up to 40% profit.
Other tools of tehanalysis
In addition to visual models, traders and investors apply:
- Methods based on finding pivot points.
- Systems of trading by support and resistance levels.
All these methods are combined within one strategy. For example, when a “Double Top” pattern appears, the user can see on the oscillator indicator that the price is in the overbought zone. Such a combination indicates the imminent end of a bullish trend.
No method of theanalysis can be considered ideal. Beginners should be cautious and not risk the money, the loss of which would put the client in a difficult financial situation. Any method of analysis requires experience and careful adjustment of all formulas and algorithms. Therefore, beginners will inevitably encounter mistakes and losing trades.
The ability to read charts on the cryptocurrency exchange helps traders to determine the trend and its likely reversal points. Different tools are used for this purpose:
- Japanese candles.
- Indicators of thechanalysis.
- Tools based on Fibonacci levels.
- Trend lines and Andrews’ Pitchfork.
During the analysis a trader can notice patterns – shaped patterns that indicate a reversal or continuation of the trend. In particular, “Double Top” and “Head & Shoulders” patterns usually appear on the eve of a change in market sentiment.