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How to Read Crypto Charts? The ultimate basics guide by InWara

How to read crypto charts

To know how to read crypto charts is the most basic skill that you need to know before you get into trading. Generally, before you get into trading you gotta learn all the jargon, technical analysis, and fundamental analysis. 

All these elements come into play while trading crypto tokens like Bitcoin, which has appreciated by more than 200% since the beginning of 2019.

How to read crypto charts

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Understanding trading and technical fundamentals are critical not just for traders but also for market analysts as well. For a comprehensive understanding of how to read crypto charts, continue reading.

Dow Theory

To know technical analysis in a better way, it is very important and basic to know Dow Theory. The fundamental analysis behind is as follows:

· The market takes all the existing, previous, and upcoming information into consideration during its pricing.

· Price movements generally follow some kind of trends that are either long. Term or short term. They are not usually random in nature.

· In the crypto market, various variables are considered that may impact the market such as the prior, current, future demands, and any sort of regulations.

· Market experts are focused on the cost of a coin instead of each and every factor that creates a movement in its cost.

With the saying history tends to repeat, it is possible to predict market behavior. It can be predicted as the traders react the same way when they come across the same kind of pattern.

Six Tenets of Dow Theory

1. Three movements of the market

· The basic movement which is generally a major trend and lasts from less than a year to several years is known as the main movement. It can either be bullish or bearish.

· Then there is the movement called medium swing which is a secondary reaction and lasts from ten days to three months.

· Then, in the end, there is a short swing which is also known as a minor movement that changes and varies according to the market predictions that go from hours to a month or even more.

These movements can even happen simultaneously.

2. Phases of market trends

· Accumulation Phase: This is the period when investors begin to buy or sell the asset against the general view of the market. In this phase, the price of the asset doesn’t change much as the investors are in a minority.

· Absorption Phase: Gradually the market captures these intelligent investors and follows the trend. An ever-increasing number of individuals pursue these patterns until rampant speculation begins.

· Distribution Phase: After enormous speculation, as a result of the constrained supply of the asset, the value starts to retrace as knowledgeable investors distribute their holdings to the market. Because of it, the price begins falling alongside the volume.

3. The stock market news

The stock market incorporates new data when it ends up accessible. When this news is released, the cost of the asset changes to reflect this new data. The cost reflects the expectations, fears, and desires for all the market members. Factors, for example, earning expectations, major elections, product initiatives, and so on are altogether incorporated into the market price.

4. The stock market average must confirm one another

To see how this function, think about this model. There is an organization A and an organization B. Assume A will be a granite organization and B is a transportation organization. A uses B’s services to ship their items. Presently, on the off chance that A gets more business, at that point B will get more business too since A will require B to move their products and the other way around. Along these lines, if an investor is keen on putting money into organization A, he has to take a look at the presentation of organization B. These two averages ought to move in a similar way. In the event that these two averages are wandering, at that point, it is an indication that the market pattern might reverse soon.

5. Trends get confirmed by volume

Dow Jones accepts that volume is an auxiliary yet significant factor in recognizing price signals. This is the means by which volume responds during major trends:

· During an uptrend, volume should rise with the raise in price.

· During a downtrend, volume diminishes with a decline in price.

6. The trends in existence

Just like Newton’s first law of motion, this tenet is just like it, for example, an object in motion will in general stay in motion unless acted upon by an outer power. Same way, Dow accepts that the market stays in trend despite “market noise.” Determining a reversal in trend isn’t simple.

Technical Analysis

What is technical analysis? Technical analysis is a tool that issued to predict the future of a cryptocurrency or a stock based on the data of the market. This analysis gives an investor an in-depth perspective of the market. Technical analysis is done by investors by looking at the historic charts of price and volume of a particular security. These charts show the trends to investors which will help them decide on their investments. So, let’s look at technical analysis in depth.

Time Frames for Crypto charts

There are various time frames that a technical analyst examines the charts. The most famous time frames are as follows:

· 15-minute chat

· Hourly chart

· 4-hour chart

· Daily chart

The time frames that a trader wants is completely a personal-trading choice. The traders also fall into two different categories such as:

· Intra-day traders: The traders who start and end their position in a single. Day. These kinds of traders prefer short time frame charts such as 5-minute and 15-minute charts.

· Long-term holders: These traders hold for a long period of time. They can hold for weeks to months and years. These holders generally prefer charts like 4-hour, daily charts or sometimes even weekly charts.

Cryptocurrency Market Cap

Market cap is a product of total circulating supply and the price of each coin. Market cap is known as a great indicator to know the stability of the coin.

Market cap = Total Circulating Supply * Price of each coin

The market cap allows investors to compare and understand the relative size of one company versus another company. It measures what a company is worth in the open market and the market’s perception of its future.

The Japanese Candlestick Charts

The graph we see below is the candlestick chart where we can see the red and green candlesticks next to each other. Each candle depicts the price movement of assets during a specific interval of time. Each candle represents the opening price, closing price, the lowest price, and the highest price of the time period. As we can all see there are two kinds of candlesticks, one is the green candle and the other is the red candle.

Each candle has a body and they have shadows that are sticking out of the body. The difference between the opening price and closing price is shown by the body. The shadows show the highest and lowest these opening and closing prices. In the green candle, the upper shadow shows the closing price and the lower shadow shows the opening price. Whereas, in the red candle, the upper candle shows the opening price and the lower shadow shows the closing price. The best part of these candles is that they show exactly where the market turned and find different trends that will help in predicting the future.

Relative Strength Index

Relative Strength Index measures the strength and speed of a market’s price movement by contrasting the present price of a cryptocurrency to its past performance. It works by comparing the magnitude of recent increases to recent losses to decide if crypto has been overbought or oversold.

Formula: RSI = 100 — (100/(1-RS))

In the equation above, RS is the proportion between the average of the days the coin was up to the average of the days the coin was down. Presently, you don’t have to make a big deal about figuring anything, as the trade will do it for you.

While RSI is a helpful indicator, truly it isn’t immune to false purchase and false sell signal which can be made by either a huge rally or a critical drop in the cost of the crypto. This is the reason RSI ought to be a tool that you use alongside different indicators to foresee the future price of a coin.

Support and Resistance

In technical analysis, support and resistance are predetermined degrees of the cost of an asset at which tends to reverse its trend. These levels are signified by numerous touches of cost without a leap forward of the level. Traders regularly purchase at support and sell at resistance.

Resistance

Resistance is nothing but something that stops from prices rising. The resistance level is a price point on the chart where traders anticipate the most maximum supply for the stock/index. The resistance level is always over the present market cost. The feasible hood of the price rising up to the resistance level, solidifying, absorbing all the supply, and declining is high. The resistance is one of the basic technical analysis instruments which market members take a look at in a rising market. The resistance frequently goes about as a trigger to sell.

Support

As the name proposes, support is something that keeps the price from falling further. The support level is a price point on the chart where the trader anticipates maximum demand into the stock/index. At whatever point the price tumbles to the support line, it is probably going to bounce back. The support level is consistently underneath the current market price. The support is one of the basic technical level market members search for in a falling market. The support frequently goes about as a trigger to purchase.

Participants in the Market

In a market, there are commonly three sorts of participants, at some given price level:

· Traders who are going long and trusting that the cost will rise.

· Traders who are going short and trusting that the cost will fall.

· Traders who don’t know what direction to go.

Price rising from support

At the point when the price bounces off a support level and goes up, the three participants respond this way:

· The traders who are going long are extremely happy with the condition of the market. They may likewise attempt to add considerably more to their position if the price drops doing to the same support level.

· The traders who are going short may rethink their position and attempt to purchase in addition to breakeven as the price reaches the support level once more.

The traders who didn’t enter the market already might need to wait for the price to get down to the support level to enter the market. In this way, this support line turns into an incredible level where all the three sorts of traders can buy-in.

Price falling through support

Price can usually fall through a support level and meet support at different levels. For this situation, the first support level progresses toward becoming resistance. So, this is the three participants respond this way:

· The traders who go long will wait for the price to come up to the original support level and sell their assets there to limit losses.

· This helps the short traders who will need to add more to their position.

At long last, traders who haven’t entered the market yet will choose to go short. Thus, this support line turns into an extraordinary level where all the three sorts of traders can sell at.

Support and Resistance: Market Emotions

The greatest factor behind price movements are feelings like fear, greed, good faith, and pessimism. You can think about a price chart as a graphical portrayal. At the point when the price tumbles down to the support level, greed/optimism kicks in and the long traders purchase the asset in order to add to their position. In the meantime, the short traders will purchase in addition to cover for losses.

As an ever-increasing number of traders buy-in, group mindset kicks and the price rises up from the support line. Thus, when the cost goes up, fear/pessimism kicks in from the traders and they sell their assets to ensure they don’t acquire any losses.

The motivation behind why emotional price levels like support and resistance are so critical is that they pull in great attention and make anticipation. This attention pulls in a countless number of volume and traders.

Trend Lines

Trend lines explains a big part of learning how to read crypto charts. Drawing these lines will help us identify the trend. The trend line is nothing but a straight line that connects two price points and this can extend into becoming a line of resistance or line of support. There two types of trending lines and they are as follows:

· Downward Trending Lines

· Upward Trending Lines

Downward Trending Lines

A downward negative slope that is created by the upper shadow of the red candlestick is known as the downward trending line. The characteristics of trending line are:

· By connecting two of the high points the trend line is created.

· Each high point should be lower than above greater point.

It acts as a resistance level and shows a decreasing price with increasing supply. Until the price remains below the trend line it indicates a bearish trend. If it breaks above the downtrend line it shows that there is a change in trend.

Upward Trending Lines

An upward trending line is created by connecting more than two points on the lower shadow green candlestick. Each low point should be greater than the previous low point. This line acts as a support and shows that as the price rises the demand for the asset rises. The price remains above the line in upward trend line. An increased price combined with increasing demand is very bullish. If it breaks through the trending line then that indicates a strong bearish trend.

Advantages and Disadvantages

· The greatest advantage of trending lines is that it is incredibly basic, cheap, and quick. Given some authentic information, a trend line can be rapidly drawn to make estimates on how the cost will react later on.

· The greatest disadvantage is this isn’t the most exact of methodologies. It should be utilized in conjunction with other technical analysis devices to make a more accurate prediction.

Simple Moving Averages (SMA)

The other tool is the Simple Moving Averages. Simple Moving Average is calculated by finding the average number of past data points. After pointing out the points the traders will be able to identify the current trend and can look at smoothed data instead of focusing on disjointed, fluctuating data. Simple Moving Average as the says it is the simplest form of moving average. It is calculated by taking the arithmetic mean of the values.

Formula: SMA n = (A1 + A2 + A3+…+An)/n

Here, A is the closing price of the asset and n being the period over which it is calculated. Some of the things that needs to be kept in mind about simple moving averages are:

· SMA is very useful in indicating the direction of the trend. SMA is moving upward then it means the trend is up and when the SMA is moving downward, then it means that the trend is down.

· The SMA 200 curve is used to identify the long-term trend, SMA 50 curve is used to indicate the intermediate trend, and most traders who want to find the short-term trend use SMA 20 curve.

· The smoother the price data and technical indicators will be if the time period is longer.

Crossing Signals

Price crossing the SMA curve is triggering signals:

· When a price is crossed over the SMA curve then it’s a bullish sign.

· When the SMA curve is curved over the price then it’s a bearish sign.

Bollinger Band

Bollinger Band is a technical analysis tool that is characterized by a set of lines plotted two standard deviations away from a simple moving average curve of the crypto’s price. The SMA time period can be balanced by the client’s preferences. On the off chance that you are utilizing the SMA 20 curve, at that point, you will utilize the 20-day Bollinger band. This technical analysis tool was created by a famous technical trader John Bollinger. There three different lines in Bollinger Band:

· The SMA curve of the time period choose is the middle curve in the band.

· The upper curve will be the positive standard deviation.

· The lower curve will be the negative standard deviation.

The stand deviation is a calculation of how much a current value of an asset deviates from its average curve.

Bollinger Band and Trading

Bollinger band are famous with trades for two reasons:

· Widening and Narrowing of the band: At the point when the bands come together, choking the moving average, it is known as a squeeze or narrowing of the band. This means the market is losing its volatility. At the point when the bands go further separated or widens, it demonstrates that the market is increasing its volatility. The widening and narrowing of the band will give you an incredible sign with respect to whether a price is going to change or not.

· Breakouts of prize: There are three regions where we need to concentrate on:

§ The green square: The price goes up and the market turns out to be bullish to the point that it breaks past the upper curve of the Bollinger band. This is emphatically a bullish sign. In a perfect world, we need our assets to be over the SMA curve. On the off chance that it breaches the upper band, at that point that implies that the market is extremely bullish.

§ The red square: Here, the bears have extremely control over the market and the price dives till it breaches the lower band. There is a green candle also, be that as it may, it is contacting the lower band. This implies that despite the fact that the session was bullish, it overall stays bearish.

§ The black square: This pretty equivalent to the green square. The market has been taken over by the buyers and now the price has breached the upper band before re-altering.

Moving Average Convergence Divergence (MACD)

This is a momentum tool which helps in identifying and letting the traders know whether an asset has a bullish or bearish momentum. It demonstrates the relationship between the two exponential moving averages of the assets price.

These are the various tools and different ways that can be used to read crypto charts. All these tools are not perfect or accurate when they are used individually. It is best to use them together so that you get an accurate result.

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