How to read crypto stock charts - a guide for beginners

09, Apr - BLOG

Have you ever looked at a crypto stock chart and felt unsure whether to make a purchase or unload your holdings? This article aims to equip you with the skills to effectively interpret cryptocurrency charts, allowing you to make informed decisions.

Mastering the art of reading crypto charts is essential for anyone involved in crypto trading. The ability to analyze price fluctuations and identify patterns in charts is what in finance is called technical analysis.

But don't let that term scare you. Technical analysis relies on market data, including trading volumes, chart patterns, and various other market technical indicators. These elements are used to help traders determine the most profitable trading strategies for an asset.

Selected parts of cryptocurrency charts

Cryptocurrency exchanges typically display continuously updated price charts for specific trading pairs. These pairs often include a user-selected cryptocurrency paired with the U.S. dollar, although users have the option to choose to pair with other currencies or cryptocurrencies.

In the chart, let's highlight seven key data points:

1. Trading Pair: Indicates the base currency (BTC) and the quote currency (USDT) used in the market.
2. Current Price: Indicates the prevailing price of the base currency (BTC) in exchange for the quote currency (USDT). It also includes indicators reflecting price changes from the previous 24 hours, which can change rapidly depending on market activity.
3. High/Low: reflects the highest and lowest price of an asset during a 24-hour period.
4. 24H Vol: displays the trading volume of a particular asset (BTC) over the previous 24 hours, specified in the quote currency (USDT).
5. Time Unit: Allows users to select time intervals from one minute to one month to be reflected in the trading market.
6. Price Graph: Visualizes currency price fluctuations over time. Each unit of time typically corresponds to one candle, and the number of candles indicates the recent trend of the asset price. Users can customize the timeframe from 24 hours to months or years.
7. Trading Volume: Below the main price chart is a smaller volume chart illustrating the trading volume of the asset, with individual bars corresponding to the candles displayed above. Longer bars indicate higher trading volumes over certain time periods. Generally, green bars indicate rising prices and red bars indicate falling prices (colors can be changed depending on user preference).

However, the most important aspect of this chart is the group of candlesticks that make up the price chart.

Understanding Candlesticks

A candlestick serves as the primary price indicator on most cryptocurrency price charts, reflecting price activity over a specific unit of time, such as 30 minutes, as shown in the chart above.

Consisting of two main bars, each candlestick includes:

• Body: the thicker part of the candle, indicating the opening and closing prices of the asset for the specified time period.
• Wick: the thinner part of the candle, indicating the highest and lowest price points reached during the same time period.

Usually in cryptocurrency charts, a green candle indicates bullish movement or price increase, and a red candle indicates bearish movement or price decrease.

Candlesticks

Based on daily market price and volume data, technical analysts have developed many chart-based indicators that help them predict the potential future price movement of the assets they trade.

These indicators range from basic patterns that analyze candlestick combinations to more advanced trend lines and metrics derived from recent price fluctuations.

First, let's take a look at some of the fundamental patterns that are commonly seen on these charts.

Fundamentals: Common chart and candlestick patterns

Candlestick patterns are usually divided into two categories: bullish and bearish. A bullish pattern usually indicates a potential upward movement in the price of an asset, encouraging traders to consider buying in anticipation of a rising price. Conversely, a bearish pattern may encourage some traders to sell in anticipation of a potential downward price movement.

However, traders' trading decisions can vary widely. Some may prefer to "buy on the dip," opting for contrarian action by buying more assets when prices are falling in anticipation of a subsequent rebound. Ultimately, trading strategies are subjective and depend on individual preferences and risk tolerance.

Shooting Star candlestick pattern

The Shooting Star candlestick pattern is usually seen during the end of an uptrend and is a sign of a bearish trend reversal. This pattern is characterized by a short body near the bottom and a long wick stretching upwards. Despite rising prices during the trading period, by the close of the session the price of the asset declines slightly, which leads to its depiction in red color.

Analysts interpret the shooting star as a signal of resistance to further price growth, indicating an imminent sell-off. Many traders prefer to sell their positions in anticipation of a potential price decline.

Inverted Hammer candlestick

The "Inverted Hammer" candlestick, on the contrary, is similar to the "Shooting Star" pattern, but has bullish characteristics depicted in green. This candlestick indicates a slight increase in price by the close of the trading session after higher price levels at the beginning of the period.

Some analysts are positive about the appearance of an inverted hammer after a downtrend, suggesting a potential rebound in price due to increased buyer demand at this point.

Head-and-shoulders patterns on cryptocurrency charts

Zooming out on individual candles reveals broader patterns on cryptocurrency charts, including the "head and shoulders" formation. This pattern consists of three peaks or valleys placed next to each other, with the second peak or valley, called the "head," overshadowing the neighboring "shoulders."

A bullish head-and-shoulders pattern, shown in green, may signal an upcoming price rise.

Conversely, a bearish head-and-shoulders pattern depicted in red often precedes a downtrend in prices.

Wedges on cryptocurrency charts

Similarly, "wedges" are observable patterns on cryptocurrency charts that offer a broader perspective. Wedges are delineated by connecting the low points of price movement over a certain period into one line and price peaks into another. When these lines converge from left to right, a wedge pattern emerges.

A bullish wedge, characterized by two downward converging lines, suggests stabilization of price fluctuations near the bottom and potential upward movement.

In contrast, a bearish wedge is characterized by two upward sloping lines approaching a convergence at a high point, indicating a potential price peak followed by a sell-off.

Patterns show opportunities, not predictions

As with many other aspects of the cryptocurrency market, it is crucial for participants to do their own research on various topics, including trading indicators and strategies. This article serves more as an informational guide to the basics of trading than definitive advice. It is important to realize that there is no single indicator, technique or method that can accurately predict market movement, especially when it comes to candlestick and crypto patterns.

While chart reading is a fundamental aspect of technical analysis, it should only serve as an initial step towards a deeper understanding of the cryptocurrency market. Relying on candlestick patterns and chart analysis alone to predict the market may not be enough.