According to you, what are the essential things you consider you should know before investing in cryptocurrencies?
Yes, it’s a basic question, and answers are pretty obvious, but most of you may miss out on mentioning one important skill, i.e., the ability to read the price charts and form a market view.
Whether you are an investor or trader, price charts are the first thing you want to look at before placing orders, as it provides a summary of the historical and current price trend. It blends all the actions of millions of market participants in a visually simplified and organised format. And, this is what makes it a unique tool for investors.
There are many chart patterns available, but we will discuss the three most popular crypto trading charts you should know before investing in this blog.
Types of Crypto Trading Charts
Whether it’s a stock or cryptocurrency, the features and functionality of price charts remain the same for both asset classes.
The following are the three most popular price charts you should know:
- Line Price Chart
- Bar Price Chart
- Japanese Candlestick Price Chart
Let’s look at all the price charts with an example and understand how to read them.
Line Price Chart
It is a basic price chart and a graphical representation of the closing price of the cryptocurrency with a continuous line. The chart depicts the price movement of a cryptocurrency over a period in multiple timeframes.
Here is an example of a line price chart of BTC/USD on the daily timeframe.
In the above chart, you can see the line connecting the closing price of BTC each day over one year in a single continuous line. In this chart type, you can easily spot the trend and quickly get the big picture of the price movement.
As the line chart uses only one metric, i.e., the closing price of the cryptocurrency, it reduces the noise in the crypto price chart.
Bar Price Chart
This bar price chart is a bit complex and carries more information for traders and investors.
A typical price bar contains five different types of information, open, close, high, low, and price range of each duration.
The vertical bar represents the range of the trading period, and its size depends on the quantum of price change in each trading period. If there is a major price fluctuation, the size of the vertical bar becomes longer and vice versa.
Similarly, the left and right horizontal marks on the vertical bar represent the open and close price. You don’t have to sweat much to determine whether the price change is negative or positive as each bar is colour coded. The green bar will indicate a positive price change, and the red bar will show a fall in prices.
Here is an example of a bar price chart of BTC/USD in a weekly timeframe.
In the above bar price chart example, you can see how the size of each vertical bar differs due to volatility in the prices.
The only advantage of bar price charts is that they offer more information about the price movement. It helps traders to make informed decisions.
Japanese Candlestick Price Chart
Candlestick price chart pattern is considered more resourceful to traders and investors. It is the oldest price chart pattern and has been around for nearly four centuries.
The Candlestick price chart was first introduced by a Japanese rice trader named Munehisa Homma in the 18th century. It is an advanced version of the bar price chart system.
Analysing candlestick is an art, which if mastered, can make you a successful cryptocurrency trader. Over the years, candlestick signals have been refined, tested, and used in various markets. Before delving more about candlesticks, let’s check out how it looks.
There are two parts of a candlestick; the first is the body, and the second is shadow.
The body is the part between the open and close price. Here, you should note that the candle’s body will be marked green if the opening price is lower than the closing price. If the open price is higher than the closing price, the candle’s body will be marked red.
Green indicates a positive price change compared to the previous day’s close price and vice versa for the red candle.
The shadow is the line above and below the body of the candle. The tip of the shadow above the candle’s body is the highest price of that period, and the bottom of the lower shadow indicates the lowest price of that period.
The candle doesn’t need always to have shadows at both ends. It happens when the open and close prices are the highest and lowest level of that period, such as the Marubozu candle.
Now, here is the part that makes candlestick exciting. Apart from the open, high, low, close price, each candle depicts the internal dynamics of the market, which can be inferred by analysing the size of the body and shadow.
Types of Candlestick Pattern
There are many candlestick formations like Doji, Hammer, Inverted Hammer, Shooting Star, Hanging Man, Bullish Engulfing, Bearish Engulfing, Bullish Harami, Bearish Harami, Morning Star, Evening Star, etc.
Here is an example of a candlestick chart for BTC/USD on a daily time frame.
The above daily candlestick price chart of Bitcoin has two distinct candle patterns, the Bullish Engulfing and the Doji candle.
Bullish Engulfing in a downtrend signifies the return of strength in the market. For the candle to qualify as an engulfing candle, the candle’s body should completely engulf the previous day’s candle.
Similarly, a Doji candle pattern after a downtrend means a change in sentiment in the market. Further, it indicates bears are losing strength, and the confirmation in the form of a big green candle the next day confirmed the trend reversal in the BTC price.
Why Do Candlestick Price Patterns Work?
Fear and Greed- the two potent emotions that play out in the market every second. The one who can judge the sentiments of the market appropriately tends to be on the winning side. How does it work?
So, if you notice, fear creates panic in the market, thus leading to more supply and a fall in prices. Similarly, greed sucks out the supply from the market resulting in a rise in prices.
The one way to measure it is through analysing the candlestick patterns. They capture the emotion and present it in a quantifiable manner, making it easier to analyse the market.
As mentioned above, analysing the crypto trading charts and forming a market view is key to successful investing.
If you are new to cryptocurrency charts, keeping things simple in the beginning is the best way forward. Start with analysing crypto line charts, find your preferences, and make an investment decision using it.
As you find yourself comfortable with the process, you can learn advanced price chart patterns like the candlestick charts.
FAQs on Crypto Trading Charts
Which is the Best Crypto Trading Chart?
If you are a long term investor, a line chart will suffice your needs, but for trading in cryptocurrencies, you need to know advanced crypto graphs like candlestick charts.
What are the 4 Types of Cryptocurrency?
There are four types of cryptocurrency in the market, which includes:
- Cryptocurrency: The coins which have their own blockchain with original codes
- Altcoins: The coins that are the result of a hard fork of an original blockchain
- Tokens: The coins are based on the top of another blockchain
- Stablecoins: The coins are backed by traditional asset classes, primarily fiat currency or gold
How do you Read a Chart in Cryptocurrency?
Reading crypto graphs include the study of price movement, trend, and volume. It also includes the analysis of price charts by drawing trend lines, support and resistance, using different technical indicators like RSI, MACD, Stochastic, Bollinger Band to confirm the trend and analyse the market sentiment.
Investing in cryptocurrencies is rewarding when done correctly. Download the CoinSwitch Kuber App and start your investing journey at ₹100.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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