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Beginner’s Guide to Understanding Trading Charts
Most crypto trading beginners often challenge by reading trading charts, especially those with no prior experience trading in traditional financial markets such as stocks and forex. However, reading and understanding trading charts are necessary to determine precise market entry and exit points for overall trading success.
Whether you are a day trader or a long-term crypto investor, understanding trading charts is mandatory to succeed in the crypto space. This beginner’s guide will look at some fundamentals on reading and analyzing standard crypto charts to enable you to make profitable trading decisions.
The Line Chart
A line chart is one of the most familiar charts used in financial markets. It’s a basic level chart connecting a series of data points with a line. For example, a line chart in cryptocurrency trading represents a coin’s performance (price action) over a particular period, usually represented by the line.
Line charts can represent any time frame from days, months, and even years. Sometimes, line charts may encompass two scales: linear and logarithmic. In the linear scale chart, the price scale is separated into equal sections, while in the logarithmic chart, the price of a digital asset is scaled based on the percent changes.
This means that if two price changes have a different absolute values yet are equal in percentage, the two price points will be represented by the same vertical shift on the log scale.
Linear charts are mainly used to represent the rate of market price changes, while logarithmic charts depict the price trend. Sometimes, a volume indicator is placed at the bottom of the crypto line chart to indicate the coin’s trading volume defined in the chart.
Trading volume is a fundamental indicator of crypto price direction and can indicate the price direction. Also, line charts may sometimes feature multiple lines representing different aspects of the coins, such as market share or price movement.
When analyzing line charts, you should first determine whether the price is on a downward or upward trajectory, how the coin is performing in the short term and whether the price is stable or volatile. Analyzing a line chart is simple; you can quickly identify patterns and key trends.
Numerous crypto traders prefer candlestick charts as they indicate more market information than the crypto price movement alone, as with line charts. In addition, a candlestick chart can provide information on several metrics relating to the coin, such as price, market cap, and volume.
It provides a much deeper insight into how a particular coin performs over a specific period- why it has become popular with crypto traders. Candlestick charts are made up of candles, representing various statistics such as the highest market price, the lowest price, the opening price, and the closing price of the specified period.
The lines (wick) at the bottom and top of each candle indicate the selected timeframe’s highest and lowest trading prices. In addition, the candle’s body is often shaded in two colors, i.e., green or red, to represent the market trend, whether bearish or bullish.
A green shade points to a bullish trend, meaning the closing price was higher than the opening price. On the other hand, a red shade indicates a bearish trend, meaning that the closing price was lower than the opening price.
There are more than ten candlestick patterns, giving crypto traders various trends. The most common types of candlestick patterns include hammer (bullish pattern), inverse hammer (bullish pattern), hanging man (bearish pattern), shooting star (bearish pattern), and Dojis (continuation candlestick pattern).
Support and Resistance Levels
Support and resistance levels play a crucial role in technical analysis. It’s based on a simple concept of identifying price levels where the market price reacted by either moving past or reversing below the barrier.
Support occurs where a price downtrend is expected to slow down primarily due to increased demand. On the flip side, resistance occurs when a price uptrend is likely to pause for a short time, primarily due to excessive supply.
Support and resistance levels exist due to an influx of buyers and sellers at a certain point and are usually important market turning points, round numbers, and congestion areas. Analyzing support and resistance level can assist you in determining market breakouts and trade reversals.
Market Depth Chart
Market depth charts are not very common in crypto but can give you a rough idea about coin demand and supply. These charts consist of two colors, i.e., red (sell) and green/blue (buy).
The shades indicate the total number of coins bought and sold orders at the prevailing market price. The buy-side is usually green and represents open buy orders below the last traded price, i.e., bid. The sell-side is shaded red and indicates all current sell-orders above the last traded price, i.e., ask.
Cryptocurrencies are very volatile and thus carry significant risks. Therefore, a moving average trend line indicates the overall price trend over a particular time.
Moving averages are crucial in technical analysis to predict market movements and determine support at a specific price. The moving average represents the average price of a digital asset based on its value for the past period. In most cases, crypto exchanges display three moving averages, usually based on the close prices for the previous 7, 25, and 99 days.
The higher a moving average value is, the more significant the price direction is. There are different moving averages, notably Simple, Exponential, Smoothed, and Weighted. Moving averages are essential in determining market trends and signals for existing or entering a position.
OHLC charts are similar to line charts in that they indicate the closing prices of the coins. However, unlike line charts, the OHLC chart displays open, high, low, and closing prices for each period.
These charts are vital in determining market direction as they constitute four major market data points representing decreasing or increasing momentum over time. The price action has strong momentum when the opening and closing momentum are far apart.
On the other hand, when the open and close points are close together, the market has a weak momentum. OHLC charts can also determine the price volatility of a particular coin using the high and low points. Traders can use these charts to decide whether or not it’s right to sell or buy.
Reading and analyzing trading charts is a vital skill in the crypto space. It can be a little confusing for beginners like you to analyze trading charts, but you’ll get used to it with time.
Even the most seasoned traders sometimes have difficulties analyzing charts; therefore, you should give yourself time. Nonetheless, continually reading and interpreting graphs using the most common indicators will ensure you get better with time.
This guide only outlines the basic concepts of understanding trading charts. It may be best to strengthen your knowledge using a practical approach and develop a crypto strategy that suits you.