Reading crypto charts is an important skill for anyone who wants to trade digital assets. Understanding crypto charts will allow you to perform the technical analysis necessary to make investing decisions.
Here’s what to know:
How to Read Cryptocurrency Charts
There are many potential methods for reading crypto charts.
Some factors aside from the chart itself can be worth considering too, as important events or changes in overall market sentiment can have a heavy-handed impact on charts.
For best results, traders can implement multiple methods of reading crypto charts at the same time. When several different indicators lead to similar conclusions, market observers have more confidence in their predictions. Relying on a single indicator is likely to create an incomplete picture and could be misleading.
Recommended: 6 Things to Know Before Investing in Crypto
1. Support & Resistance Levels
Support and resistance are among the most basic technical analysis concepts used when reading charts. Support refers to a potential bottom in prices, while resistance refers to a potential top. Prices tend to reverse at these points, and if they don’t, it can mean that a new trend has emerged.
When prices breakout beneath support, further declines could be possible. Likewise, when prices breakout above resistance, further increases could be possible.
Pivot points, predictive indicators that average the high, low, and closing price from the previous trading session, provide a more precise way to calculate specific support and resistance levels. Traders who are serious about reading crypto charts could begin by researching topics like pivot points more thoroughly.
2. Moving Averages (MA)
Moving averages plot a line on a chart that indicates the trend of price averages over a certain period. Investors can use MAs for just about any time frame, but many believe that long-term averages carry more weight as they include more data. The same can be said of most technical indicators.
Investors also often use multiple moving averages in conjunction with each other. For example, investors consider a “golden cross” a bullish signal, while a “death cross” is a bearish signal.
A golden cross happens when a short-term moving average rises above a long-term moving average. Often this involves the 50-day MA moving above the 200-day MA. A death cross happens when this trend reverses and the short-term moving average falls beneath the long-term moving average.
3. Volume Weighted Average Price (VWAP)
The Volume Weighted Average Price (VWAP) appears on a single line on a chart. Similar to a moving average, VWAP includes one crucial variable – volume. Including volume into the average price calculation may create a more accurate picture of previous price behavior. A trend based on low volume could be weak and reverse quickly, while a trend based on high volume is thought to be more robust.
Recommended: What Is Volume in Cryptocurrency?
4. Relative Strength Index (RSI)
The Relative Strength Index, RSI, is another often-used and easy-to-read indicator. It appears as a single line beneath the price chart itself, with a value between 0 and 100, with 50 being neutral. A low RSI reading may signal oversold conditions, meaning prices could rise soon, while a high RSI reading could signal overbought conditions, meaning prices could fall soon.
The closer the RSI is to its extremes of 0 or 100, the more reliable investors consider it. In some cases, the RSI can remain elevated or suppressed for long periods before the foretold price reversal materializes. For this reason, it can be helpful to use other price indicators alongside ones like the RSI.
5. Crypto Fear & Greed Index
The Crypto Fear and Greed Index provides an approximation of overall market emotions. Using a variety of data, the index shows a value between 0 and 100, with 100 being maximum greed and 0 being maximum fear.
This is a contrarian indicator, meaning investors might use it to do the opposite of what everyone else is doing. When the index reads below 20, that signals extreme fear, and could mean buying opportunities. When the index reads above 80, that signals extreme greed, and could mean it’s time to take some profits.
Recommended: How to Use the Fear and Greed Index to Your Advantage
6. Trends Tend to Continue
Figuring out exactly when a trend is about to reverse can be difficult if not impossible much of the time. Many believe it’s better to just identify existing trends and try to ride on that momentum.
But how do you know exactly when a trend has changed? It’s difficult to say, and traders might disagree. In general, it’s when a pattern breaks down or prices close above resistance or below support, for example, the trend may have changed course.
7. Candlestick Charts
Candlesticks are price charts that show the high, low, opening, and closing prices of cryptocurrency during a specific time period. When you set up a candlestick chart, you’ll choose the time period that you want it to cover.
8. Bitcoin Dominance
One last factor worth taking note of when reading crypto charts is Bitcoin dominance . This number, expressed as a percentage, refers to the amount of the crypto market captured by Bitcoin. For many investors, the higher this value rises, the more bullish they are on Bitcoin, while being bearish for many altcoins.
The opposite is also thought to be true. Investors may perceive a decline in Bitcoin dominance as a bearish signal for Bitcoin and bullish for altcoins.
On April 22nd, 2021, Bitcoin dominance fell below 50% for the first time since 2018. Some market observers believe this means that Bitcoin could either fall or trade sideways for a time while many altcoins rally.
Bitcoin forks can also potentially impact Bitcoin dominance, as a new altcoin is created when this happens.
Recommended: How to Invest in Bitcoin
The Takeaway
This has only been an introduction to how to read crypto charts and tips for investing in Bitcoin and crypto. Using one or more of the above listed methods can help traders make informed decisions, but they may also want to do additional research.
Photo credit: iStock/SARINYAPINNGAM
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