Beginner’s Guide to Understanding Trading Charts
In financial markets, trading charts provide a basis for technical analysis to determine market direction. Trading charts consist of trends and patterns crucial to enable you to form a market view and come up with successful trading decisions.
Most crypto trading beginners often challenge reading trading charts, especially those with no prior experience in trading in the 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. In this beginner’s guide, we’re going to look at some fundamentals on reading and analyzing common crypto charts to enable you to make profitable trading decisions.
The Line Chart
A line chart is one of the most common charts used in financial markets. It’s a basic level chart connecting a series of data points with a line. In cryptocurrency trading, a line chart 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 value 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 are used to represent the price trend. Sometimes, a volume indicator is placed at the bottom of the crypto line chart to indicate the coin’s trading volume represented 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 quite simple, and you can easily identify chart patterns and key trends.
Numerous crypto traders prefer candlestick charts as they indicate more market information rather than the crypto price movement alone as with line charts. 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 is performing over a particular period-the reason 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 highest and lowest trading prices of the selected timeframe. 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 at a bullish trend, meaning that the closing price was higher than the opening prices. 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 different types of candlestick patterns, each giving crypto traders various trends. 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 patterns).
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 the barrier or reversed 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 where a price uptrend is expected to pause for a short time, mostly due to excessive supply.
Support and resistance levels exist due to an influx of buyers and sellers at a certain point and are usually crucial 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 the crypto space 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 sell orders at the prevailing market price. The buy-side is usually represented in green and represents open buy orders below the last traded price, i.e., bid. The sell-side us shaded red and indicates all current sell-orders above the last traded price, i.e., ask.
Cryptocurrencies are very volatile thus carry significant risks. A moving average trend line is used to indicate the overall price trend over a particular time.
Moving averages are crucial in technical analysis to predict market movements and determine support at a certain price. Moving average represents the average price of a digital asset based on its value for the past period. In most cases, crypto exchanges display 3 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 different types of 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 quite similar to line charts in that they indicate 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 over a period to represent decreasing or increasing momentum. When the opening and closing momentum are far apart, the price action has strong momentum.
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. Overall, traders can use these charts to determine whether 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 charts using the most common indicators will ensure you get better with time.
This guide only outlines the basic concepts in understanding trading charts. It may be best to strengthen your knowledge using a practical approach and develop a crypto strategy that suits you.