How to read cryptocurrency charts
So you have decided to buy bitcoin, congratulations! Now this first thing that comes to mind is: what is the best time to buy?
On this page we’ll try to help you out with that particular question by learning you basic technical analysis. Technical analyses is a general term for methods we use to read a chart. Is it smart to buy bitcoin after an upwards movement? Or should I wait until the price drops? Of course there are people who are a bit impatient and don’t like to wait, but you could be missing out on a few percentages. Who knows what this might bring in over the course of a few years.
When applying technical analysis you can get an idea of what the bitcoin price or ethereum price might do, short term or long term. It all depends on which time frame you’re looking at. Technical analysis also gives you insight into your portfolio, it helps you determine the right moment to sell a certain asset or buy one.
A basic chart: Japanese Candlesticks
The first concept we have to discuss, and what the majority of the traders use on a daily basis are Japanese candlesticks. These candles were invented in the 18th century, they work very well because they hold a lot of information yet they are small to display.
Candlesticks are the red and green body’s you see in the chart. A green candle means that the price increased relative to the one before. A red candle means the prices decreased relative to the one before it. Colored area within a candle is it’s body, the bottom of a green candle is the price at which it opened and the top side is the price at which it closed. The small line you see underneath the candle is the lowest price point of that hour; everything above it indicates the highest price of the hour.
The candles you see in the chart above represent one hour, which means that one candle displays one hour of price action. You can choose the time frame at which the candles display information. You can pick between 5 minute candles, 4 hours or a full day. All these different types of display give you a better understanding of the current trend.
Support and resistance
Now that you understand how candlesticks work and what information it provides, we can take a look at certain trends within charts and how to recognize them. The most important thing about trends is knowing where the support and resistance of a trend is.
A resistance line is basically a line where the price is struggling to break out, a point where bitcoin struggles to increase. Usually the price bounces off the line and decreases. A support line is the opposite, it’s a crucial price point where an asset usually bounces on to increase afterwards. This basic principle applies to all prices like the bitcoin cash price, litecoin price or ripple price.
It usually easier to remember these things if you see it visually, so let's grab a chart and draw the support and resistance lines. The bottom line you see in this chart is a support line you’ll notice that the price tends to bounce off it. The upper line is the resistance line where you’ll notice the opposite happen. By learning how to spot these trends at an early stage you’ll be able to recognize trends and anticipate them. It makes it much easier to predict what the price might do.
In the chart above you’ll notice that we are dealing with an uptrend. Both lines are going up and bitcoin keeps making lower lows and higher highs. As long as bitcoin stays within this channel you’ll be able to anticipate this. Even more interesting is the moment where an asset tends to break out of a channel. In this case you’ll notice the price breaking down on the 17th of February. The support line wasn’t strong enough to hold up, this usually indicates a trend reversal. Most traders are nifty about these moments, volatility usually means an opportunity to make money. Taking the information displayed on the chart in consideration the downwards trend is starting to make sense.
Trend lines and Channels reliability
Starting to draw random support and resistance lines everywhere is probably not the best idea at this point. Generally speaking, most traders only rely on support and resistance lines once they are confirmed. They usually get confirmed whenever they bounce off a certain line more than 3 times. Support and resistance lines that only bounced off twice aren’t proven to be very reliable.
The interesting thing about trend channels is the ability to determine a strategy for your portfolio, but also providing information on the best moment to buy into an asset. Is the price reversing a trend? Or did it see some action sideways? Or is it bound to break out? It might be a great moment to buy your first bit of bitcoin. If it's the other way around, it might be better to wait it out.
Moving Averages: Another very important tool in your kit
Moving averages are another important way of interpreting support and resistance lines. Most traders tend to watch these very closely as well. Moving average literally means a progressive average and displays the average price of a set amount of time.
The 200 day moving average shown in the chart below (green line) displays a very clear support line for bitcoin back in 2018. Shortly after it turned into a very strong resistance which is very interesting. You’ll notice how the price back in 2017 got rejected a few times and in 2018 bounced on it. A lot of traders take these lines in account when applying technical analysis which makes it very powerful.
The majority of technical analysis is based on psychology. If people believe the price is going to drop, traders will sell causing the price to actually decrease. People don’t really tend to change though which makes this tool very powerful.
Which strategy is the best for me?
In the end it all comes down to the goals you have set for yourself, and the time you’re willing to invest into your portfolio. The fun thing about cryptocurrencies is that the market never closes, which means you could be trading every minute of the day.
Bitcoin is also perfect for a storage of value or an investment instrument. So always store bitcoin safely. You can basically just buy a bit of bitcoin at a certain point where you feel the price is in your favor and wait for a couple of months to see where it brings you. There’s a big chance that you’ll end up with quite some profit and you didn’t have to break a sweat. Delightful isn’t it? By knowing how to read these charts you’re able to determine the right moment to sell bitcoin or buy ripple. For some people this might not be enough, which we totally understand. We always want more don’t we? Using technical analysis might be a perfect way to start trading and differentiate yourself between active traders and HODL’ers. If you’re looking to trade frequently you might be the best checking 5 minutes or 30 minute time frames. If you want to take a slower approach the 4 hour candle or maybe even the daily or weekly chart is a better option for you. It all comes down to your desires and perspective, and how you approach markets.