Have you heard the stories about people making money by trading crypto?
Those traders all use something called technical analysis, which involves analyzing market charts. We know this sounds complicated and difficult, but it’s really not that difficult to understand the basic trends that you see on these charts.
That said, this article will not make you an expert on analyzing crypto charts. In our experience, the only way to become an expert at reading crypto charts involves following crypto charts for a long amount of time.
Anyway, here are some of the basics for reading crypto charts.
Note: Bull refers to an increase in price caused by people buying the underlying asset. Bear refers to a decrease in price caused by people selling the underlying asset.
Foundational Assumptions for Technical Analysis
There are a few foundational assumptions for technical analysis. These assumptions are most likely true and are the foundation for all technical analysis, which is why we refer to them as foundational assumptions. Here are those assumptions.
- All information is already built into the price. [Note: Crypto is not nearly as efficient as the stock market, but this still applies for the most part.]
- Price movements are not truly random. They follow certain trends.
- Focus on price and not particular variables.
- The market has three different time periods:
- Long-term movement of about a year for crypto (ie. 2017 Bitcoin bull run).
- Medium-term movement of about a few weeks to a few months.
- Short-term movement is usually a day to a week.
- The market moves in a general trend.
- Accumulation phase: Smart money moves into the market and either buys or sells the asset. The price does not change very much, but there is a slight tick in the upward or downward direction of the smart money.
- Absorption phase: The general public picks up on the trend and the trend from earlier magnifies.
- Distribution phase: Smart money sells or buys their position causing the price to go back.
- Volume increases as price increases. Volume decreases as price decreases.
- Trends continue until something stops them, which makes determining the end of a trend difficult in real time. There is a high signal-to-noise ratio in the market.
Market Time Charts Worth Watching
There are a plethora of time frames that you look at for crypto charts. However, not all of these charts are useful for all people. Here are the most useful time breakdowns for market charts:
- 15 minute charts (very short term)
- 1-hour chart (very short term to short term)
- 4-hour chart (short term)
- 1-day chart (short term to medium term)
- 1-week chart (medium term).
There are obviously more charts, but those charts will be the ones that you most often find yourself using. Now, if you buy and sell within a single day, then you will most likely use 15-minute charts. On the other hand, if you plan on holding for a few days or weeks, then a four chart or even 1-day chart would make more sense.
Chart Patterns To Know
Finally, here are some of the chart patterns that you should pay attention to when you look at crypto charts. First, you will probably be reading something called a candlestick chart – every exchange has these charts. Those are the ones that look like, well, candlesticks.
Candlesticks are easy to understand. The bottom of a green candlestick indicates the opening price and the top indicates the closing price. The inverse is true of a red candlestick with the top showing the opening price and the bottom showing the closing price.
Bullish Chart Indicators
Here are some of the bullish chart indicators. Of course, there are more than just these, but these are a good start to understanding the market. Also, it’s important to note that these indicators are still just predictions, which means that they do not always come true.
Green Hammer Candlestick
The hammer candlestick is a bull signal. These are the candlesticks that have a long bottom, a short green rectangle, and a small line at the top.
This indicates that the price started off with strong bear sentiment and then closed with strong bull sentiment.
If you see a green hammer candlestick, then the price will likely increase. It’s also a good indicator that some positive data entered the market causing the price to increase.
Bullish Engulfing Pattern
An engulfing pattern is when you see a red candlestick next to a green candlestick. This indicates that the market is shifting. For instance, if you see a red candlestick to the left of a bigger green candlestick, then you can infer that some event occurred that caused strong bull sentiment that completely overwhelmed bear sentiment.
A bullish engulfing pattern is a great signal that the price will increase. And the bigger the green candlestick, then the bigger the bull momentum.
The morning star is similar to the bullish engulfing with one caveat. There will be an “empty” candlestick in the middle, hence the morning star name, that indicates the price did not move before it increased during the green candlestick.
This is a good indicator that the price will increase as the bulls overcame the bears and drove the price upwards. Again, if the green candlestick is larger than the red candlestick, then it’s safe to assume that the price will increase for the next time block.
Bearish Chart Indicators
Here are some bearish chart indicators. In our experience, these indicators are not nearly as important for trading because your selling point should be based on your profit margin not trying to time the top of the market. Why?
It’s extremely difficult to time the top of the market. Most successful traders take profits when they can rather than trying to find the very top of the market. That said, here are some bearish chart indicators. Just take these with a big grain of salt because it’s difficult enough to time a bull trend, and even harder to time a bear trend.
The shooting star is the inverse to the green hammer. There will be a large candle tip at the top, a small red rectangle at the bottom, and a small shadow under the red rectangle.
This shows that the time frame started out with a lot of bulls causing the price to increase and then the bears took over causing the price to drop.
Again, the trend will likely continue for the next time frame.
The engulfing bear is yet again the inverse of the engulfing bull. There is a green candlestick to the left and even bigger red candlestick to the right.
This indicates that the bulls won the previous time frame causing a price increase and then lost the next time frame causing an even bigger price drop. This is a pretty good indicator that the price will decrease in the next time frame.
Finally, the evening star is the inverse of the morning star. Green candlestick on the left, empty candlestick in the middle, and a big green candlestick on the right.
The bulls caused a price increase on the left, the next time frame was a draw that resulted in a plateau, and people panicked and sold for the next time frame causing a price drop.
Support, as the name implies, is a chart pattern that shows a price the cryptocurrency will not typically drop under. The easiest way to spot the support is by looking at a price that the crypto hits then immediately jumps back up from.
That is the support.
It’s extremely important to know the support because that’s usually the bottom of the market.
Of course, if the price falls under the support for too long, then a sell off usually starts and the price craters.
At this point, the support often becomes the new resistance, which we will cover in the next section.
Resistance is the price at which a sell off usually occurs, which causes the price to drop. Just like the support price, you can spot the resistance price point by looking for the price that the crypto struggles to break.
In our experience, resistance for the long-term is often psychological because it’s usually at a round number. In the case of bitcoin, the resistance tends to be in increments of $10,000 and to a lesser extent $5,000. Why is this the case?
Sellers seem to like placing sell orders at nice round numbers.
Yes, it really is as simple as that for resistance.
Anyway, if the price jumps past the resistance for a long enough amount of time, then all those sell orders will clear and the price should increase afterwards. We have seen this with bitcoin blasting past the $50,000 resistance after coming close for weeks before that.
It just took that much time for all the sell orders leading up to $50,000 to clear.
Is it guaranteed money if I can read crypto charts?
In fact, most people that attempt to day trade or swing trade end up losing money. It’s generally more profitable to simply hold during a bull market than try to actively trade crypto. This is especially true with day trading.
On the flip side, money can be made trading during a bear market. However, the price of bitcoin last year was about $4,000 and it’s currently $56,000 – that means you almost certainly would have made more money holding than trading. Why?
Most traders lose money.
When to sell when reading crypto charts?
If you’re reading crypto charts, then that means you’re usually trading crypto. Holders tend to dollar cost average (DCA) or buy a lump sum irrespective of price.
With that in mind, you generally want to sell when the price increases a certain percentage. Guaranteed profits are better than risking it for extra percentage gains. In that case, you should simply hold it rather than trade.
That covers it for the basics on reading crypto charts. There is obviously much more to it than just this, but observing the candlesticks is a great place to start to see if you like technical trading.
It’s also a good place to determine if you even like technical trading.
Finally, we’ll reiterate that it’s extremely difficult to turn a profit trading crypto. Holding is generally the best strategy when it comes to cryptocurrency.