Reading a crypto token chart is one of the most important skills to have when you trade crypto. The ability to assess price movements and recognise patterns in the charts is crucial to doing what is called technical analysis in finance.
Don’t be intimidated by this term. Technical analysis uses market-driven information such as trading volumes, chart patterns, and other market-based technical indicators to inform a trader on the best available options for trading an asset.
In this article we will cover how do you analyze crypto – how to read cryptocurrency charts – that anyone can easily learn and grasp.
How to Read Cryptocurrency Charts: Components of a Crypto Chart
Cryptocurrency exchanges typically show a constantly updating price chart for any particular trading pair. Most often, the trading pair is set to USD/the cryptocurrency you are looking at by default. But you can also set it to other currencies or cryptos.
The information provided in the chart shows the key data points that serve as the basis for the numerous indicators you can use for trading cryptocurrencies. In a chart for the BTC/USDT (Bitcoin/TETHer, a US dollar-pegged stablecoin) trading pair, you can generally see the following:
1. Trading Pair: This indicates the base currency (BTC) and the quote currency (USDT) being used in this particular market.
2. Current Price: This part shows the prevailing price for the base currency (BTC) being bought or sold in exchange for the quote currency (USDT). There are also indicators that show how much the price has gone up compared to 24 hours ago. These figures change rapidly, depending on how active a certain market is.
3. High/Low: These figures indicate the highest and lowest prices for an asset over a 24-hour period.
4. 24H Vol: This indicator shows how much of a certain asset (BTC) has been traded over the past 24 hours. This volume is expressed in the form of the quote currency (USDT).
5. Unit of Time: You can select the time increments that you want to reflect in a trading market. Increments can go from as little as one minute to as much as one month.
6. Price Chart: This chart visualizes the rise and fall of the currency’s price over a period of time. In cryptocurrency markets, the price movement for an individual unit of time is usually shown through a candle. The assortment of candles in the chart would show the overall recent price trend for an asset. You can set the time frame from 24 hours up to months and years.
7. Trading Volume: Below the main chart where price movement is shown, there is a smaller trading volume chart, with individual bars showing the trading volume of an asset, corresponding to the candle being shown. Longer bars indicate higher trading volumes compared to other time periods. Usually, a green bar indicates a price increase, while a red candle shows a price decrease, although you can edit this color according to your preference.
But perhaps the most important part of this chart is the group of candlesticks that make up the price chart.
Understanding Candlesticks
A candlestick is the main price indicator in most crypto price charts, and each candlestick represents price activity within one unit in time (e.g. 30 minutes). A candlestick consists of two main bars: the body (the thicker part), which indicates the opening and closing prices of an asset, and the wick (the thinner part), which shows the highest and lowest price points.
On most crypto charts, a green candle indicates a bullish move or a price increase, while a red candle shows a bearish move or a price decrease. Based on the price and volume data that the market generates day by day, technical analysts have developed several chart-based indicators to aid them in assessing the potential future value of the assets they trade.
Some of these indicators are basic pattern assessments of a combination of candles, while others are more sophisticated trendlines and metrics that are based on price movements. For the purpose of this article, we will start with introducing some of the more basic patterns first.
Common Chart and Candlestick Patterns
Candlestick patterns are generally categorized into bullish and bearish patterns. A bullish pattern often indicates future positive price movement for an asset, signaling a trader to buy in anticipation that the token will increase in value. The inverse happens with a bearish pattern, which suggests traders sell before the price moves downward and they make a loss.
Here are three examples of how candlesticks and other chart patterns are used to anticipate price movements. More examples are covered and can be found in our other articles dedicated to candlesticks.
Shooting Star Candlestick
The shooting star candlestick is a bearish pattern that usually shows up at the end of a price uptrend. This candlestick has a short body situated near the bottom and a long wick that extends upward. It indicates that the price went slightly down by the end of the trading period even after reaching higher prices along the way, which explains its red color.
Analysts interpret this as a sign that there is resistance against the further increase in price and that a sell-down is imminent. In other words, many traders decide to sell now before prices drop.
Inverted Hammer Candlestick
The inverted hammer candlestick looks like a shooting star candlestick, but it is bullish instead of bearish, shown by its green color. This time, the candlestick shows that the price went slightly up by the end of the trading period after reaching higher prices along the way.
Seeing this candlestick following a price downtrend is a good sign that the price is about to rebound, according to analysts, because it indicates that there is high buying demand at that particular moment. In other words, consider buying as the asset might be on the rise.
Head and Shoulders in Crypto Charts
When you zoom out of individual candlesticks to check the general crypto charts, you can unearth even more patterns. One such arrangement is what we call ‘head and shoulders’, which is characterized by three peaks or valleys that show up next to each other. In this pattern, the second peak or valley looks like a ‘head’ that overshadows its neighbors on both sides, or the ‘shoulders’, giving this pattern its moniker.
A bullish ‘head and shoulders’ pattern would have their peaks facing the downside, indicating that the crypto price is about to go on an upswing. Meanwhile, a bearish ‘head and shoulders’ pattern would be the inverse – peaks facing the upside – typically preceding a potential price downtrend.
Wedges in Crypto Charts
Similar to ‘head and shoulders’, you can also see ‘wedges’ as patterns in crypto charts that involve a wider point of view. You can trace ‘wedges’ in a crypto chart by drawing a line that connects the lower points of price movement over a period of time and another line that traces the price peaks. If those two lines approach each other from left to right, you now have a wedge.
A bullish wedge is characterized by two lines with downward slopes that almost form a triangle pointed downwards. This pattern may indicate that as the up-and-down movement of the price is stabilizing near the bottom, the asset may soon swing in a more positive direction.
Meanwhile, a bearish wedge shows two lines with upward slopes and near-convergence at a high point. This may precede a peak in the crypto price and a subsequent sell-off.
Closing Thoughts
As with many things in crypto, it is important to do your own research on several topics, including trading indicators and strategies. This article is not hard-and-fast advice, but a guide to trading basics. There is no singular indicator, technique, or mETHod that can predict the market’s direction. This is especially true for candlestick and crypto chart patterns.
As a basic part of technical analysis, learning how to read cryptocurrency charts should serve as an introduction to understanding the crypto market better through learning more techniques and crypto market factors. Reading candlesticks and charts should not be your sole basis for forecasting the market.
