What types of charts are there in cryptocurrencies?
If you know how to read charts and what patterns (figures) to pay attention to, charts can indicate the potential of an asset or, conversely, demonstrate its unreliability. In simple terms, charts help traders build a competent trading strategy. Depending on what patterns the user notices, he will decide to sell or accumulate the selected cryptocurrency.
According to the Dow Jones Theory, there are three types of trends in the market:
main trend - can last from several months to decades;
secondary trend - lasts for weeks or months;
minor trend - lasts up to 10 days.
To determine the market phase and prospects, a trader uses price charts. Let's look at their types that can be found on trading platforms.
Linear price chart
The line chart is considered the simplest, as it reflects the history of price changes as a result of closing trades at a certain point in time. It is visually represented as a continuous line.
The horizontal axis shows time, and the vertical axis shows the price of the cryptocurrency. This chart is convenient for analyzing market movements on long timeframes, and is also popular among beginners.
However, the line chart is not suitable for deeper analysis because it does not display data on the range of price movements.
Candlestick chart
Candlestick charts contain more information. This type of chart, known as "Japanese candlesticks", shows the history of price changes as a result of opening and closing trades over a certain period of time, the maximum and minimum prices, as well as the general sentiment of investors.
The indicator itself — a candle — consists of a body and a wick (shadow), where the body demonstrates the value of the asset. The wick at the top of the candle indicates the highest value of the cryptocurrency, and the lower wick records the lowest value of the coin over a certain period of time.
A long lower shadow on a candlestick may indicate that traders are actively buying cryptocurrency when the price drops.
The color of the candle changes depending on the dynamics of the asset price in a certain period of time: if the value of the cryptocurrency has increased, the candle will be green, and if it has decreased, it will be red.
Japanese candlesticks also demonstrate the general mood of the market. For example, if the body of the candlestick is quite voluminous, the wicks are short, and the color is green, then such indicators indicate a bullish mood of investors. A similar form of candlesticks, but in red, signals a bearish trend on the selected time frame.
However, there are situations when sellers and buyers are equal and neither of them controls the situation. In this case, a doji is formed - a candle that is almost devoid of a body, but has long shadows.
The appearance of a doji on a chart may indicate a change in the market trend. However, a trader needs to use other technical analysis tools and study different indicators.
Candle shapes
On the Japanese candlestick chart, different figures are formed that can indicate possible market dynamics. There are several dozen patterns that are conventionally divided into three groups:
trend continuation pattern;
bullish reversal pattern;
bearish reversal pattern.
Below, the Incrypted editorial team has analyzed several key patterns.
"Hammer" - bull market
The hammer pattern appears when an asset is trading below its opening price but gradually rises in the selected time frame and closes near its opening price.
The figure is formed within one candle and visually resembles a hammer or the letter “T”: a small body and a lower wick at least twice as long as the main part.
This pattern signals a bullish trend reversal if the hammer is followed by a so-called confirmation, i.e. the next candle should have a higher closing price than the previous one.
It is worth noting that the pattern must appear in the context of a downtrend to indicate a reversal towards a bullish market.
Hanging Man - Bear Market
The hanging man pattern signals a bearish market reversal and appears at the top of an uptrend. It is a single candlestick pattern that has a short wick (or none at all) at the top of a small body and a long shadow at the bottom.
The color of the candle does not matter. But the presence of confirmation of the trading signal is important. The author of the "Complete Encyclopedia of Chart Price Patterns" Thomas Bulkowski believes that if the pattern is confirmed, the price decreases in 70% of cases.
"Shooting Star" - Bear Market
The shooting star pattern is formed within a single candlestick and is characterized by a long shadow above a short body and a small wick below.
The Shooting Star appears during an uptrend, but may indicate a possible price collapse. It is important to wait for the next candle to confirm the bearish reversal trading signal. That is, the maximum should remain below the pattern maximum.
If the price continues to rise after the “shooting star”, then it was a false signal and the asset has recorded a potential resistance area.
How to work with indicators?
A number of other indicators help the trader to successfully close trades on the market. In conditions of high volatility, it is best to have as many technical analysis tools as possible at your disposal.
The moving average (MA) is one of the basic indicators that can work independently and is the basis for more complex tools.
MA averages out the price fluctuations of cryptocurrencies, smoothing out sharp deviations.
Most often, MA is calculated for 10, 20, 50, 100 and 200 days. There are also simple (SMA), exponential (EMA) and weighted moving averages (WMA).
The most attention-grabbing indicators for digital asset users are the 50-day and 200-day SMA. When their charts intersect, a so-called “death cross” is formed, which is believed to precede a fall in the asset’s price.
For example, on June 19, 2021, such a figure formed on the Bitcoin chart.
On-balance volume (OBV) indicator indicates strong market movements that are accompanied by changes in trading volume. OBV readings help predict changes in the price of an asset.
As a rule, if trading volumes increase and the price remains relatively stable, the value of the asset will still go up.
The Relative Strength Index (RSI) is an oscillating indicator that measures the speed and strength of an asset's price movements. The indicator helps calculate whether a cryptocurrency is overbought or oversold.
RSI fluctuates between 0 and 100, where values >70 indicate overbought and give a sell signal, while <30 indicate oversold and signal a good time to buy the coin.
Bollinger Bands (BB) indicate the volatility of an asset and record abnormal price fluctuations within the current trend.
This indicator consists of three lines: a 20-day SMA, as well as upper and lower bands that reflect deviations from the simple moving average.
In situations where the price of a cryptocurrency rises above the upper band values, the asset is considered overbought. And vice versa.
Depth of Market (DOM) Chart
Depth of Market (DOM) displays the number of buy and sell orders for a selected asset in an electronic list that is updated in real time. The indicator visualizes current liquidity and market sentiment.
The more orders there are for both buying and selling assets, the deeper the market. However, this is true if the number of orders is approximately equal. An imbalance of orders can lead to high volatility of quotes.
Therefore, the deeper the market, the less likely it is that a large trade will have a significant impact on the value of the cryptocurrency.
Conclusion
The cryptocurrency market is considered the most unpredictable, however, even with basic knowledge of technical analysis, you can try to predict the price fluctuations of assets and thus not miss the opportunity to profit.
To work successfully, a trader needs:
learn to read cryptocurrency charts;
see patterns characteristic of different market cycles;
compare them with other indicators;
react in time and, if everything goes well, take profits.
