How to Read Crypto Charts: Complete Beginner Guide

Anatomy of a Candlestick (Open, High, Low, Close)

A candlestick chart represents four price points – Open, High, Low, and Close. The high point shows the top of the upper shadow, or the body if there is no shadow, while the low point represents the bottom of the lower shadow, or the body if there is no shadow.

The relationship between the closing price and the open decides whether the candlestick is bearish or bullish. If the price closes above the open, it’s bullish; otherwise, bearish. Coloured candlesticks are useful here, as traders can recognise bearish and bullish candlesticks instantly. Therefore, analysing the four price points across multiple candlesticks can help traders identify market sentiment and determine how the bears and bulls are faring against one another to predict potential price movements.

Bullish vs Bearish Candles

A bullish candle suggests an upward trend as it is the outcome of the closing price exceeding the opening price. Typically, the bullish candle is coloured either green or white. Similarly, a bearish candle signals downward momentum as a result of the closing price being lower than the opening price. The bearish candle is most commonly coloured red or black.

Common Candlestick Formations

Traders commonly use candlestick formations to spot potential indicators of reversal or continuation in the crypto market. For instance, the “Bullish Engulfing” pattern exhibits a very small bearish candlestick that is immediately followed by a larger bullish candlestick, which completely engulfs the smaller one, signalling a reversal of trend from selling to buying pressure. 

Conversely, the “Bearish Engulfing” is in reverse, signalling a dominance of the selling price over the buying price. Other patterns are “Morning Star”, a three-candle bullish reversal pattern, Evening Star, a three-candle reversal pattern, and “Rising Three Methods” and “Falling Three Methods”, which signal a continuation of price trends.

Classic Chart Patterns in Crypto 

Continuation Patterns 

Continuation patterns are graphics or chart formations that develop after a brief pause in the existing trend, indicating that the trend is more likely to continue. Some examples of continuation patterns include –

• Flag (price consolidation in a channel after a strong move)
• Pennant (a small triangular consolidation after a strong move in either direction)
• A symmetrical triangle (a contracting range in which buyers and sellers are equal until a breakout)
• A symmetrical expanding triangle (a widening range or “megaphone”) 
• A descending triangle (lower highs coverage on a key support level before breakdown)

Reversal Patterns

Reversal patterns indicate when a trend is likely to reverse. 

• Double Top/Bottom: Price reaches a level twice, and then fails to break, signalling a reversal of the previous trend. 
• Wedge (Reversal Edition): Rising or falling wedge that breaks the opposite of the trend, signalling a trend reversal. 
• Head and Shoulders: Left shoulder, higher head, lower right shoulder. Breaking through the neckline signals a change in trend. An inverse edition works in a downward trend.

Support and Resistance Levels

The support and resistance levels are positions where prices tend to bottom or peak, respectively. Support is where the crypto asset price breaks and bounces back up, whereas the resistance is where the price stops rising and dips back down. 

The support and resistance levels appear because of the balance between demand and supply or buyers and sellers. Prices rise because demand outstrips supply, but when it reaches the maximum that buyers are willing to pay, demand starts to fall at that price. At this level, buyers may decide to close their trade position, thereby creating resistance, and resulting in the price falling towards the support level, and here, supply starts to outstrip demand. Once the price declines enough, buyers might buy back into the market as the price becomes more acceptable, creating a support level where demand and supply start to equal out.

Trendlines and Channels

Trendlines connect upper trend line (higher lows) or down trend line (lower highs) on the price chart. Channels, on the other hand, involve parallel lines that include price movements. It can be horizontal, ascending, or descending, and any price breaks or breakouts from channels or trendlines can indicate potential price or trend reversal.

Key Indicators for Chart Analysis 

• Moving Averages (SMA, EMA)

A moving average (MA) helps smooth out price fluctuations and highlight overall trend directions by averaging historical data. A simple moving average (SMA) gives equal weightage to every time-sequence used, but it is smooth and slow to react. An exponential moving average (EMA) gives greater weight to the most recent price data through a multiplier, making it faster to change, and therefore, more appropriate for short-term trading. SMA is better for determining and identifying long-term trends, while EMA provides a quicker signal to changes in trends. 

• RSI (Relative Strength Index)

Relative Strength Index (RSI) is a momentum oscillator used to measure the extent of recent gains, losses, and price action to determine overbought or oversold conditions. RSI ranges between 0 and 100, with levels above 70 considered overbought and levels below 30, oversold. The default RSI uses 14 periods, and it can be helpful in range-bound markets, since it is less reliable in strong trending cases. RSI gives one of the most powerful indications, like convergence or divergence, that can be witnessed as bearish (negative) or bullish (positive). 

• MACD (Moving Average Convergence Divergence)

Another popular momentum oscillator used in technical analysis is the MACD, primarily used in trading trends. Despite being an oscillator, MACD is not generally used to identify overbought and oversold conditions. It is displayed on crypto charts as double lines that oscillate without any boundary. When the MACD line crosses above the signal line, it’s a bullish signal, but when it crosses below, it’s bearish. The crossover of the two lines provides trading signals similar to a two-MA system.

• Bollinger Bands

Bollinger Bands are price envelopes that define high and low prices. The envelopes are plotted at a deviation level below and above the simple moving average of the asset’s price. Since the band’s distance is calculated on the standard deviation, they can adjust to price volatility in the market. Bollinger Bands are used to determine whether the prices are high or low, and are always used in pairs in conjunction with the moving average. Furthermore, the pair of bands is not used on its own, but with other indicators to confirm the signals. Bollinger Bands coupled with the Relative Strength Index is the most effective trading strategy to identify high probability entry or exit points in a volatile market like crypto.

• Volume Indicators

Volume indicators in crypto trading offer deep insights into a trend’s strength and direction. Traders can get a quick glance into the heartbeat of the crypto market by looking at the trade volume, and understand whether a particular price movement is because of buying or selling interest. Volume indicators are used to identify trading opportunities, gauge market sentiment, confirm price trends, and spot reversals in the crypto market.

How to Read Crypto Charts Like a Trader

Spotting Trends (Bullish, Bearish, Sideways)

By spotting trends, traders can make more informed trading decisions and act confidently while reducing emotional biases. A bullish trend indicates a consistent upward trend, while a bearish trend shows declining prices. Additionally, a sideways trend indicates a consolidating price within a particular range. Therefore, recognising bullish, bearish, and sideways trends helps traders align strategies with momentum rather than going against the crypto market.

Timeframes: Intraday vs Long-Term Analysis

If you are learning how to read crypto charts, you need to keep in mind the time frame you are interested in. The crypto market is open 24×7 and is highly volatile. Traders can therefore go for intraday analysis that uses short time frames, ranging from about 1 minute to 1 hour, for a quick, high-frequency crypto trading. They can also go for long-term analysis that uses daily/weekly charts to spot broader trends for buy-and-hold strategies.

Using Multiple Indicators Together

Technical indicators provide a unique perspective, and depending on anyone can risk incomplete trading decisions. A combination of multiple indicators helps traders confirm real trends, time entries or exits better, avoid emotional crypto trades, and filter false signals.

Avoiding False Signals

Even the most professional or successful crypto traders can fall victim to false trading signals. In crypto trading, false signals can considerably mislead traders to make expensive losses. Some examples of false signals are – 

• Fake Breakdowns – This happens when a crypto price breaks above or below a significant support or resistance level and then quickly returns to its previous range. 
• Fake Reversal – This happens when a crypto price temporarily alters its direction and resumes its original direction. 
• Deceptive Price Patterns – Certain chart formations can mislead traders into believing that the crypto price can move in a particular direction when it will do exactly the opposite.

Advanced Chart Reading Techniques

Cryptocurrency charts display price and market movements over time in a graphical representation, but traders need to consider advanced chart reading techniques to make the most of crypto charts in trading. To analyse them, here are a few techniques that one can apply – 

• Identifying trends that can be upward or bullish, downward or bearish, and sideways or neutral. 
• Support and resistance levels that involve looking at price levels, where a crypto tends to spot barriers as it moves up or down, are crucial for predicting price breakouts or reversals. 
• Candlestick patterns that reveal price actions through patterns like Hammer, Engulfing, Doji, or more complex formations like the Head and Shoulders pattern. 
• Technical Indicators like moving averages, Bollinger Bands, and Stochastic Oscillator provide predictable price movements for the future based on mathematical calculations.

Fibonacci Retracement in Crypto

The Fibonacci trend analysis is a widely used and fascinating method in crypto trading where percentages are drawn from the Fibonacci Retracement levels considered as “natural” levels for support and resistance. Traders often use Fibonacci tools to analyse patterns and price trends. However, they are not foolproof and don’t guarantee success in all trades.

Order Book & Market Depth Charts

The order book and crypto market depth charts are dynamic, constantly updated in real time. The order book consists of three elements – buy orders, sell orders, and trading history. It helps indicate imbalances between the orders and provides clues to traders in what direction the price may fluctuate in the short term. 

The market depth chart is the order book’s visual representation, which reflects the number of pending buy or sell orders for a specific currency pair. With this chart, it is easier for traders to see how many are interested in buying a selected crypto at a lower or higher price than the present one and assess market liquidity.

Sentiment Analysis with Charts

Sentiment analysis is an important tool in crypto that traders use to predict price trends, assess risks in the market, and make informed trading decisions. It looks at minute psychological hints that influence market behaviour, unlike traditional technical analysis, which is based on historical data, or fundamental analysis, which considers financial and economic aspects.

Combining Technical and Fundamental Analysis

Fundamental analysis provides the cornerstone to spot quality crypto assets and maintain a long-term perspective, while technical analysis provides tools that maximise timing, risk management, entry points, and profit-taking. The two approaches can be used together by investors to select crypto assets with growth potential, intelligent stop losses, and enhance overall crypto trading performance. Remember that neither of the two methods is perfect, and both need to be integrated to give investors an edge in the crypto market.

Conclusion

Reading crypto charts has become an essential skill for every trader who wants to make profitable trades. While it can be intimidating at first, the main task is to start simple and then gradually move on to more complex chart-reading techniques. 

As traders become more confident in their chart reading abilities, adjusting trading strategies and analysing market conditions can become second nature. With more practice, traders can become comfortable with various techniques and tools, making it easier to manage market dynamics. However, note that crypto chart reading does not guarantee profits; it is merely a skill that traders need to master to make data-driven trading decisions.