How To Understand Crypto Trading Chart as a Beginner

Crypto trading chart can be very confusing with lines criss crossing, numbers everywhere, and an array of terms like “candlesticks,” “moving averages,” and “Bollinger Bands,” all these might seem like a foreign language especially to a beginner who is just starting and don’t know left from right. With a little guidance, you should be able to read these charts like a pro, hence we broke down the essential components of a crypto trading chart and provide you with the tools to interpret them with confidence.

The Basics

A trading chart is simply a visual representation of an asset’s price over time. The horizontal axis represents time, while the vertical axis represents the price of the cryptocurrency. Each point on the chart represents the price of the asset at a specific moment in time.

Cryptocurrency charts can display data over various timeframes, from minutes to months. As a beginner, it’s often best to start with longer timeframes like the daily or weekly charts. These provide a broader view of the market and are less prone to short-term noise.

Candlesticks

One of the most popular ways to represent price data on a crypto chart is with candlesticks. Each candlestick represents a specific period (such as an hour, day, or week) and provides a wealth of information about the asset’s price action during that time.

A candlestick has four key components:

• Open: The price at the beginning of the period.
• Close: The price at the end of the period.
• High: The highest price reached during the period.
• Low: The lowest price reached during the period.

The “body” of the candlestick represents the range between the open and close prices. If the close is higher than the open, the body is usually colored green or white, indicating bullish sentiment. If the close is lower than the open, the body is usually colored red or black, indicating bearish sentiment

Read also: 10 Best Bitcoin Trading Strategies and Techniques

The “wicks” or “shadows” of the candlestick represent the high and low prices. These provide insight into the full range of trading activity during the period.

Moving Averages: Tracking Trends

One of the most useful tools in a trader’s toolkit is the moving average. A moving average is a line on the chart that represents the average price of an asset over a specific number of periods. The two most common moving averages are:

• Simple Moving Average (SMA): Calculated by taking the sum of an asset’s closing prices over a certain number of periods and then dividing that sum by the number of periods.
• Exponential Moving Average (EMA): Similar to the SMA, but gives more weight to recent prices, making it more responsive to new information.

Moving averages help smooth out price action and can provide insight into the underlying trend. When the price is above the moving average, it suggests an uptrend. When the price is below the moving average, it suggests a downtrend. 

Many traders also watch for crossovers between short-term and long-term moving averages. When a short-term moving average (like the 50-day) crosses above a long-term moving average (like the 200-day), it’s known as a “golden cross” and is often seen as a bullish signal. The opposite, when the short-term moves below the long-term, is a “death cross” and is seen as bearish.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum indicator that measures the speed and change of price movements. It oscillates between zero and 100. 

Traditionally, an RSI over 70 is considered overbought, suggesting the asset may be overvalued and could see a price correction. An RSI below 30 is considered oversold, suggesting the asset may be undervalued and could see a price increase.

However, in strong trends, the RSI can remain overbought or oversold for extended periods. Therefore, it’s often more useful to look for divergences between the RSI and the price. If the price is making new highs but the RSI is making lower highs, it’s known as bearish divergence and could signal a potential reversal. The opposite, bullish divergence, occurs when the price makes new lows but the RSI makes higher lows.

Analyzing a Chart

• Identify the trend: Start by looking at the price action and moving averages. Is the price above or below the moving averages? Are the moving averages trending up, down, or flat? In our example, let’s say the price is above the 50-day and 200-day moving averages, and both averages are trending up. This suggests a bullish trend.
• Check for momentum: Next, look at the RSI. Is it above 70, indicating the asset may be overbought, or below 30, indicating it may be oversold? In our example, let’s say the RSI is at 75, suggesting the asset may be overbought in the short term.
• Look for divergences: Compare the movement of the RSI with the price action. Are they moving in the same direction, or is there a divergence? In our example, let’s say the price has been making new highs, but the RSI has been making lower highs. This bearish divergence could signal a potential reversal.
• Consider multiple timeframes: Repeat this analysis on different timeframes. What may look like a strong uptrend on the daily chart could be a brief pullback in a longer-term downtrend. In our example, let’s say the weekly chart shows a similar bullish setup, confirming the strength of the uptrend.

Based on this analysis, a trader might conclude that the asset is in a strong uptrend but may be due for a short-term pullback given the overbought RSI and bearish divergence. They might look to buy on a dip or wait for the RSI to cool off before entering a long position.

Remember that trading is not an exact science. No single indicator or chart pattern is infallible. The most successful traders use a combination of technical analysis, fundamental analysis (studying the underlying factors that affect an asset’s value), and risk management to make trading decisions.

Learning to read crypto charts takes time and practice. Don’t get discouraged if it doesn’t click immediately. With persistence and a willingness to learn, you will gradually become good at it

Key Takeaways

1. Crypto trading charts are visual representations of an asset’s price over time. The horizontal axis represents time, while the vertical axis represents price.

2. Candlesticks are a popular way to represent price data. Each candlestick shows the open, close, high, and low prices for a specific period.

3. The body of the candlestick represents the range between the open and close prices. Green or white typically indicates a price increase, while red or black indicates a decrease.

4. The wicks or shadows of the candlestick represent the high and low prices during the period.

5. Moving averages, such as the Simple Moving Average (SMA) and Exponential Moving Average (EMA), help smooth out price action and provide insight into the underlying trend.

6. When the price is above the moving average, it suggests an uptrend. When the price is below, it suggests a downtrend.

7. Crossovers between short-term and long-term moving averages can provide bullish (golden cross) or bearish (death cross) signals.

8. The Relative Strength Index (RSI) is a momentum indicator that oscillates between zero and 100. An RSI over 70 is considered overbought, while an RSI below 30 is considered oversold.

9. Divergences between the RSI and the price can signal potential reversals. Bearish divergence occurs when the price makes new highs but the RSI makes lower highs. Bullish divergence occurs when the price makes new lows but the RSI makes higher lows.

10. To analyze a chart, identify the trend using price action and moving averages, check for momentum using the RSI, look for divergences, and consider multiple timeframes.

11. Successful trading involves a combination of technical analysis, fundamental analysis, and risk management.

12. Developing and sticking to a trading plan is crucial. Always use stop-loss orders to limit potential losses and never trade with more than you can afford to lose.

Frequently Asked Questions

1. What is the best timeframe for a beginner to start with when looking at crypto charts?

As a beginner, it’s often best to start with longer timeframes like the daily or weekly charts. These provide a broader view of the market and are less prone to short-term noise.

2. What is the difference between a Simple Moving Average (SMA) and an Exponential Moving Average (EMA)?

Both SMAs and EMAs are used to smooth out price action and identify trends. The main difference is that EMAs give more weight to recent prices, making them more responsive to new information.

3. What is a “golden cross” and a “death cross”?

A golden cross occurs when a short-term moving average (like the 50-day) crosses above a long-term moving average (like the 200-day). This is often seen as a bullish signal. A death cross is the opposite, when the short-term moves below the long-term, and is seen as bearish.

4. What is the Relative Strength Index (RSI) and how is it used?

The RSI is a momentum indicator that measures the speed and change of price movements. It oscillates between zero and 100. Traditionally, an RSI over 70 is considered overbought, while an RSI below 30 is considered oversold. However, the RSI is often more useful for spotting divergences with price action.

5. What is a divergence in technical analysis?

A divergence occurs when the price of an asset and an indicator (like the RSI) are not confirming each other. A bearish divergence occurs when the price makes new highs but the indicator makes lower highs, suggesting a potential reversal. A bullish divergence occurs when the price makes new lows but the indicator makes higher lows.

6. Should I make trading decisions based solely on chart analysis?

No, successful trading involves a combination of technical analysis, fundamental analysis (studying the underlying factors that affect an asset’s value), and risk management. Chart analysis should be one tool in your trading toolkit, not the only one.

7. How long does it take to become proficient at reading crypto charts?

Learning to read crypto charts takes time and practice. The more charts you analyze and the more trades you make, the more comfortable you’ll become with the process. Consistency and persistence are key.

8. What should I do if a chart pattern or indicator doesn’t play out as expected?

No single indicator or chart pattern is infallible. False signals can and do occur. This is why risk management is so important. Always use stop-loss orders to limit your potential losses and never risk more than you can afford to lose.

9. Can chart analysis guarantee profits in crypto trading?

No, chart analysis cannot guarantee profits. The crypto market is highly volatile and can be influenced by a wide range of factors. Chart analysis can help you make informed decisions, but there are no guarantees in trading.

10. Where can I learn more about crypto chart analysis?

There are many resources available to help you learn more about crypto chart analysis. Online courses, YouTube tutorials, and books on technical analysis can all be helpful. Many trading platforms also offer educational resources. The most important thing is to keep learning and practicing.