We know trading can be quite intimidating, even for seasoned cryptocurrency veterans. In order to alleviate some of the stress and anxiety associated with trading, this article aims to shed some light on the fundamentals of trading strategies. We will begin by discussing charts, which can look quite confusing if you’re unfamiliar with how they work, but if you get to know them, you’ll find that they are a really useful and necessary tool for trading.
Essentially, charts are graphical representations of prices of a certain asset or assets (for example, cryptocurrencies) over a certain period of time. Charts provide all of the necessary trading information from the past, which you can use to make technical or fundamental analyses of a market, which then let you ‘predict’ the price of a given asset in the near future. Charts are the bread and butter of every trader’s repertoire, and as a trader, you will be required to utilize them every day.
To start with, traders should consider several elements when looking at a chart, as these factors provide very important information. These are so-called chart characteristics. We’re sure that most of you have noticed the values on the horizontal and vertical axes of each chart. Like most charts you have probably encountered in school, the horizontal axes denote a time scale, while the vertical axes denote a price scale.
1. Time Scale - the range of time displayed at the bottom of the chart, which can vary from seconds to decades. This is called the time history of the chart. The most commonly used time frames are daily, weekly, monthly, quarterly, and yearly. Shorter time periods, such as hourly or by minute, are commonly used by traders or investors who are looking for more detailed information about a particular cryptocurrency. That being said, these smaller time periods can sometimes be overly complicated and may mislead investors with an abundance of information.
2.Price Scale - represents the price range of a given cryptocurrency, which is displayed on the right side of the chart. This scale informs you of the price data from during the given time scale. This is the so-called price history of the chart. The price scale can either be linear or logarithmic. 2A) A linear price scale has the same gap between each entry, meaning the price movement from 1 to 2 USD is the same as the price movement from 4 to 5 USD. In other words, the linear price scale measures absolute price movements and does not show the impact of percentage changes in the price value. 2B) A logarithmic price scale looks at price movements in percentages. This is because the difference between 1 and 2 USD is 100%, while the difference between 4 and 5 USD is only 25% (even though the total amount is the same – 1 USD). Many experts use logarithmic charts for trading, as they make it easier to determine the percentage differences of certain prices and, therefore, make it easier to calculate potential profit in percentages rather than absolute values.
There are three basic types of charts that are commonly used by traders and investors on a daily basis:
Line Charts: The simplest of the three types, line charts connect single price points for each time period (usually closing prices) with a line. This offers a clear and straightforward view of a security's overall trend over time but lacks detailed information about price movements within the trading period.
Bar Charts: Bar charts use simple bars instead of lines. Each bar has a horizontal slash on the left side indicating the opening price and one on the right side for the closing price. The top of the bar shows the highest price of the period, and the bottom shows the lowest. Like candlestick charts, they give detailed information about the price movements within a period but are less visually intuitive for some traders compared to candlesticks.
Candlestick Charts: The most complex of the three types, candlestick charts offer detailed information about price movements within a particular time frame, including the opening, closing, high, and low prices. Each "candlestick" consists of a body (the range between the open and close) and wicks (shadows) that extend to high and low prices. Green (or white) candles indicate prices closed higher than they opened, while red (or black) candles show prices closed lower than they opened.
Candlesticks do not always begin and end exactly where the previous one closed, often creating a "gap" between them caused by significant price increases or decreases between trading periods.
Such gaps, common in cryptocurrency markets that trade over weekends, can result from one exchange temporarily going offline while others continue to trade normally, leading to a higher opening price when the offline exchange resumes. Gaps are categorized into three main types: Breakaway (at the start of a trend), Runaway (in the middle of a trend), and Exhaustion (at the end of a trend). Despite its relative complexity, this type of chart is highly valued for the depth of information it provides and its ability to show potential price reversal patterns.
Now that you’re familiar with the types of charts you will be encountering, let’s take a look at how you can read these charts in order to identify market trends and devise a viable trading strategy.
The two basic market trends are uptrends and downtrends. In an uptrend, the market consistently makes higher highs and higher lows, indicating increasing prices over time and suggesting a bullish sentiment among investors. Traders have named it the bullish trend because when a bull attacks its prey, it does so from bottom to top. More precisely, it tries to pick up its prey on its horns with a so-called sweep.
Conversely, in a downtrend, the market makes lower lows and lower highs, showing declining prices and reflecting a bearish sentiment. Traders have named it bearish because when a bear attacks its prey, it does so from top to bottom. More precisely, it stands on its hind legs and uses its large claws on the front limbs to attack its prey from the top down.
These trends help traders and investors to gauge the general direction of the market and make informed decisions about buying, selling, or holding assets.
Support and resistance are fundamental concepts in trading that identify price levels on a chart where the price of an asset tends to stop moving and reverse direction. Support is the level below the current price where buying interest is significantly stronger and can surpass the selling pressure, leading to a potential halt or reversal of a downtrend. Resistance is the level above the current price where selling interest outweighs buying pressure, possibly stopping or reversing an uptrend. These levels are used by traders to make decisions about entry and exit points, and stop-loss orders and to predict future price movements.
To better grasp these concepts, imagine them as a plain corridor, focusing on the floor as support (green) and the ceiling as resistance (red). When you throw a ball with force, it bounces from the floor to the ceiling, similar to how support and resistance work with price points (represented by bars, candles, or lines) bouncing between these levels.
Breakouts occur when the price of an asset moves outside a defined support or resistance level with increased volume, indicating a potential continuation or reversal of a trend. It suggests that the market sentiment is strong enough to push the price beyond previous limits, signaling traders to enter new positions based on the direction of the breakout.
On the other hand, fake breakouts happen when the price initially moves beyond a support or resistance level, suggesting a breakout, but then reverses direction and moves back within the previous range. This can be misleading for traders, as it appears to signal a new trend but fails to sustain the momentum, often leading to incorrect trading decisions. Fake breakouts require a cautious interpretation of market signals, and you often need additional indicators or volume data to confirm them.
Trend lines are essentially the application of support and resistance within set lines, which help traders better understand these two levels in the context of upward or downward market trends. Trend lines, which can be either horizontal or diagonal, are incredibly useful in identifying the current or past direction of a trend.
They are a popular tool among traders for short-term investments based on trend movements or for locking in profits during significant market movements in a very short timeframe, especially in anticipation of a correction. This trading style, known as swing trading, is favored by day traders who aim to make quick profits rather than investing over weeks or months. Despite its higher risk, swing trading can be rewarding with patience and discipline, operating on the principle of buying at support levels and selling at resistance levels, using support and resistance zones. This method is simple yet requires discipline to recognize strong support and resistance points that indicate a trend or to avoid trading when no clear trend is formed.
Crypto trading does not have to be this intimidating world of variables and unknowns. Though cryptocurrency markets are often unpredictable and volatile, there’s still a structure behind its chaos. You are now hopefully equipped with a basic knowledge of charts, their structure, and what they can reveal. Going forward, we will expand on this knowledge with additional articles that aim to provide you with the building blocks needed to trade rationally and successfully.
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