If you have joined the trend and plan to start trading Bitcoin, you must know how to read the charts as it can help you make better decisions.Every trader who invests using fundamental analysis still uses technical analysis bitcoin Prices to determine the correct time to buy, sell or exit.
Reading charts is one of the most useful skills when trading Bitcoin, but it is not an easy skill to learn (you may need to practice it for many years). It requires you to consider multiple sources of information and draw conclusions. People who are more proficient or accustomed to reading data visualizations can understand the relationship between variables on the graph.
When learning to read charts, start with the basics. Read on to learn how to read Bitcoin charts.
Anatomy of a Bitcoin Chart
Price charts displayed by cryptocurrency exchanges are automatically updated for any given trading pair. Generally, trading pairs consist of your desired cryptocurrency (in this case, Bitcoin) and the U.S. dollar. Due to the strength of the dollar globally, not to mention the number of investors from the US, the US dollar is the most common base currency pair. You can pair with other cryptocurrencies and currencies. The elements of the chart are:
- trading pair. These pairings illustrate the value of a particular asset. For example, how much BTC equals USD. If you own Bitcoin, you can trade it with any pair listed on the exchange.
- current price. It refers to the Bitcoin price at any given moment. The current price serves as a benchmark for buyers and sellers. The price of the next sale may be higher or lower depending on supply and demand.
- High front and low back. It indicates the highest and lowest price of Bitcoin within 24 hours.
- 24 hours trading volume. The number of coins exchanged in the past 24 hours shows the value of Bitcoin. 24-hour trading volume is a good indicator of BTC’s future profitability.
- time unit. You can choose time increments (from one minute to one month) to reflect in the trading market.
- price chart. It shows the price of Bitcoin over a period of time. You can focus on the BTC price instead of every variable that affects the price. Color is used to differentiate open from closed.
- Trading volume. Refers to the transaction record of Bitcoin. Longer bars indicate higher volume, while shorter bars indicate lower volume. Colors can be edited to your liking.
Dow Theory – The Foundation of Technical Analysis
You have to analyze historical data to predict future bitcoin price movements, which can be done with technical indicators. Every trader must know Dow Theory. This is a trading method that shows that market trends consist of three distinct phases: the accumulation phase, the public participation phase, and the distribution phase. The above phases are self-repeating.
You have to evaluate the cryptocurrency market in the context of its different stages. Try to imagine the following – on a BTC/USD chart, the primary price trend is bullish and the secondary price trend is bearish. According to the Dow Theory, you should trade towards the main trend. Rather, it helps if you wait for the minor trend to end.
Chart Patterns Every Bitcoin Trader Should Know
Identify patterns that form on cryptocurrency charts by connecting common price points such as highs or lows or closing prices over a specific period of time. Let’s take a look at the most common trend indicators, shall we?
head and shoulders
This particular chart pattern highlights a bullish to bearish trend reversal. It is characterized by three peaks – the middle one being the tallest. The pattern is uniform, which means that both shoulders are of similar height. The reason traders prefer the head and shoulders pattern is that it allows them to place a stop loss order, usually at a price above the overhead high.
Cryptocurrencies like Bitcoin are highly volatile, making it nearly impossible to trade without market noise. It is recommended to open a position when the pattern appears to be in a downtrend.
A double top is formed when Bitcoin hits two consecutive highs with a modest decline in between. It looks like the letter “M”. To put it simply, the currency price hit a new high, pulled back, and failed to reach the previous high.
Most importantly, you must be patient and confirm the identity of the double top to avoid misreading and leaving the market early. The time between the two peaks will help you determine if a double top pattern is present. As you know, this pattern is more likely to appear on long-term charts, which provide the best overall picture of price and market activity.
If three peaks move into the same area with pullbacks in between, you have a triple top. A triple top pattern is much like a double top; the only difference is that there are three tops instead of two. The specific chart pattern suggests a change in trend direction after buyers failed to clear horizontal resistance after three consecutive attempts.
The triple top pattern can be used to identify selling opportunities in Bitcoin so you can make an informed decision. The fact that you see as many as 3 successful attempts to break higher makes the reversal compelling.
We’ve given you some helpful guidance on how to read Bitcoin charts, but it’s best to do additional research to make your best judgement. If you can read the sentiment of the cryptocurrency market, you can better predict trends.
Please keep in mind that analytical data may not always be accurate as Bitcoin is volatile and past performance is not the best indicator of future performance. When trading Bitcoin, you should regularly check news sources for updates and changes in the market, and deploy risk management strategies. If you want to be successful at anything, especially cryptocurrency trading, you have to be willing to take risks.