What Charts Should Crypto Investors Use? – Investopedia
With the recent boom in the crypto industry, many are exploring ways to earn from cryptocurrencies. A familiarity with technical analysis is important if an investor wants to trade cryptocurrencies. Whether they plan on trading cryptocurrencies actively or want to invest in them for the long term, understanding and learning how to properly use technical analysis is essential.
Technical analysis is the process of using historical price data to attempt to forecast the likely future direction of price. The technician has many tools at their disposal. All are derived from price and/or volume. Through the study of historical price data which is plotted on charts, the technician is able to make a judgment about the sentiment of market participants.
These technical tools can be used with a wide variety of securities such as stocks, indices, commodities or any tradable instrument including crypto currencies.
Charles Dow (1851-1902) is considered to be the father of technical analysis, he was the first editor of the Wall Street Journal. In 1882, Dow together with Edward Davis Jones formed Dow Jones and Company as a Wall Street financial news bureau. The following year, they put out a two page summary of the days financial news called the Customer's Afternoon Letter. Included in the newsletter was the Dow Jones Index which consisted of 11 stocks; nine railroad issues and two non rail issues.
In 1889, the partners decided to transform their newsletter into a full-fledged financial newspaper and the Wall Street Journal was born. It has been published continuously since that date. Charles Dow was the first editor of the WSJ. The editorial column in the WSJ educated his readers about the stock market, it was in this column that he would often write about his observations of stock price movements. These observations became the foundation of what was to be called Dow Theory and is the foundation of what we now know as technical analysis.
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Even though Dow Theory has been around for over a hundred years, its principles still apply to today's markets. Dow theory describes market trends and how to identify them. In 1916, Dow increased the number of companies in his index to 20.
As larger corporations began to emerge in the 1890s, Dow created the Dow Jones Industrial Average (DJIA). In 1896 when it was created it included 12 corporations. Dow would make a note of the closing price of all twelve corporations add them up and divide by 12 to come up with the average.
The original index of rail stocks had two non-rail stocks, Dow replaced these two non-rail stocks with rail stocks and the Dow Jones Railroad Average (DJRA) was born. In 1970, when the average was changed to the Dow Jones Transportation Average, the rail stocks were replaced by airline and trucking stocks.
Because industrial output requires some form of transportation to move the goods to customers, Dow observed that in order for a trend to be valid, the two trends must be moving in the same direction. When industrial output is up, the railways are busy and hence both indices should be up. When industrial output is down, the railways will be less busy and therefor both indices should be lower, Transportation of goods is now done by trucking and airline companies. Hence the DJIA and DJTA must confirm for a trend to be valid.
The Dow theory is based on six principles:
Charts are the main tool of the technician. There are different types of charts. Their purpose is to provide a visual representation of price action.
Line charts are the most basic type of chart used in technical analysis. They usually use only one data point; the closing price. To identify the trend, a series of closing prices is plotted on a chart and joined to form a line.
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Bar charts contain more information than line charts. The open, close, high and low is used for every bar which is plotted on a chart. These charts are often called OHLC for open high low close.
These charts originated in Japan in the 1700s and were first used by rice merchants. They were introduced to the west by Steven Nison in his book “Japanese Candlestick Charting Techniques.” Like bar charts, candlesticks use the open high low and close but their depiction is more visual and has become popular among all traders. In fact, candlestick charts are one of the most popular charts used in the west and are available on all trading platforms.
Candlesticks are popular among cryptocurrency traders and they are used in the same way as traders use them for other securities. For short term traders there are charting services that will provide time frames from intervals of as little as 1 minute charts and various intervals up to daily charts, For the longer term trader daily, weekly and monthly charts are useful.
Each candle has two parts: the body and the shadows or "wicks." The body indicates the difference between the opening and closing price of the crypto coin in a time interval. The top wick shows a cryptocurrency's highest price during a time interval. And the bottom wick reveals the lowest price of the crypto asset in a time interval.
A candlestick can be bearish, appearing as a red-colored candlestick, or bullish, appearing as a green candlestick. A bullish candlestick has a higher closing price than its opening price, while a bearish candlestick has a higher opening price than its closing price. When read correctly, candlestick crypto charts can help you see patterns in market trends so you can predict possible future outcomes.
Image by Julie Bang Â© Investopedia 2019
Support and resistance levels are important levels recognizable on a chart, where supply and demand meet. Learning to recognize these levels can help the trader with successful entries and exits.
When the level of demand rises to match the supply of a crypto currency or other security, then the price of the asset in a downward trend will stop falling. This level is known as support and will be tested several times by traders. If the support level does not break after several tests, then traders are more comfortable to enter long trades. Sometimes, however, the support level will be breached and prices will move lower. When this happens, price will continue lower until a new support level is found. The prior support level often becomes a new resistance level.
Resistance levels are made when supply matches demand. In an uptrend, prices will rise until they reach a level where demand no longer outpaces supply. As price gets to this level, more traders are willing to sell. There is more supply than demand, creating a ceiling over prices. These levels will often get tested multiple times. Successful tests of these levels often means that traders are now more comfortable shorting the security. Sometimes, however, prices will breakthrough resistance and continue higher. When this happens, price will continue rising until it finds a new level of resistance. As with support, the old resistance level will often become new support levels.
All markets move in trends. There are three main trends. Markets can move upwards in an uptrend, markets can move downwards in a down trend and markets can move sideways in a channel or consolidation.
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Uptrends are identified when price makes higher highs and higher lows. The trend can be plotted on a chart. The convention is to draw an uptrend line under price, linking the lows. Some traders will use a moving average to identify the trend in lieu of drawing trend-lines.
Down trends are identified when price makes a series of lower lows and lower highs. The trend line is drawn above price by linking the price highs. It is also acceptable to use moving averages in lieu of drawing trend-lines.
Sometimes during an uptrend or a down trend, the market will oscillate sideways within a narrow band. These are often dull markets and are sometimes called consolidation trends. Different trading rules apply to these types of markets.
There are many technical indicators traders use to gain greater insight into the trend. There are indicators which are plotted over price like Bollinger Bands and those which are plotted in panels above or below price like the Moving Average Convergence Divergence (MACD) and the Relative Strength Index (RSI). There are also indicators which use volume like the On Balance Volume indicator (OBV). All indicators, no matter how they are plotted are derived from price and/or volume. Therefore, they should only ever be used in conjunction with price. Confirmation should always come from price.
The moving average convergence divergence (MACD) is one of the most popular and well known indicators. It was developed in the late 1970s by Gerald Appel. This indicator is plotted with two lines; the MACD line which is the difference between the 12 day exponential moving average subtracted from the 26 day exponential day moving average. The second line is the signal line which is the 9 day EMA of the MACD. The two lines fluctuate around a center line which is at zero. There is no upper and lower limit to the indicator.
The most common way the MACD is used is for signal line crossovers. The signal line trails the MACD line. When the MACD line turns up and crosses the signal line, that is bullish. When the MACD turns down and crosses the signal line, it is bearish.
Another popular indicator is the relative strength (RSI). This indicator was developed by J. Welles Wilder. The RSI is bounded and fluctuates between zero and 100. It is a momentum oscillator that measures the speed of price movements. Default settings are 70 and 30. When the oscillator is above 70 the security is considered overbought, when the RSI drops below 30 the security is considered oversold.
Image by Sabrina Jiang Â© Investopedia 2020
Bollinger bands are volatility bands placed above and below a moving average and plotted on price. They were created by John Bollinger. Volatility is based on the standard deviation. The bands which often will encompass price expand and contract as volatility expands and decreases are based on +2 standard deviations above the center line and -2 standard deviations below the center line.
The interpretation of price action depends on the trading environment. In bullish conditions, it is often more profitable to trade in the direction of a price breakout. In bearish markets, short in the direction of the breakout. The idea behind Bollinger Bands is that prices will eventually return to the mean. Periods of high volatility will eventually become periods of low volatility.
Image by Sabrina Jiang © Investopedia 2021
The on-balance volume (OBV) was developed by Joe Granville. It measures buying and selling pressure using volume rather than price. Granville surmised through his observations that volume precedes price. The OBV therefore is a running total of cumulative volume. On days when the volume outpaces volume on down days, the OBV rises and on days when the volume on down days outpaces the volume on up days, the OBV falls.
Image by Sabrina Jiang © Investopedia 2021
Once you have a basic understanding of how to read a chart, the next step is to learn where to find crypto chart tools and what to look for.
Trading View is a popular site where crypto companies and investors can find live trading charts for crypto. A free version and a premium version are available on the website.
The features available on Coinigy help investors to understand market sentiment. Its a cloud-based platform, as well as data from other cryptocurrency exchanges. It also offers a free plan as well as a few paid options.
A popular crypto charting & trading terminal is Cryptowatch. It is owned by Kraken exchange. The tool allows you to analyze market movements and make trades on major crypto exchanges. The service is completely free.
Investing in cryptocurrencies requires understanding what data to look for on a crypto chart. There are a few basic parameters to consider when assessing the performance of a cryptocurrency.
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Technical Analysis Basic Education
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Technical Analysis Basic Education
Technical Analysis Basic Education
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