If you’ve joined the trend and are planning to start trading Bitcoin, you must know how to read charts, as it helps you make better decisions. Every trader who uses fundamental analysis to invest still uses technical analysis of Bitcoin price to determine the right time to buy, sell, or exit.
Reading a chart is one of the most useful skills to have when trading Bitcoin, but it’s not an easy skill to learn (you may have to practice it for many years). It requires you to consider multiple sources of information and draw a conclusion. Those who are more versed or accustomed to reading the visualization of data can understand the relationships between the variables on the chart.
When learning to read a chart, start with the basics. Please continue reading to find out how to read a Bitcoin chart.
The Anatomy of a Bitcoin Chart
Cryptocurrency exchanges show price charts that update automatically for any given trading pair. Generally speaking, the trading pair consists of your desired cryptocurrency – in this case, Bitcoin – and USD. Owing to the dollar’s strength around the world, not to mention the number of investors from the US, USD is the most common base pair. You can pair with other cryptocurrencies and currencies. The elements of a chart are:
- Trading pair. The pairings illustrate the worth of specific assets. E.g., how much BTC equals USD. You can trade with any pairing listed on the exchange if you own Bitcoin.
- Current price. It refers to the Bitcoin price at any given moment in time. The current price serves as a baseline for buyers and sellers. The price of the next sale may be higher or lower depending on the supply and demand.
- High/Low. It indicates the highest and lowest prices of Bitcoin over 24 hours.
- 24-hour volume. The number of coins that have been exchanged over the last 24 hours shows how much value Bitcoin has. The 24-hour volume is a good indicator of BTC’s future profitability.
- Unit of time. You can choose the time increments (from one minute to one month) to reflect in the trading market.
- Price chart. It displays the price of Bitcoin over a period of time. You can focus on the BTC price instead of every variable impacting the price. Color is used to differentiate between open and close.
- Trading volume. It refers to the record of the purchase and sale of Bitcoin. Longer bars indicate higher trading volumes, while shorter bars indicate lower trading volumes. The colors can be edited according to preference.
Dow Theory – The Foundation of Technical Analysis
You must analyze historical data to project future Bitcoin price movements, which can be accomplished via technical indicators. Every trader must know the Dow theory. It’s an approach to trading that suggests that market trends encompass three distinct phases: an accumulation phase, a public participation phase, and a distribution phase. The aforementioned phases are self-repeating.
You must assess the cryptocurrency market in the context of different phases. Try to imagine the following situation – in a BTC/USD chart, the primary price trend is bullish, and the secondary price trend is bearish. Based on the Dow theory, you should make trades towards the primary movement. More exactly, it would help if you waited for the secondary trend to end.
Chart Patterns Every Bitcoin Trader Should Know
Patterns formed on cryptocurrency charts are identified by connecting common price points, such as highs or lows or closing prices, during a specific period. Let’s have a look at the most common trend indicators, shall we?
Head And Shoulders
This specific chart formation highlights a bullish-to-bearish trend reversal. It’s characterized by three peaks – the middle peak is the highest. The pattern is uniform, meaning that the two shoulders have a similar height. The reason why traders prefer the head and shoulders pattern is that it allows them to place stop-loss orders, typically priced above the top-of-the-head high price.
Cryptocurrencies like Bitcoin are highly volatile, so it’s almost impossible to trade without market noise. Opening a position is recommended when the pattern appears to be in a downtrend.
A double top takes shape when Bitcoin reaches a high price two consecutive times with a moderate decline in between. It looks like the letter “M”. Simply put, the price of the coin reaches a new high, pulls back, and fails to reach the previous high.
Above all, you must be patient and confirm the double top’s identity to avoid a false reading and exit early from the position. The time between two peaks will help you determine if a double top pattern exists. Just so you know, the pattern is more likely to be found in 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. The triple top pattern is much like the double top pattern; the only difference is there are three tops instead of two. The specific chart formation suggests a change in the trend direction after buyers failed to clear the horizontal resistance in three attempts in a row.
The triple-top pattern can be used to identify opportunities whether to buy Bitcoin and sell it, so you can make informed decisions. The fact that you see as many as three successful attempts to break higher makes the reversal compelling.
We’ve offered you some helpful pointers on how to read a Bitcoin chart, but it’s a good idea to do additional research to make the best possible judgment. If you’re able to read the cryptocurrency market emotions, you’ll have a better shot at predicting the trends.
Remember that analyzing data may not always be accurate because Bitcoin is volatile and past performance isn’t the best indicator of future performance. You should regularly check news sources for updates and changes in the market and deploy risk management strategies when trading Bitcoin. If you want to succeed at anything, especially cryptocurrency trading, you must be willing to take risks.