MarketMarket Analysis

Crypto Market Analysis for Dummies

Most of us would argue that the hardest thing for any crypto newbie, especially one who has not been acquainted with any financial market prior to cryptocurrency, is to read bitcoin price charts and other crypto assets.

We know that from experience. We would read market analysis of professional traders and think they are just bluffing with their predictions. But none of us would call their bluff simply because, well, they’re not bluffs.

As many expert traders and analysts say, financial markets, including cryptocurrency, tend to follow a certain trend or pattern at any given time.

We have done the legwork and compiled the basics to teach you how to read market charts. Thank us once you’ve profited from this article later on and spread the word to your friends. As the saying goes, sharing is caring.

Before we begin, you have to understand that there are three general types of market analysis: fundamental, sentimental, and technical.

Fundamental analysis focuses on a particular asset or firm’s intrinsic value by taking into account its financial performance and other economic variables.

Sentimental analysis takes into consideration the sentiments of influential people and organizations in a particular industry. These can be publications, corporate executives, social media influencers, etc.

Meanwhile, technical analysis looks at past price movements and trading volumes to determine possible trends.

Many cryptocurrency traders prefer technical analysis simply because crypto chart patterns are easily observable for those who have the knowledge. Moreover, there are scores of technical analysis tutorials and courses that are available online.

The Dow Theory

The Dow Theory is the foundation behind the technical analysis. Credited to American journalist Charles H. Dow, this financial theory states that the current price of an asset will follow a specific trend pattern until it has become either overbought or underbought.

Once this happens, the trend will reverse or undergo a market correction.

Dow compared trends to ocean tides. He wrote for the Wall Street Journal,

A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market.

The Dow Theory is used by many people to other financial markets, including cryptocurrency. Contrary to fundamental analysis, technical analysis focuses on the price and the market, not the company behind the asset and its milestones or mishaps.

However, the theory admits that it is not infallible. It is possible for a specific event to defy the trends and create a different one. Furthermore, abrupt and unsustainable manipulation is possible even though the primary trend cannot be manipulated.

How to Read Crypto Charts

There are different things to take note of when reading crypto charts. There are candlesticks, support and resistance levels, and moving averages. These are the basics that you need to be familiar with.

Candlesticks

In a price graph, you will see green and red upright rectangles of varying sizes. If you look close enough, you will see that they also have a line in the middle that looks like a wick. That is why these are called candlesticks.

Others call these Japanese candlesticks, giving credit to Japan for inventing these primitive light bulbs in the 17th century.

Candlesticks are very important to technical analysts because they show the highest price and the lowest that the cryptocurrency has reached during that specific trading session, as well as the opening and closing price.

If the candlestick is colored green, then it means that the closing price during the specified trading session is higher than its opening price. This means that the price has somehow gone up. Also, more traders bought the asset at a higher price.

If the candlestick is colored red, then it means the opposite: the closing price during the specified trading session is lower than its opening price. This reflects a bad trading session — more people sold the asset at a relatively lower price than they hoped so.

To make things simpler, remember that people love buying discounted items. The same can be said with any asset, including cryptocurrency. Also, if there are too many sellers than buyers, then the tendency of the asset is to go down in price.

Of course, not all candlesticks look like the one we’ve shown in the image above. Some of them do not even have a wick at the top, and vice versa.

For example, there is what we call the hammer, which literally resembles a hammer more than a candlestick. This means that the closing price is also the highest that the asset has reached within the trading session.

The opposite would be the shooting star, which means that the asset’s closing price is its lowest during that particular trading session.

Another is the doji, which signifies a neutral or static trading session. Some of them have almost non-existent bodies which reveal that the opening price and the closing price are the same.

Make sure to not confuse the dojis with the spinning tops, which show an indecisive market. But never be fooled by these because they often indicate that the market is about to undergo a drastic change.

As you go deeper, you will observe more candlestick patterns. Take into account each specific candlestick and compare it with the previous or succeeding ones. This allows you to get a more accurate picture of the market.

Now that you have a basic understanding of how to read crypto candlestick charts, let’s proceed to the support and resistance levels.

Support and resistance levels

Once you are familiar with candlesticks and you can observe a series of trading sessions, you will see a similar limit in terms of highest and lowest prices. These are usually called support and resistance levels.

When a considerable number of traders believe that the crypto asset is worth buying at a particular price, they form what we call the support level.

This means that if ever the asset declines in price to that level, many will buy it. Thereby proving that the asset is good for their money’s worth. The opposite is true for resistance levels.

When a considerable number of traders want to sell their asset at a particular price, that will form a resistance level. This goes to show that people believe they will make enough profit at the said level and that they are not willing to let the opportunity pass them by.

Ethereum showing resistance at $450 level. (source: TradingView)
Ethereum showing resistance at $450 level. (source: TradingView)

According to an article on TradingView, Ethereum is forming a resistance level at $450. This means that traders find it profitable enough to sell their ETH assets when the price reaches the said price.

Moving averages

To observe how the market is doing for a specific timeframe, cryptocurrency traders and analysts also take note of the moving averages. There are two common types: simple moving average (SMA) and exponential moving average (EMA).

The simple moving average is calculated by summing up recent closing prices and then dividing it by the number of time periods in the calculation average. In simpler terms, the SMA can be identified by getting the average price for the last 20, 30, or 50 days (totally up to you).

For example, you can get the 20-day SMA by summing up the closing prices for each day of the last 20 days, and then dividing them by 20. After getting the SMA, you can form it into a line. This will provide an easier way to analyze the cryptocurrency’s trend.

Contrary to expectations, this line is not going to be straight. This is because each point is representing a trading session that has a one-day difference in computation.

Bitcoin 30-day SMA (Source: MarketWatch)
Bitcoin 30-day SMA (Source: MarketWatch)

Meanwhile, the exponential moving average places greater weight on recent price changes. It still does a job of plotting the average price of the asset. But, it responds better to recent changes in the market.

Bitcoin 30-day SMA and EMA (Source: MarketWatch)
Bitcoin 30-day SMA and EMA (Source: MarketWatch)

In the chart above, you can see that the SMA (line in black) has barely moved. While the EMA (line in green) has responded more consistently with the recent change in price. This shows that Bitcoin’s price is seemingly going on an upward trend.

This is the reason why many cryptocurrency traders rely more on EMA than on SMA when trying to gauge the market’s sentiment.

Conclusion

Now that you’ve learned the basics of how to read crypto charts, why don’t you try to look at price graphs and familiarize yourself with everything that we’ve shown you in this guide?

Also, try to check for more advanced market analysis resources when you have leveled up in your crypto technical analysis. With our guide, you wouldn’t be too confident enough to say that you know how to read crypto candlestick charts do you?

Best of luck to all crypto traders out there!


Jesus

Jesus is the Senior Editor of CoinQuora. He's been following the crypto space since 2016, and may possibly do so indefinitely. He covers various blockchain-based developments and crypto market trends.

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