Yesterday we discussed what Ripple is, so now that you understand Ripple a little more, the next questions you might have are: “What is it worth? or When should I buy?”
While I can’t in good conscience answer those questions, I can speak a little on how to read charts, and point out certain patterns that will allow you to make that determination for yourself.
Since we’ve been talking about Ripple, and considering the interesting price fluctuations over the past few weeks, and more so after the apparent dip yesterday, I figured we’d start discussing some of the basics of trading and use Ripple as our subject.
We will be using Candlestick chart analysis, so let’s start with the basics.
What is a Candlestick chart?
A candlestick chart (also called Japanese candlestick chart) is a style of financial chart used to describe price movements of a security, derivative, or currency. Each “candlestick” typically shows one day; so for example a one-month chart may show the 20 trading days as 20 “candlesticks”.
We will be using the hourly chart in the below examples, so each candlestick will represent an hour, and if you were to look at a cryptocurrency chart, it is not like stocks, so there will be candlesticks for every hour of every day as opposed to the 20 trading days of the month.
(Source – wikipedia.com)
How do we read these charts?
Charts can be complicated to read, so in this article we will look at 2 trend characteristics and one new term. Once a week I will review another three types, providing I can find a coin that is displaying those trends. I will keep them relevant so that the information isn’t only teaching you a little about the trend itself, but also about the currency we analyse.
Today we will look at:
- Support (Term)
- Head and Shoulders
Here we have an example of the XRP to BTC chart from 29 December 2017 to 10 January 2018. As you can see the green line shows that from the 29th until the 4th there was a very bullish climb. You will also notice that on the 1st, there was a period of relative stability. This level patch would be considered support, meaning that the coin’s value does not seem to want to go lower than this point.
If you look carefully at the support on the 1st and then look at the low point on the 5th, you’ll notice that the price of XRP does not drop below the rough price of it in the support. Its also important to know that finding a good amount of support may prompt a net increase in buying activity.
Head and Shoulders
Head and shoulders is a reversal pattern, which usually lets us know that the current trend will break. In this case, we have a huge climb in the XRP value, then the head and shoulders, and as we have noticed over the past few days, we notice that the price drops right back down to the support level we just spoke about, and in this case, XRP has given us a textbook example.
Head and shoulders consists of four parts, two shoulders (left and right) and the head. The fourth part is known as the neckline, as illustrated in green.
For a swing trader, once the price goes below the neckline, it’s a good indication that selling may be a good idea as the price is likely to drop to the previous support level, which might be a good time to re-buy and increase your holdings.
A pennant is created when there is a significant price movement in the currency, followed by a period of consolidation. This creates the pennant shape due to the converging lines in orange.
A breakout (up or downwards trend) then occurs (usually) in the same direction as the big price move. This is similar to a flag, and sometimes looks like a symmetrical triangle, both of which we will look at next week.
This pattern generally forms over short periods of time, and usually takes less time to form in downtrends than in uptrends.
The above pennant seems to be showing that there may be a negative breakout, but I am optimistic. You can follow the pennant chart live here.
To confirm the pennant, you will notice a large trading volume in the initial price movement, as seen by looking at the bars at the bottom of the chart. The large volume can be seen below the head and shoulders section that we just looked at. During the pennant, the volume will be significantly lower, and then it will grow during the breakout.
A good point of reference for buying more of the currency (or stock) would be at the point of a positive breakout, once you have confirmed the three characteristics above.
That’s it for this week’s look at chart analysis, hopefully it helps you make slightly more informed decisions on buy and sell points. If you have any questions or comments, feel free to contact me on Twitter: @CryptTee