Chart analysis is one of the most important aspects of being able to make a sound decision when it comes to trading. These principles do not only apply to cryptocurrency, but also to stocks. Granted, cryptocurrencies tend to be a lot more volatile, and also tend to show patterns and trends in the space of hours that, in stock trading, takes days or weeks to form. It is critical that reading a chart becomes automatic for any prospective trader, so we will start with the basics.
My charting tool of choice is TradingView, it’s accurate, user-friendly, and free.
First up, let’s look at the interface in general, you’ll want to familiarise yourself with the UI as soon as possible.
Step 1 – Setup your currencies
The first thing you want to do is set up which currency you want to analyze. The accepted way of doing this is as follows:
- Analyze your baseline currency against your fiat currency. In this case its BTCUSD Bitcoin over US Dollar. Some people might use Ethereum as their baseline currency, essentially, it is the main currency that you will use to buy other currencies. Some of you might just buy coins directly from USD, however, the majority of traders hold Bitcoin to buy other altcoins with as many exchanges use pairings.
- Analyze your altcoins against your main cryptocurrency. If I was going to analyze Stellar’s chart I would putt up the XLMBTC chart.
- When selecting your pairing, look for your exchange in the list of options. There’s no point in you using the Coinbase pricing if you are using Binance for example.
Step 2 – Choose your indicators
- Click on the top green box and select your indicators.
- The active indicators show up in the larger green box, and their relevant lines or shading will highlight on the chart.
- As a baseline, you normally want at minimum your EMA (Exponential Moving Average) and the Volume. The third one we will look at today is the Bollinger band.
Step 3 – Get to know your tools
- The dark blue box on the left highlights the tools.
- Familiarize yourself with them, and how they work. There is no need to understand them just yet, as we will focus on each tool at a later stage, for now, you just want to spend a little time picking each one, and seeing what it does when you click around.
Step 4 – Check the values
- On the far right, you will see values and each of those values correspond with its relevant value at a chosen period of time.
- Familiarise yourself with the colors, corresponding values, and indicators. You should be able to quickly reference any indicator easily without having to spend too much time trying to figure out which is which.
- Each time you set up a new chart, get in the habit of using the same colors for the same indicators so that you are always able to reference quickly.
Step 5 – Understand the indicators, patterns, and terms
This part is far easier said than done! We previously looked at the following patterns:
- Cup and Handle
- The Wedge (Rising Wedge)
- Head and Shoulders
And we looked at the following terms:
As we progress through this series, you will learn more terms, more patterns and more about indicators. This will be a long process because it’s important not to overwhelm yourself when it comes to getting this knowledge to become second nature. Cramming it all in may result in a misunderstanding of an idea, term or pattern, which could result in loss of money.
Exponential Moving Average (EMA)
The exponential moving average is a type of moving average that is similar to a simple moving average The main difference is that more weight is given to newer data.
This means that as trends change from hour to hour or even minute to minute, newer data will factor more heavily into the next day/hour/minutes EMA plotting on the chart.
Moving averages are generally considered to be “lagging indicators” meaning that because the data is generally historical. If you were to use a moving average to find the best entry or exit point, you might find that you have missed it by the time you get the data that reflects a certain trend. The EMA attempts to (and to an extent does) alleviate this by adding more weight to the most recent data, it clings to the price action a little tighter, so it, therefore, reacts quicker to a changing market trend.
EMA’s are best suited for trending markets, so when the market is in an uptrend, the EMA will show an uptrend, and vice-versa for a downtrend. To best use the EMA to your advantage you should be vigilant and look not only at the direction of the EMA line but also look at the relation of the rate of change from one bar to the next, whether it’s by the minute, hour or day.
An example of this might be that as the price action of a strong downtrend begins to rise and reverse, the EMA’s rate of change will begin to increase until the rate of change is zero, and then starts to trend upwards.
As you can see with the three line graphs, the 20-day moving average in red shows the general trend of the currency but isn’t very accurate. If you were to attempt to use the 20-day moving average to find an entry or exit point, you’d probably make really bad decisions. The 6-day moving average is more accurate in some areas but as demonstrated in the first climb and dip, the 6-day moving average showed a longer uptrend than what actually happened. The EMA managed to more closely hug the actual trends and this is due to its unique averaging and weighting.
Volume is the number of coins traded in an exchange or an entire market during a given period of time. For every buyer, there is a seller, and each transaction contributes to the count of total volume. When buyers and sellers agree to make a transaction at a certain price, it is considered one transaction. So if only fifty transactions occur in a day, the volume for the day is fifty.
Volume, as an indicator in a technical analysis, is used to measure the relative worth of a market move. If the markets make a strong price movement, then the strength of that movement depends on the volume for that period. The higher the volume during the price move, the more significant the move.
Volume is one of the most important measures of strength for traders and technical analysts. Bar charts are used to allow analysts to quickly gauge the level of volume. The bars also provide easy identification of volume trends. You can use volume to confirm a price movement, if the volume increases with either an up or down price movement, it is considered a price movement with strength. For example; If you want to confirm a reversal on a level of support, you would look for a high buying volume, and conversely, if you are looking for a break in support, you would look for a low volume from buyers.
(click to enlarge)
A Bollinger Band®, developed by famous technical trader John Bollinger, is plotted two standard deviations away from a simple moving average.
Bollinger Bands® is a highly popular technical analysis technique. Generally, the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market is.
(click to enlarge)
John Bollinger has a set of 22 rules to follow when using the bands as a trading system, and you can find them here.
BB’s consist of a center line and two price channels (bands) above and below it. The center line is an EMA, and the price channels are the standard deviations of the coin being studied. The bands will expand and contract as the price action of an issue becomes volatile (expansion) or becomes bound into a tight trading pattern (contraction).
(click to enlarge)
A coin may trade for longer periods in a particular trend or pattern, this might even include a bit of volatility from time to time. To better see the trend, you should use the moving average to filter the price action. This enables you to gather relevant information about how the market is trading.
After a sharp rise or fall in the trend, for example, the market may consolidate, trading in a narrow fashion and crossing up and down, above and below the moving average. To better monitor this behavior, you would use the price channels, which encompass the trading activity around the trend.
When you use Bollinger Bands®, you should allocate top and bottom bands as price targets. If the price deflects off the lower band and crosses above the EMA (20-day average usually), the upper band comes to represent the upper price target. If the coin is in a strong uptrend, prices usually fluctuate between the upper band and the EMA and the opposite can be said if the prices start to move towards the EMA, and then crosses over to move between the EMA and bottom line, indicating a move towards, and subsequently a downtrend.
Bollinger Bands® should not be used on its own, John Bollinger actually suggests using it in conjunction with 2-3 other non-related indicators to better analyze a chart.
Did this article help you? Comment below or tweet me your thoughts or questions!
Tiaan Wolmarans is a cryptocurrency investor and trader, airplane pilot, musician, and writer.
Disclaimer: The information presented by Tiaan is for informational purposes only. It should not be considered legal or financial advice. Tiaan is not a financial adviser. You should consult with a financial professional to determine what may be best for your individual needs.
Tiaan does not make any guarantees or other promises as to any results that may be obtained from using his content. No one should make any investment decision without first consulting his or her own financial adviser and conducting his or her own research and due diligence.
Please always only invest within your means and do so responsibly. If you have any questions feel free to contact him via the social media buttons below.