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How to Interpret Cryptocurrency Charts and Patterns

WikiBit 2022-04-15 02:02

Abstract:Technical Analysis examines the price history and volume of cryptocurrencies, visualizing the information in trade charts in order to forecast where they will move next.

  •   An overview of charting software

  •   The basics of chart patterns

  •   A Pennant formation in action.

  •   What is the best way to crowdsource chart resources?

  If you've read our knowledge base articles on how to trade cryptocurrency, you're probably familiar with the concept of technical analysis.

  Technical Analysis examines the price history and volume of cryptocurrencies, visualizing the information in trade charts in order to forecast where they will move next.

  Experienced traders achieve this by looking for any of a vast variety of well-known patterns that may indicate a specific price movement in the future, as well as using creative annotation to build their own interpretation.

  It's worth noting that trading charts and pattern detection aren't exclusive to cryptocurrency; they're essential to trading any asset, though the specifics may differ. To comprehend it, you must first become acquainted with the tools that will allow you to annotate and design charts.

  Tradingview is one of the most popular tools on the market. By visiting a cryptocurrency exchange like Bitstamp, you can get the essential parts of Tradingview for free. When you get on their homepage, you'll notice the Tradeview option. There are more similar tools available.

  We've already covered the fundamentals of crypto price charts, but if you're still curious, check out these articles:

  •   What exactly are cryptocurrency price charts?

  •   What does Technical Analysis mean.

  •   Explained: Leading and Lagging Indicators

  Charting Tools Included

  Trading software like Tradingview can be compared to Excel. Their role is to handle as much of the heavy lifting as possible in terms of analysis, using pre-defined statistical measurements and indicators, but leaving you to figure out how they relate to future price movement.

  Because there are so many indicators and ways to filter price data, selecting what is significant is part of the issue.

  Ranges of dates

  The use of a date range, which isn't random, is one of the most basic techniques to filter data. Looking at bitcoin's price over the last day gives you a very different picture than looking at it over the last five years.

  Technical Analysis concentrates on short-term positions in general, but not entirely, therefore you'll be doing a lot of analysis in short periods.

  Because a standard trading view will include candlesticks - an explanation of candlestick charts may be found previously in our knowledge base - date consideration does not end there. They help traders comprehend price context across time by depicting it as narrow vertical rectangles with what appear to be wicks at the top and bottom, resembling a candle.

  The wicks represent price highs and lows, while the rectangle represents price, open, and close for the specified time period. The color of the wick indicates if the price increased or decreased.

  The candlestick range can be set anywhere between 1 minute and 3 days in trading view; the opposite extremes of the spectrum lend themselves to radically distinct trading strategies.

  Trying to make minuscule margins several times, frequently through arbitrage, would be the goal of trading in one-minute intervals. For trading strategies like Momentum Trading, the considerably wider candle range is important.

  Indicators of Technical Excellence

  Standard trading tools, as previously indicated, are jam-packed with Technical Indicators that may be accessed via a simple drop-down menu. As previously stated, rather than being led by whatever indicator appears intriguing, you should first determine what type of trader you are, where you believe you may discover an edge, then apply the correct indicators, rather than being led by whatever indicator looks fascinating.

  Learn Some of the most common technical indicators that fit within these categories were introduced by Crypto's trading knowledge base:

  · Price-driven - based on a price change.

  · Volume is calculated based on the amount of trade activity.

  · Precede a certain shift in course by leading.

  · Confirm a certain price change has occurred by lagging.

  When you choose a conventional technical indicator, it will either overlay the price chart (such as Moving Averages) or create a parallel pane below the chart (such as RSI) (Relative Strength index).

  These indicators don't have to be utilized alone; they're frequently employed in conjunction with other types of research that aren't quantifiable within a trading chart, such as news or fundamentals.

  Patterns in Price Charts

  When you start looking for typical patterns within the price chart, or when you start annotating your own interpretation of price and volume movement, technical analysis becomes more complicated.

  The goal is to find patterns that have a demonstrated association to a given price move, based on whether the price moves below or above resistance levels.

  The Success Rate is the term for this measurement, however it isn't an objective statistical number like the known value of one standard deviation. Because the entire field of technical analysis and charting is subjective, there is no definite Success Rates reference table.

  The ability to construct a set of precise criteria for the formation of the pattern and confirmation of breakout - up or down - accounts for much of the difficulty.

  The success rates for patterns can vary drastically depending on whose trading study you choose - and there are many - which should make any rookie trader wary of putting too much reliance in them in isolation.

  Trading patterns should be viewed as one instrument among several available for determining pricing.

  The reference table below, developed by a Tradingview user, gives a decent overview of four pattern categories, each of which contains frequent patterns with names that describe the shape that price points take.

  •   Continuation - The interruption of an established trend for a short period of time.

  •   A reversal is a change in the current price trend.

  •   Neutral - Expecting a big movement in price direction but not certain whether it will be up or down.

  •   Special Patterns - These are unique patterns that should only be considered by seasoned traders.

  Drawing Patterns: Basic Rules

  Despite the fact that there are typical chart patterns, the Trading tool will not identify them for you, therefore you'll have to learn how to spot them on your own.

  Continuation and Neutral patterns are symmetrical in terms of the price points that contribute to pattern development, as seen in the cheat-sheet.

  They indicate that a major price move is likely, but the direction is unknown.

  . The pattern's upper and bottom limits provide the parameters for the projected breakout.

  Example of a Pennant Formation

  We'll look at a Pennant pattern, which is one of the most prevalent continuation signs, because it's the easiest method to demonstrate how chart patterns function.

  They occur after a major move up or lower on greater-than-average volume, which is followed by a few weeks of price consolidation and lower volume before a new breakout.

  Within the consolidation, the range of highs and lows narrows, resulting in the pennant shape. Traders will seek to profit from an expected breakout, which is characterized as a move above or below the pennant's top/bottom lines, by entering a trade with a stop-loss at the opposite bound.

  If an upward breakout is anticipated, the stop-loss should be placed below the lower line of the pennant, as this would falsify the assumption. The converse is true if you're hoping for a lower breakthrough.

  You should always use a stop-loss, which is a type of transaction designed to decrease the danger of making a mistake, regardless of the type of pattern. If you believe the price will break out positively, you set a stop-loss below the pattern's lower boundary to invalidate your prediction and prevent your potential losses at that point, as you have no idea how low the price will go and risk losing your whole trading account.

  Setting a price objective - a crucial part of trading - isn't an exact science, but it can be based on the total of the price before to the last breakout, which then forms the Pennant formation, plus the price when the Pennant is broken.

  Given their name, reversals aren't in any manner ambiguous. They expect a precise directional shift in the opposite direction of current price movement. The goal is to confidently identify the precise reversal pattern, then place your trade, calculating your price target and putting a stop-loss at the time where your assumption is invalidated, as usual.

  Don't try to manufacture a specific pattern in price movement because that contradicts the purpose.

  For Continuation and Neutral patterns, maintain the required symmetry.

  Adding Notes to Price Charts

  To recognize any of the frequent patterns from the cheat sheet, you'll need to get good at drawing the patterns over the price chart. Tradingview has all of the tools you'll need to do so, but it'll take some practice.

  You don't need a Tradingview account to try this, but it will make saving any of your annotated charts much easier. You may draw trend lines, text, add icons, and labels with the drawing utilities, which are akin to simple drawing/photo editing applications.

  The tremendous level of subjectivity associated with analyzing bitcoin price charts may be making your head swim a little bit at this point.

  There is no shortcut to success, as we have stated throughout our section on how to trade cryptocurrencies. Trading takes a lot of time to understand and research, and properly analyzing chart patterns can only be learned via experience - especially when it comes to calculating Success Rates.

  Trading services will enable you to test your techniques without risk and even compile them in code. Tradeview supports Pine script, a simple language for building trading strategies, but if you have data science expertise, you can easily construct and backtest your own models using common computer languages like Python or R.

  Insight from Crowdsourcing

  You don't have to face this problem alone, as one of the most significant recent changes in Trading has been the development of the social element. Traders can either post their tactics with the rest of the community for validation or comments, or they can simply employ the techniques created by more experienced users.

  This comes with a major caution, because there is no shortcut to success in trading, as there is in any other field. Consider why someone might share a profitable approach they've discovered. If they try to persuade you to pay for a bespoke service, consider whether it's worth it, as these services can be a slippery slope.

  If you're new to trading, the ideal way is to simply soak up as much knowledge as possible and learn from other people's errors so you don't have to do them yourself.

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