Technical analysis is a technique that allows traders to predict the future prices of cryptocurrencies. It is done by examining cryptocurrency charts over specific intervals. But before you grasp how technical analysis works, you must get an in-depth understanding of the Dow Theory.
Read on to learn what the Dow Theory is and how it helps traders read cryptocurrency charts.
The Dow Theory
Charles Dow proposed the Dow Theory. This theory states that the current pricing of the assets integrates all past and current factors. In the case of crypto, all past, present, and future demands are considered, along with any regulations that might impact crypto pricing.
Moreover, rather than focusing on single variables, market analysts tend to focus more on the price of a single coin. Plus, the price fluctuations aren’t random. A particular trend is followed, whether the market is long-term or short-term.
Crypto Charts Timeframes
The timeframe in which analysts examine cryptocurrency charts is essential. Generally, the most widely used timeframes used in crypto trading include:
- Daily chair
- 4-hourly chart
- Hourly chart
- 15-minute chart
Most intra-day traders prefer to use hourly, 15-minute, and 5-minute charts. Intra-day traders complete transactions within a single day. On the other hand, long-term traders hold their positions in the market for weeks, months, and years. Long-term traders prefer to use 4-hourly, daily, and weekly charts.
The chart you should use all boils down to your preferred trading style. For instance, if you’re more into long-term trading, a 15 or 5-minute chart will be of little importance to you.
Japanese Candlestick Charts
The Japanese candlestick charts are the most commonly used out of all the cryptocurrency charts. Since these are so widely used, you have likely seen one. Generally, candlestick charts have two types of patterns in the form of candlesticks. These candlesticks are either green or red. These color-coated candlesticks display the price fluctuations of cryptocurrencies over specific intervals.
Every candle shows valuable information, including the price difference at the time of opening and closing of a particular asset. This information is displayed on the body of the candle. The candles also have shadows at the top and bottom.
The shadows represent the highest and lowest price of assets at the time of opening and closing.
You will see the open price at the top shadow and the close price at the bottom in green candles. The top shadow displays the close price in red candles, while the bottom shadow displays the open price.
The great thing about candlestick charts is that they are so easy to read, making them easy to read and predict market trends. By identifying market patterns and shifts, you can make better decisions in crypto trading.
Now that you know what candlestick charts are, let’s now look at the trends of bullish and bearish markets using these crypto charts.
Bullish Market Trends
The hammer is a one-candle pattern with a little or no top shadow. On the contrary, it has a really long bottom shadow. A hammer is generally formed after the price recovers from a decline. In this case, the closing price is at the top quarter of the entire range.
This usually happens when sellers intentionally decrease the price after the market opens. But because of the high buying momentum, the price reaches new highs. In this case, the closing price far exceeds the opening price. This type of green hammer indicates a bullish market.
2. Bullish Engulfing Pattern
In the bullish engulfing pattern, you will find two candles next to one another. The first candle is red, which is bearish, while the other is green, bullish. The first candle indicates that the seller is in control; however, the bullish candle is far greater in length than the bearish candle. This means that the bull market overcame the bear market.
3. Morning Star
In the morning star, you will find three candles. The first one is red, a bearish candle. The second one has a tiny range, while the third candle is green, a bullish candle. The red candle shows that sellers are in control, but the second candle displays that both buyers and sellers have made transactions simultaneously, thus canceling each other. The last candle indicates a bullish market because of the overwhelming response of the buyers.
Bearish Market Trends
1. Shooting Star
A shooting star pattern has one bearish candle with a really long top shadow and a small or no bottom shadow. It indicates that buyers took control as the market opened, significantly increasing the price. However, there was an increase in the selling momentum at the market closing. It continued till the market turned into a bearish one. This happened because of the selling pressure.
2. Bearish Engulfing Pattern
It has two candles; the first one is a bullish candle where buyers control the market. But after sellers take over, it turns into a bearish market because the market closes at a considerably lower price when compared to the previous candle’s low price.
3. Evening Star
Similar to the morning star, the evening star has three candles. The first one is a bullish candle indicating buyer control. It means a high closing price.
The second candle has a small range, showing the competition between bulls and bears. The third candle is a bearish one, indicating seller control over the market.
As a beginner, you must grasp the basics of how to read candlestick cryptocurrency charts for crypto trading. It will help you in making informed decisions. You can choose charts that cap information over different periods based on your preference and trading style.
You can learn to use different price indicators to get more insight as you progress. This is something that you learn with practice. But make sure to incorporate the Dow Theory every time you analyze crypto charts. It will help predict price fluctuations, and you will be able to identify market reversals when they occur. Knowing when a bullish or bearish market is about to start is very important in crypto trading.