How to Read Cryptocurrency Charts: A Beginner’s Guide to Technical Analysis - Defiway
How to Read Crypto Charts — A Beginner's Guide to Understanding Technical Analysis photo
By: Natali

How to Read Crypto Charts — A Beginner's Guide to Understanding Technical Analysis

Table of Contents

The crypto industry is one of the most complicated parts of the finance industry. At the same time, it has many similarities with traditional finances. Price charts are one of them. If you are familiar with stock exchanges, you already know the basics of token charts. They stay the same throughout the whole industry.

However, if you are just a beginner in crypto tech analysis, this article is for you. Once you read it, you get a deeper understanding of the underlying patterns and causes that encourage traders to buy and sell tokens at specific times.

Check this article to find out the parts of the crypto chart, the most common patterns, and how to read crypto charts in real life.

The Individual Parts of a Crypto Token Chart

Crypto charts provide valuable info about the market state. It is crucial to read it properly. Once you understand the relationships between components, you unlock the ability to spot new trends before they become obvious.

When you learn to define support and resistance levels, you can enter and exit trading at perfect timing. Support levels are prices where buyers are likely to step in and prevent the price from falling. Resistance levels are prices where sellers are likely to step in and prevent the price from rising.

But before I start, I want to warn you that crypto trends are often manipulated by traders, bots, or influenced by news. Just remember the Dogecoin case and how Elon Musk’s influence raised and dropped it.

It is vital to use other evaluation factors in technical crypto analysis. It can include research on the different industries. If you want to invest in a token from the healthcare industry, you should research similar projects in healthcare.

Let’s understand the meaning of each common part of a typical crypto chart:

  1. Price Axis. It’s the vertical axis on the left side of the chart. It symbolizes the price of the chosen token, allowing users to see value changes over time.
  2. Time Axis. It is the horizontal axis, showing the consideration period: minutes, months, or even years.
  3. Candlesticks or Price Bars. They are the visual elements used to display value movements over time. Each bar represents a specific period, such as one minute, hour, etc. They consist of four main components:
    1. Open Price. The opening token price during the period.
    2. Close Price. The closing token price of the during the period.
    3. High Price. The highest token price during the period.
    4. Low Price. The lowest price during the specified period.
  4. Volume. This indicator represents the trading volume (total tokens traded during the period). That’s the way you understand the strength of price movements to predict trends.
  5. Time Frames. Most crypto charts allow users to select different time frames for analysis. Short-term frames are minutes, hours, and days. Medium terms are weeks and months. Long terms are months or years.
  6. Zoom and Pan Controls. Users can zoom in and out of the chart and pan to different periods.
  7. Indicators. Many charts allow users to overlay technical indicators to provide additional insights into the price chart.
  8. Annotations and Drawings. Some charts offer the ability to draw lines and use text on the chart to highlight specific price levels, patterns, or trends. These annotations can help traders and analysts make notes and plan their strategies.
  9. Background Grid. It is a grid behind the chart helping users evaluate price levels more accurately.
  10. Legend. It is the list containing the decryption of colors, patterns, or styles used in the chart on different elements.

These 10 elements are vital for further crypto technical analysis. You can make more informed decisions by recognizing details and relationships with them.

Understanding Candlesticks

Candlesticks are a chart type that displays price changes over time. They are made up of a body and wicks. The candle’s body symbolizes the opening and closing prices, while the wicks (shadows) represent the highest and lowest prices.

Long bodies and wicks show that the price moved significantly, while the short candle tells us that the price stays relatively stable. Doji candles have small bodies and shadows, reflecting that the token price stays relatively the same.

Candlesticks can be green or red. The green color shows that the token closed higher than it opened, while red indicates that the token price devalues over the period.

Open price is the price at which a cryptocurrency started trading at the beginning of the indicated time frame. The close price is the price point where the cryptocurrency finished trading at the end of the selected period.

The Basics: Common Chart and Candlestick Patterns

Chart patterns are recurring patterns on price charts formed by the buyer's and seller's interactions. Patterns can provide valuable market insights to sophisticated traders.

Once you understand crypto patterns, you increase your chances of making a profitable trade. You will be able to see trends before they become obvious. It will lead you to a greater profit since you can buy promising tokens at their lowest positions while selling them at the highest prices.

Remember that reading crypto charts complexly is crucial. Envision them as trendlines. Here are the most basic patterns:

  1. The bullish pattern. This crypto trend indicates the rising token price. There are three main bull trends: classic bullish (red and green candle), morning star (three-point pattern: long red, doji green, long green), and three white soldiers (three green candles with increasing length).
  2.  The bearish pattern. This trend indicates potential token devaluation. There are three main bear trends: bearish (green and long red candles), evening star (long green, doji candle, long red candle), and three black crows (three red candles with decreasing bodies) 
  3. Double Top and Double Bottom. These crypto patterns represent the end of a trend. A double top forms after an uptrend, suggesting a bearish reversal. A double bottom forms after a downtrend, assuming a rising trend. 
  4. Flags and Pennants. Those patterns represent short consolidation periods that led to the continuation of existing trends. 
  5. Cup and Handle. This is a bullish pattern that resembles a teacup. It consists of a rounded "cup" followed by a smaller consolidation known as the "handle." A breakout from the handle often leads to higher prices.

Crypto chart patterns often reflect the mass psychology of market participants, demonstrating the current society mood. By identifying chart patterns beforehand, traders can set the perfect timing of entry and exit points.

Shooting Star Candlestick

It is a bearish reversal candlestick pattern occurring at the top of an uptrend. It has a long upper wick and a small body. It indicates that the buying pressure is finally overcome by the selling pressure, meaning that the price is likely to reverse course.

Generally speaking, the token price is more likely to fall in the future. That’s the point in time when users often use bridges to switch to another promising token.

To identify this trend, look for a bar with the following characteristics:

  • A long upper wick (usually twice the length of the body);
  • A small body (usually less than half the length of the wicks);
  • A small or no lower wick.

Despite the shooting, morning and evening stars are from the same “family” crypto charting trends, but they are different from shooting ones.  It can be hard to identify the direction, so many users ask on forums “How to know when crypto will rise or fall on star trends?”. I have a real-life metaphor that will ease your understanding.

Shooting Star tells you “Yes, I know that prices went up a bit, but eventually, they ended even lower than they started”. Morning Star's trend is “Hey, we surpassed the bottom. There is a high chance that the price could go up.”. Evening Star crypto chart trends feel like a warning, that says “Hey, we might just surpass the highest token price in the current trend. Beware the price could go down.”.

Inverted Hammer Candlestick

The inverted hammer is a bullish pattern on the bottom of the downtrend. Speaking generally, it shows the token's price at its bottom. It will most likely rise back. That’s why many traders consider the classic hammer in crypto chart analysis as a fine entry point for long trades.

 If you see the next candle pattern, it’s most likely a hammer:

  •  A small body after a downtrend;
  • A long lower wick (usually 2x the body);
  • A small upper wick.

I recommend you wait for a trend confirmation before entering the trade. If you see a forming pattern but are unsure about it, wait for the next point. You need to see that the current closing price is above the opening. It’s a great sign that token prices start to rise, starting a bullish trend.

I like to call this pattern a “Thor hammer” since this trend can act as a metaphor for the Thor myth. It’s a boomerang weapon that obeys only the strongest: it may be hard to predict whether it is a hammer trend or a sudden spike in a bearish trend. But once a trader learns how to use it, they become unbeatable.

Head and Shoulders in Crypto Charts

The head and shoulders pattern is a bearish reversal pattern. It has a bottom, peak, and second bottom. The price is likely to fall after the pattern forms. To identify the pattern in your crypto charts analysis, look for the next three candles:

  • A large green candle forms the left shoulder;
  • A small red candle forms the head;
  • A large green candle forms the right shoulder.

The neck of the head and shoulders pattern is the horizontal line connecting the lows of both shoulders. This pattern is most reliable when it forms at a resistance level, indicating that the price is more likely to fall.

Traders use this pattern to identify potential exit points for their long trades. Once the token price achieves the neckline, they sell the digital currency.

Use the hiking analogy to understand this trend. Once you pass the top of the hill, it will always go downhill no matter where you are heading next. The same thing applies to this trend: the first candle (left shoulder) represents the start of your hiking, the neckline represents the top of the hill, and the third candle (right shoulder) represents the decline.

Wedges in Crypto Charts

Wedges are continuation patterns characterized by converging trend lines squeezing the price into a narrower range. Wedges can be either bullish or bearish, depending on the trend direction.

Bullish wedges form in downtrends and indicate that the downtrend is losing momentum. This dynamic shows that token prices may start to rise. Bearish wedges form in uptrends and show that the uptrend is losing momentum. You are highly likely to see a price downfall.

To spot a wedge pattern, look for two trend lines converging with each other. The trendlines can be either horizontal or diagonal.

Don’t miss it with flags and pennants in crypto value analysis. They are also continuation patterns but characterized by a symmetrical triangle formation. While wedges can equally likely be bullish or bearish, flags and pennants are more likely to be bullish than bearish. Wedges also have a converging trendline formation, while flags and pennants have a symmetrical triangle formation.

Patterns Show Possibilities, Not Predictions

Many beginner investors often over-rely on trends and cryptocurrency technical analysis charts, thinking they are always telling the truth. Meanwhile, patterns indicate possible outcomes that may or may not happen.

The crypto market is volatile and unpredictable. No one can guarantee the token price. If someone tells you to listen to them and use their prediction assistance because they are always right, don’t believe them. They will tell you their assumptions, while you are free to trade however you want to.

A bullish pattern forms on a chart that makes you think you can safely buy a token. But, you can’t be 100% certain about the trend longevity even in the proven best crypto charts. Maybe, tomorrow something will happen with the chosen organization related to the token. Maybe you will see a token devaluation. No one can predict the “elephant in the room”.

Due Diligence and Do Your Research

Before making decisions, cross-reference patterns with other technical indicators, news factors, and fundamental analysis. Use a diversified approach to your crypto trading strategy.

Research the technology behind the chosen token and the team behind the project including their backgrounds. Always look at the landscape. If it’s possible, complete a quick SWOT analysis to find token strengths, weaknesses, opportunities, and traits.

Read white papers, blueprints, and other technical documentation behind the project.  Use multiple information sources, so you’ll have a few points of view on the same situation. Trust no one, especially those who tell you that they are the single eligible source.

Bloggers and traders who tell you to have your head on your shoulders and do your research are more trustworthy. They remind you that you are the only one capable of your decisions.

Wrapping Up: Constant Learning is the Most Important Part of Your Trader Journey

The financial industry is not a piece of the cake. It may take weeks to learn how to read crypto charts, and years to understand the underlying details. That’s why, we, Defiway experts, are here for you. We want to ease your trader journey.

I know how difficult it is to understand graphs. I’ve ditched my Bachelor of Science degree, finishing only my junior bachelor's because numbers and blueprints were too hard for me. I finished a mixed BA/BS Marketing/Advertising degree because I still like numbers and want to help people understand them.

The main thing that I can tell you about charts is to try your best to find real-life analogs to market situations. It will ease your learning process, making it more smooth. Start your crypto finance from basic things from the simplest things like axes and bar colors. Slowly add more parameters, like bullish pattern and bearish pattern.

Analyze past cases, including scam projects. You will start to notice the same up-and-down patterns in all of them. It saves you from future failures. Once you comprehend the bullish and bearish patterns, add new and more complex patterns like doubles, flags, stars, hammers, etc. That’s how you slowly but surely comprehend how to read cryptocurrency charts.

Read as much technical information as you can physically comprehend. Follow crypto experts to read their new insights. Do your research and believe in your intuition. Sometimes it’s more precise than all calculations. However, don’t risk it all. Invest that amount of money that you are not afraid to lose. That way you can speed up your learning curve on how to read crypto charts.

We, Defiway experts will always be here for you, educating you about new crypto possibilities. Stay smart! Stay with Defiway! Use our tools to boost your trading skills.