So you want to get deeper into the crypto game and are ready to start reading a crypto chart. But what is a crypto chart to begin? Here we outline the functionality of the crypto chart, how it works, and how you can read it effectively in order to make more empowered cryptocurrency investments.
Dow Theory
The first step to understanding how to read a crypto chart is gaining an understanding of Dow Theory. The main premise behind Dow Theory contains the following:
- All crypto demands in the past, present and future affect the crypto market pricing, including any regulations that may impact the crypto market.
- The movement of price is not random but rather follows short-term or long-term trends.
- Analysts tend to focus on price rather than the factors that influence price.
- History repeats itself and thus market behavior can be predicted.
Understanding Dow Theory is necessary for reading crypto charts because it helps you improve your technical analysis.
Technical Analysis
Technical analysis is just a fancy way of saying “predicting the future” for how a cryptocurrency will behave. To do so you’ll need to be mindful of time frames, as in hourly charts vs 15 minute charts vs 4 hour charts. Each chart serves a specific function depending upon which type of trading you’re into. Day Traders find the 15 minute chart most relevant, whereas the long term investors find the longer charts more appealing. A general rule of thumb is, if you’re looking to make short-term crypto buys and sells, consult the shorter charts. If you’re looking to make longer term crypto investments, the longer charts will be more helpful in determining which specific cryptocurrencies are worthy of your investment.
Market Cap
Understanding a crypto coin’s market cap is the same philosophy as understanding a stock in that it all has to do with supply and demand. In the world of crypto, a coin’s market cap is determined by its circulating supply and the price of the coin. For example, if Example Crypto Coin has 100,000 coins in circulation at a price point of $3, Example Crypto Coin would have a market cap of $300,000. Generally speaking, a stable cryptocurrency coin market cap over time is a fantastic indicator of a coin’s positive future performance, whereas a volatile market cap over time might be more indicative of a problematic or riskier cryptocurrency investment. As you become more well-versed reading crypto charts effectively, you’ll want to spend a decent amount of time analyzing the market cap of target coins.
Candlestick And Support / Resistance
The candlestick chart is one of the most popular financial charts in existence. When it comes to analyzing crypto, you’ll want the candlestick chart to become one of your new best friends since there’s a ton of useful info to be cleaned from it. Within the chart you’ll be able to see a coin’s opening and closing price and the trends those opening and closings are producing over time.
From there, you’ll be able to analyze what’s called the Relative Strength Index (RSI) of a specific coin, which looks at the speed of the market price movement of a coin in comparison to its past performance. When an RSI approaches 70, it’s considered to be overvalued or over purchased and may drop in cost. When an RSI is around 30, it is considered to be undervalued and may rise in price. Understanding RSI will then allow you to understand Support and Resistance, which are just succinct ways at labeling the price level at which a coin appears to make a move up or down (Support level) and the price level at which a crypto coin stops rising (Resistance level). A great way to practice reading RSI and Support and Resistance levels is to check out the charts on EthereumMax.
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