Understanding cryptocurrency charts
Understanding cryptocurrency charts
If you’re considering becoming an active cryptocurrency trader, you’ll most certainly want to keep an eye on some sort of price chart. Like traditional stocks and shares investing, it’s important to keep an eye on prices to determine the best times to buy and sell.
It’s a good idea to start understanding cryptocurrency charts by knowing what the most common ones are, what they represent and how to read them, so that you can start using them to your advantage.
1. Line charts
Line charts are designed to provide a quick and simple overview of cryptocurrency pricing, and so are best suited for beginners and less active traders. They work in a similar fashion to the simple line charts that you can create in Excel, and typically show how the price of a certain cryptocurrency changes over a specific time frame (this can range from hours and days to months or even a year at a time).
Line charts will typically show the price of the cryptocurrency (e.g. Bitcoin) vs. another cryptocurrency (e.g. Ethereum) or a fiat currency (e.g. GBP).
Line charts tend to only give one price value: the closing price. You can’t see the opening price, the high price and the low price, which are important factors for investors who try to predict where prices will go next. These are covered in the more complex charts.
2. Bar chart
A cryptocurrency bar chart includes four important values that are useful for traders: high price (the highest price it achieves), low price (the lowest price it achieves), opening price (the price at which the currency starts, at the beginning of a selected time frame) and closing price (the price it finishes at, in a time frame). When combined, these values show the ‘trading range’ for a cryptocurrency across any given time.
Cryptocurrency bar charts look different to the type you typically see in Excel, or perhaps worked with while at school. The highest and lowest points of the vertical line represent the highest and lowest price of a cryptocurrency during a specific time frame. The horizontal dashes at the left and right represent the opening and closing prices respectively, during that same timeframe.
Bar charts are certainly a step up in complexity from line charts but are a step down from candlestick charts, which we’ll cover next.
3. Candlestick charts
Candlestick charts are arguably the most important type of chart for any active and committed trader. It shows you everything that a line and a bar chart can show you combined, but with more depth.
These charts display bars that are known as ‘candlesticks’. Like the bar chart, each end of the candle body indicates the opening and closing price of the cryptocurrency in that time interval. The wick, which can appear on either side of the candle (or indeed both sides), shows fluctuations above and below the opening and closing price. The ends of the wicks therefore represent the highs and lows of price for that cryptocurrency.
You will notice that candlesticks appear in different colours. In the world of cryptocurrency, they are most commonly either red or green. If the candlestick is red, the closing price was lower than the opening price (indicating a ‘bearish’ trend). If the candlestick is green, the closing price was higher than the opening price (indicating a ‘bullish’ trend).
If the candle is shorter, it indicates a smaller difference between the opening and closing prices. If the wicks are shorter, it indicates that the highs and lows were not as far away from the opening and closing prices. This type of chart is more useful for traders because it helps them to do more technical analysis, which in turn helps to predict where the price will go next.
Taking the time to understand cryptocurrency charts will help you to understand how the markets behave and thus, enabling you to make more informed decisions.