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Intermediate Guide The Basics of Chart Reading

Discussion in 'Intermediate Level' started by xyzzy, Aug 7, 2017.

  1. xyzzy

    xyzzy Master of None Staff Member Super Admin

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    Alright peeps, let's go over the basics of chart reading and get familiar with the trading information provided to us by the exchanges we use.

    The first thing to learn is how to read candlestick charts, since these are most commonly used on crypto exchanges and provide a wealth of information at a glance. Let's get started.

    How to Read a Candlestick
    So, candlestick charts are made up of candlesticks which represent a certain interval of time, typically ranging from 5 minutes to 1 day. When looking for high level trending clues, it's useful to make sure the candlestick time interval makes sense for the date window you are analyzing. Simply put, if you are looking at the chart patterns of BTC over the past 6 months, it's more useful to set the candlesticks to 1 day rather than 5 minutes. Alternatively, if you want to look at trends over the course of a day, than the 5 minute to 1 hour candlestick intervals are more useful.
    The structure of the candlestick is broken up into two parts: the body and the shadow (see below).


    The body represents the solid rectangle that is either white/black or green/red. The body indicates where the open and close price ended up for that time interval, essentially indicating whether there is buying or selling pressure at a quick glance. If the body is positive (white or green), the top of the rectangle is the close price and the bottom of the rectangle is the open price. If the body is negative (black or red), the top of the rectangle is the open price and the bottom of the rectangle is the close price.

    The shadow represents the stick forming above and below the body. The shadow indicates the highest and lowest prices that occurred during the time interval. Longer shadows means larger differences in high and low prices, showing higher amounts of volatility. High disparity between high and low prices but low disparity between open and close prices tell us that there was a shift in dominance between buyers and sellers.

    That's about it! Now you know how to read the information presented by candletstick charts. However, interpreting candlesticks is a whole 'nother ball game. There are various candle patterns that can indicate bullish/bearishness or trend reversals, as shown in the image below.


    candlestick-patterns.jpg
    Chart Reading and Trend Lines
    Now that we know what the candlestick charts of made of on a micro scale, let's cover how to read charts on a macro scale. The most fundamental thing to learn is how to see high level trends from drawing trend lines. To understand trend lines, we must first introduce two definitions:

    Support levels: price points in which downward price movement is resisted due to market conditions.
    Resistance levels: price points in which upward price movement is resisted due to market conditions.
    Breakout: refers to the event when the market price moves passed these predefined support or resistance level

    support-resistance-breakout-chart-reading.PNG
    The image above shows examples of support and resistance levels with an associate breakout. This occurred with BTC over the past couple of months. With those points we can draw trend lines to indicate where the trend is heading.

    trend-lines-chart-reading.PNG

    You might be thinking it's already obvious where the trend is going, and you would be right. Trend lines are not the full story, as they only provide a means to see high level movement through eliminating much of the noise. The second piece to the puzzle is to understand and know common chart patterns, as they can provide clues to upcoming trend reversals or continuations. This is a more advanced topic that we will cover in another guide. For now, get used to identifying where support and resistance levels lie, and how to draw trend lines from them.

    Trading Volume
    You might've noticed the bar graph usually shown at the bottom of crypto charts. These show us the trading volume associated with that candlestick. Trading volume is the total amount of crypto that was traded during a time interval. This is important because for you to buy or sell a crypto, there needs to be someone else to fill your order.

    High trading volume combined with a market price fluctuation is a good indicator that something in the market has changed, signalling the start of a new trend. If you look back on crypto price charts, you may notice that there were large fluctuations in trading volume that happened along with large price movements (either up or down). We, as traders, want to be able to read these occurrences to know whether to buy, sell, or hodl.

     
    Last edited: Aug 7, 2017
  2. Newman

    Newman Beginner

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    Good information, thanks! I'm still wondering how do you choose where to draw those lines to predict the trends and how far ahead can they be used for? 1 day/week/month?
     
  3. xyzzy

    xyzzy Master of None Staff Member Super Admin

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    You draw the lines by connecting consecutive support/resistance levels in the time frame you are looking at. Let's say you are looking at a crypto's price history over the last six months, and you see 2 resistance levels and 3 support levels. You draw a line connecting all 3 support levels, and you draw another line connecting the 2 resistance levels. The lines you draw will create a channel that will point upward (bullish), downward (bearish), or sideways.

    How far ahead you can draw them is going to depend on the pattern that is forming (if any). A trend line could be bullish, but the pattern forming within can indicate a trend reversal could occur.
     
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  4. CryptoBoy

    CryptoBoy Beginner

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    In the candle stick, what do you mean by "price"?
    a.) Is it the price set by the orders of the traders?
    b.) Is it the price that were actually bought or sold?
    c.) Is it the price that the Exchange set for that coin?
     
  5. NOAHCOINOfficial

    NOAHCOINOfficial Contributor

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    Wow, for the beginners that's very useful and helpful information!
     
  6. Arpit

    Arpit Moderator Premium Member

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    That's an excellent resource @xyzzy
    Another book that newbies may read to understand the world of Candlesticks is "Japanese Candlestick Charting Techniques” by Steve Nison

    You don't have to read the entire book. Have a look when starting out. take notes, observe and use some charts to keep analysing. It's an art which you acquire while working on it.
     
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  7. Arpit

    Arpit Moderator Premium Member

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    I suppose you are talking about the currently traded price. That is the price the latest transaction has taken place.
    Other than that, opening price indicates the price at which the market opened for that particular day.
    Closing price is the price at which the market close on that day.
    Price usually means the current market price at which it is trading.
    Settlement is the price at which all the trades for the day are calculated.
     
  8. Innate

    Innate Contributor

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    That's awesome! When I stay at home, I will try them.
     
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  9. WCDCOIN

    WCDCOIN Contributor

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    Wow, for dummies in trading that's really awesome! Thanks!
     
  10. GuardianofCrypto

    GuardianofCrypto Master of Trolls Staff Member Super Admin

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    lmao. yes everyone starts somewhere
     

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