- Understanding how to read price charts is an essential skill that every investor should know how to do to improve their performance.
- Price charts can show you the price trend for a cryptocurrency, its support and resistance levels, price momentum, and insight into where to place stop-losses and take-profits–so learning trading patterns and understanding trade charts is essential.
- The most common types of trading charts include line charts, bar charts, and candlestick charts, and the basic elements of a price chart are the price, trading volume, time frame, and a trader’s preferred technical indicators.
Being an active trader in any market – be it cryptocurrencies, stocks, or other popular assets like forex – one of the most important skills to learn is how to read charts for trading. Even if your focus is on fundamental analysis to help select which asset to buy, understanding the technical analysis of an asset's price movement, its patterns in trading, can help you better time your entry and exit points and determine the best levels to buy or sell.
Whether you have short-term growth goals or are looking to maximize your returns on individual cryptos, knowing how to read price charts is a critical piece to your overall success. Here’s an introduction to reading different types of trading charts to help maximize your returns.
What Is a Price Chart?
A price chart is a chart that shows how the price of a crypto, stock, exchange-traded fund (ETF), or other asset has fluctuated over time. Most cryptocurrency exchanges and stockbrokers offer the ability to view the price chart of an available asset, and there are a variety of tools, indicators, and other charting tools that can help better understand an asset's price action and determine the best course of action.
Reading trading charts including crypto charts can show you:
- A cryptos price trend
- Support and resistance levels
- Price momentum
- Where to place a stop-loss to help limit risk
Types of Price Charts
There are a variety of different ways that investors can view the data available on a price chart, with the most popular types of trading charts being the line chart, bar chart, and candlestick chart.
A line chart that shows the crypto’s closing price for each trading day of the specified date range. This is the simplest of the three chart types covered and is the preferred type of chart for beginners.
A bar chart is a type of trading chart that provides several more data points than a simple line chart, including the asset's opening price, its closing price, and the highest and lowest price of the day. In the typical green and red chart color scheme, days when the closing price is higher than the opening price have green bars, while days when the closing price is below the opening price are shaded red.
Candlestick charts provide similar data as bar charts but display the data in a different format. In this trading chart pattern, the top and bottom of the candle’s body (shaded section) represent the opening and closing prices of the day. On green candles, the close price will be at the top of the body and the open price will be at the bottom. For red candles, the open price is at the top and the closing price is at the bottom.
Candle shadows and wicks indicate the lowest and highest prices of the day, and the length of each provides insight into how far the highest and lowest prices were from the open or closing prices.
How to Read a Trading Chart
To read any kind of chart, including crypto charts you will need to understand the basic elements that they include. Keep reading for a full guide of trading charts explained.
Price is the most basic thing you will find on a chart. The y-axis (vertical) represents the stock price, and the x-axis (horizontal) represents time. On a line chart, the price is plotted at points where the crypto traded at specific times. On a bar or candlestick chart, the open, high, low, and close display for the specific period defined by the chart, such as 1 hour, 4 hours, 1 day, or 1 week.
Another common feature on most charts is the Trading Volume. This tells you how much of a specified crypto traded during a certain period and at what price. This can help you determine which price levels are popular entry and exit points for traders. Volume is often displayed in vertical bars at the bottom of the chart.
Technical indicators are helpful tools that provide additional insight into price movements. There are many different types of technical indicators that provide different types of information about an asset's price including momentum and prevailing trend. Popular indicators include Relative Strength Index (RSI), Volume-Weighted Average Price (VWAP), Bollinger Bands, Moving Averages (MA), the Moving Average Convergence Divergence indicator (MACD), and On Balance Volume (OBV).
How to Read a Price Chart
The first thing you want to do when reading trading charts is to determine the time axis for your chart. As a general rule, the longer the time frame, the more significant the trend. Unless you are focused on short-term day trading, it’s generally best to choose, at minimum, a one-day chart to get a sense of an asset's price action.
Once you have your date and time range selected, it's time to look for trends. Ideally, you’ll want to focus on the overall price movement from left to right on the chart rather than each mountain or valley. Generally, an asset is either in an uptrend, downtrend, or it’s trading sideways.
Evaluate Trading Volume
It’s always important to examine the trading volume when reading crypto charts to get a sense of the level of demand for an asset. A high volume indicates that the level of demand for an asset is higher, and can also mean that institutional investors are involved in changes to the price. The higher the trading volume, the more likely that the trend is legitimate.
In the world of crypto, trading volume is especially important to consider because less active tokens will be harder to offload, and even minor sales can greatly affect the asset’s price.
Identify Support and Resistance Levels
Support and resistance levels are price levels in a crypto’s history when supply and demand have halted an upward or downward trend. Because of this, previous highs and lows often wind up being major support and resistance levels when the price action returns to those levels on the chart.
A cryptos value appreciates when demand outweighs supply. But eventually, the token will reach a price point that causes these market forces to switch. At that point, more traders will be selling the token than buying it, which results in a decline in price. The point where the price peaks and then reverses course is called a resistance level.
In contrast, when a crypto’s price finally reaches a point that attracts more buyers than sellers, which leads to a price increase, the token is said to have reached a support level.
Identifying key support and resistance levels can greatly inform trade decisions and provide insight into which levels may be optimal entry and exit points.
Spot Price Channels
Oftentimes a cryptos price will oscillate between a support and resistance level but fail to break out to a higher or lower price. This is what is known as a price channel, and they are strong predictors of a token's future behavior.
The three types of price channels are ascending, descending, and horizontal. Ascending price channels are those with an upward trend, while descending price channels are trending down and horizontal channels trend sideways.
Moving averages are some of the most popular and widely used indicators in technical analysis. As its name suggests, a moving average simply shows a stock’s average price over a set period of time. These indicators provide a good general overview of how an asset has been performing and can often act as support or resistance for a token.
For traders who want to keep things simple and not get too into the weeds with different technical indicators, moving averages offer an easy way to better understand a token's price action and determine good levels for entries and exits.