In the cryptocurrency asset class, charts and technical analysis (TA) are just as important as they are in the world of stock trading. No matter the asset being traded, TA gives traders and investors a visual representation of price over a set period of time.
TA is an acronym you’ll hear crypto traders say a lot. The term refers to a type of analysis that attempts to predict future price action based on what has happened in the past. (You might see the word ‘charting’ used in the crypto space. This is just another word for technical analysis, or TA.)
Charts & Technical Analysis
Technical analysis, as we know it, simply wouldn’t exist without price charts. For technical analysts—that is, people who study the past price action of cryptocurrencies and other assets—charts give them the ability to analyse price movements.
Many types of charts are used in TA. However, you’ll often come across the following three: line charts, bar charts, and candlestick charts. Among those who trade and invest in cryptocurrencies like bitcoin, candlestick charts are the most widely used chart type.
Why Do Crypto Traders & Investors Love Candlestick Charts?
With candlestick charts, each candlestick gives you information on the opening, high, low, and closing price of a given cryptocurrency. A single candlestick, or ‘candle’—as it’s more commonly referred to as—will cover whatever time frame you wish, whether that’s one minute or four hours.
Because candles present information on the open, high, low, and close, a candlestick chart is considered a type of OHLC chart. Another chart you’ll often see crypto traders use is the bar chart. (A bar chart is also a type of OHLC chart.)
The reason OHLC charts are so popular among the crypto TA crowd—as opposed to, say, in stock trading—is because they show price volatility. Other well-known chart types, such as line charts, fail to show price volatility.
- Open: the price of a cryptocurrency when the trading period begins.
- Close: the price of a cryptocurrency when the trading period ends.
- High: the highest price of a cryptocurrency over a given trading period.
- Low: the lowest price of a cryptocurrency over a given period.
In terms of candlestick charts, the ‘open’ and ‘close’ define the vertical ends of the candlestick’s rectangular box. This box is known as the ‘body’. The ‘high’ and ‘low’ points are defined by each end (i.e., ‘wicks’) of the single vertical line running through the middle of the candlestick.
If a candle is green, that means the ‘close’ is higher than the ‘open’. The opposite is true for a red candle.
Doing Technical Analysis on Cryptocurrencies
You now know about technical analysis and the common charts used by crypto traders and investors. However, to really get a sense of what TA is, it’s worth learning about popular indicators and tools used by technical analysts.
Once you learn these, you’ll get a richer understanding of how TA helps crypto traders and investors decide when they should buy and sell cryptocurrencies.