Our previous article talked about how bitcoin’s price is generated, the role of exchanges in bringing together buyers and sellers to trade, and the kind of basic information they provide about trades.
Price is of course fluid - more so than traditional assets as there are no fixed trading hours - constantly changing as exchanges facilitate the evolving sentiment of buyers and sellers. The pattern of that changing sentiment can provide clues to where the price will go next, and is represented by a bitcoin price chart.
Your challenge as a trader is to interpret all the information that a bitcoin price chart offers and use it as part of your Technical Analysis tool-kit to predict where price is going next.
At the most basic level, a bitcoin price chart is a line graph on two axes illustrating price history for bitcoin trades conducted between a specific pair of currencies. Bitcoin’s price is always relative to another specific currency, known simply as a Trading Pair.
Trading pairs are offered against base currencies - currencies which are the most liquid. Given there are thousands of cryptocurrencies, enabling trading pairs between all of them and all FIAT currencies would be impractical, Instead exchanges offer trading against base currencies which are generally:
A stablecoin is a cryptocurrency that provides the stability of an existing fiat currency against which it is pegged using one of several approaches. We explore Stablecoins here.
Here some examples of each
The trading chart will provide a legend telling what the price is at that given moment for the chosen Pair, and as you watch it will change, turning green as it goes up and red as it goes down.
Here is the chart for Bitcoin from Bitstamp’s Tradeview from March 16th, 2021. It’s important to understand that the chart is relative to the context of the specific Trading Pair - USD/BTC
The movement depicted in the chart is specific to this currency pair. BTC may be declining against USD but if ETH is declining faster against USD then BTC is increasing when paired with ETH.
A simple line price chart gives the most basic indication of sentiment. As you can see from Bitcoin’s full price history, the peaks and troughs are associated with key events, as well key trends. At this scale, the chart is more relevant to Fundamental Analysis and Investing, remembering the distinction provided.
Given the exponential increases in bitcoin's price over a ten year period (600x) only the most dramatic changes are visible.
However, if you switch to a log scale, where the Y axis plots two equal percent changes as the same vertical distance on the scale you are able to get a different perspective.
In your quest to understand where price is going it's up to you to decide the time frame within which you want to operate, remembering the distinction between Trading - short term decision - and Investing - long term positions.
Charts enable you to zoom out and look at the broadest possible time scale, or zoom in and focus on price change on a short term basis, aiding Technical Analysis.
Within your chosen time-frame the bitcoin price charts tell a story of how the price has moved - its volatility - to provide a plot for your chosen scale.
But to get a more detailed view of the price movement you need, chart that includes what’s known as Candlesticks (often abbreviate to just Candles) because that is what its shape resembles. With four key elements, the top and bottom of the candle body and a wick above and below.
Through these four elements candles flesh out a simple line plot providing much more detailed information about what happened to price within a given chunk of time, rather than the single plot.
For example, bitcoin’s price may have averaged $37,000 on a given day, but this doesn’t tell you anything about volatility. How high did it go, how low, and was the price higher than the previous day or lower? All these are crucial for trading..
The chart above is the for the same period as the simple line chart shown earlier in the article, except that it is annotated with Candlesticks for each 15 minute period.
A green candle tells at a quick glance that the price increased during the period in question; a red candle that price fell. For this reason you’ll see references on Social Media such as ‘hoping for green candles’.
A quick glance at a candle chart will tell price direction, via the colour, but the simple plot would have done the same. What candles do is fill in the gaps in terms of how price oscillated within that period.
Each candle will tell you where the price opened (started). If price has increased during the chosen period - shown by a green candle - the Opening Price is illustrated by the bottom of the candle body. If the price fell, the Opening Price is at the top of the candle body.
The inverse is true of Closing Price. If price fell during the chosen period the bottom of the candle is where the price ended for that candle duration, whereas is price rose, the Closing Price will be at the top.
Closing and Opening prices frame price activity within a given period but you want to know how the price moved, by knowing the highest price reached. This is illustrated by the tip of the wick extending from the top of the candle.
Where price has increased, the wick will extend from the Closing Price - top of the candle body - to the highest price reached.
Conversely the lowest price that was reached will be shown by a wick extending from the bottom of the candle.
A trading chart is interactive and enables you to zoom in or out, from the perspective of time. So you can choose to look at price candles for different time periods, depending on how granular you want to get.
The standard time cohorts for candles are:
Hopefully, as you digest this information you can start to appreciate the story candles are telling. The longer a candle the more price has moved during a period, the long the wicks the greater the range of movement, which can be described as Volatility.
The more volatile a market is, the greater the opportunities to buy/sell and make a profit, but it is a double-edged sword, as the greater the risk. Volatility=risk.
Looking at price movement with the aid of candles is the first step toward technical analysis, as they provide a first layer of detail of price signal and pattern.
A successful trading strategy will interpret recognisable signals and patterns as being indicative of specific future price movement.
The next signal we’ll look at in the following article is trading volume.
Next step: Understanding crypto trading volumeGo to next step