How to understand a bitcoin chart: chapter one
The basics of bitcoin charts
In the first part of this article, we'll be showing you the ropes around bitcoin charts. Get up to speed with the terminology and learn why bitcoin charts are so important in trading!
What is a bitcoin chart?
A bitcoin chart is a graphic depiction of the exchange rate of bitcoin to another financial asset or currency. Price charts reveal information about the entire history of bitcoin’s price fluctuations.
The price of bitcoin varies from one exchange to another. Accordingly, charts for an identical time period are likely to display discrepancies based on the chosen exchanges' price data. Charts display the exchange rate of bitcoin to either a fiat currency, another cryptocurrency, or other types of assets such as stocks or gold (with the latter being more uncommon).
Bitcoin charts are necessary for traders and investors to decide how they want to interact with the market. Charts provide crucial information to trace bitcoin’s present and historic price action. They may seem daunting without prior understanding of what to analyse. However, if you learn to read between the lines, you’ll start to recognise trends and patterns that help explain price movements.
Plus, understanding cyclical patterns in the price action of one asset enables you to understand movements in the price action of other assets. The trends and patterns in charts are the same for cryptocurrencies, forex, securities or any other type of investment vehicle. In this article, we explore trends and patterns using examples from bitcoin charts.
In our academy article “Bitcoin trading: A beginner’s guide”, we explain fundamental and technical analysis. Within technical analysis, it’s precisely by examining bitcoin charts that interested parties speculate about how bitcoin’s price will move. Though, it’s wise to undertake both types of analysis in order to gain a more complete understanding of the market.
Getting involved in a market purely based on price action does not take the asset’s fundamentals into consideration. Even though technical analysis may seem to provide traceable evidence of an asset’s worth, it’s not free from scepticism. Acclaimed investors have criticised the style of analysis as a form of pseudo-science.
Therefore, while it’s useful to have the knowledge to perform technical analysis, it’s imperative to always keep your risk tolerance in mind before making any spontaneous decisions based on price movements in bitcoin charts.
The concept of candlesticks emerged hundreds of years ago and was used by the Japanese to track and manage rice trading. Naturally, they received their name due to their similar appearance to candles, but they have a lower wick, as well as an upper wick. Candlesticks show the open and close price, as well as the highest and lowest price of an asset during specific timeframes, indicative of how traders perceive the market’s value.
Candlesticks are usually depicted in green and red, but you can also set your own colour preference. A red candlestick represents a specific time interval where the close price of the candle was below its open price. On the contrary, a green candlestick represents a time interval where the price went up, and the close price was higher than the open price.
If you choose to view an hourly candlestick bitcoin chart for a particular day, the candlesticks will express the price action per hour. Thus, the perpendicular length of each candle will correlate to the hour in question, shown on the horizontal axis of the chart. Below, we explain the information derived through a candlestick.
Figure A - Explanation of the information found in a candlestick chart
The open price of an asset during the specific trading period shown by a candle is found at either the top or the bottom of a candle (not to be confused with the top or bottom of a wick). You can find the location of the open price based on the colour of the candle.
For example, if the candle is green, the open price is at the bottom of the candle because green indicates positive price action (moving upwards). Conversely, if the candlestick is red, the open price is at the top of the candle because the negative price action took place. As shown in figure A, the open price for bitcoin at 12 pm was approximately €6,430
In the same spirit, the close price of an asset during the specific trading period is found at either the top or the bottom of a candle depending on whether the price moved upwards or downwards. The close price refers to the last price at which an asset was traded at. Thus, it becomes the next trading period's open price at the given exchange. Figure A shows bitcoin’s closing price at €6,590.11
A candle may or may not have upper and/or lower wicks. An elongated upper wick or lower wick indicates that the market price was once trading outside of the candle's range but then retracted back into the candle body to close.
In figure A, bitcoin’s price reached a high of just over €6,700 within the trading hour and a low of almost €6,360. There is great price variation in the bitcoin chart shown below, even though it only shows hourly price data.
A trend refers to the overarching direction of price movement. For example, 15-minute candles on a specific day might show a short-term downtrend. However, day candles for a period of one week (including the day with the 15-minute analysis), might just demonstrate an upward trend.
Hence, trends are relative to the time period. Periods of downward price action within short time periods can be viewed as price retracements that are in fact part of a larger uptrend, and vice-versa.
Various indicators such as relative strength index, moving average convergence divergence and moving averages, are used as technical analysis tools to help understand the occurrence of trends. Nonetheless, whatever the trend is, it may experience either a continuation or reversal. With nothing being guaranteed, an upward trend may suddenly reverse and become a downtrend, and vice-versa.
There are three main trends to observe within bitcoin charts, namely bearish, bullish and sideways. However, bearish and bullish are mere “sentiments” and may be subject to quick and drastic change like in the case of the 2008 mortgage crisis. Moreover, the sentiment may be established amongst traders before it has become an overall market trend.
A bearish market, or downward trend, is when the market experiences a decline in value. Bearish trend charts show negative price action as market players believe that prices will continue to go down. In Figure B, the bearish trend drove the price of bitcoin from €5,740 down to €5,607 over the course of three days.
Figure B - A bearish trend within a 3-day timeframe from November 7th - 10th, 2018. Taken from Bitstamp via TradingView.
A bullish market or upward trend signifies an increase in a market's value. Bullish trends indicate optimism amongst traders that prices will continue to rise. Figure C shows an example of a bullish trend. The price of bitcoin raised more than 5%, before going back down again, reversing the trend.
Figure C - A bullish trend between October 29th - November 7th 2018.
A sideways drift, or sideways market, usually occurs during the times of uncertainty, and low volume. It's identified by the way prices fluctuate across a horizontal corridor. A sideways trend signifies low volatility and is generally accompanied by a low volume of trading while market players anticipate a major breakthrough in either up or down in price.
Figure D - A sideways trend between October 18th - November 12th, 2018. Taken from Bitfinex via TradingView.
Common patterns in bitcoin charts
Patterns form over time as price action begins to symbolise commonly known shapes. These shapes have meaning and significance attached to their occurrence. These recurring market movements (shapes) are key indicators used by traders and investors to decide when to enter or exit a specific market.
Patterns repeat themselves over time and have shown that recognisable forms frequently produce the same outcomes. As a result, they are used to predict future price action. For example, some patterns indict the likely continuation of a price trend, while others indict the probability of a reversal.
Additionally, patterns assist traders while deciding when to buy or sell according to support and resistance levels. Support levels are found where a price tests a certain low on one or more occasion and does not break that price level for a prolonged period. With established support lines, as the price nears support, buying becomes more common than selling, thus, symbolising the market’s level of demand. However, rather than prices moving in a bullish direction, support levels can also break to create a bearish trend. In that case, a new support line is established.
Figure E - Year-long support level is broken in bitcoin chart during November 2018. Taken from Bitstamp via TradingView.
On the other hand, resistance levels show the highest price point that an asset has reached over a prolonged period, signifying the highest price paid by traders or investors. Thus, a resistance line is like a price ceiling.
Triangle patterns are continuation patterns. As the name indicates, continuation patterns are those in which prices stay around the same level for some time. Yet, for both ascending and descending triangles, once the shape narrows down, prices can break out in either direction. In spite of that, triangles represent periods of less volatility.
A descending triangle illustrates a bearish market. The price is in decline but remains within the area of the triangle. The base support line of a descending triangle is on the bottom and the lower highs are mapped on top.
In contrast, ascending triangles signify a bullish market, indicating a period of accumulation, while still remaining within the triangle. These triangles have their horizontal line of resistance at the top of the triangle. The resistance line forms once there are two or more high swings in price. Consequently, the upward sloping line is found on the bottom of the triangle.
Figure F - The famous descending triangle beginning in December 2018. Taken from Bitstamp via TradingView.
In the bitcoin chart above, there is a most famous example of a descending triangle within the market. The chart captures the moment when bitcoin’s price rose to its highest point of €17,133 on Coinbase (and even higher on other exchanges) during December 2018. The chart shows how bitcoin’s price subsequently dropped to around €5,000 in February 2018 and proceeded by ranging within the triangle until November 2018.