Deciphering Cryptocurrency Charts: A Beginner’s Guide

9 min readOct 26, 2023

Cryptocurrency charts, filled with fluctuating lines and perplexing terms, can be intimidating for the uninitiated. However, with a foundational grasp, they become a powerful tool for informed trading decisions. This article breaks down the essentials of understanding these charts to make them less of an enigma and more of an ally.

1. The Candlestick Chart: Unlocking Price Mysteries

Widely regarded as the quintessential chart for cryptocurrency aficionados, the candlestick chart isn’t just a series of colorful bars but a rich tapestry of market sentiment and trader behavior. Originally hailing from 18th-century Japan, the candlestick chart has become a global standard for traders across all markets, including the frenetic world of cryptocurrencies.

Each “candle” on the chart serves as a visual snapshot of a specific time interval’s price activity, be it an hour, a day, or even a minute. These candles tell a story, revealing the opening salvo, the dramatic highs and lows, and the final consensus for that period:

The Opening Price: This is where the price was when the curtain rose for that timeframe. It’s the start of our little price narrative.
The Closing Price: As the curtain falls, this is where the price decides to take its bow. Was it higher or lower than when it started? The color of the candle will tell you that tale.
The Highest Price: This is the pinnacle, the highest point the price reached during its performance. It’s like the climax of a good story.
The Lowest Price: Conversely, this is the point where the price dipped its lowest, the dramatic trough before potential ascension.

Visually, the candlestick is broken down into two primary components:

The Body: This thick central part of the candle represents the range between the opening and closing prices. A bullish green (or sometimes white) body means the closing price was higher than the opening, signaling a price increase. Conversely, a bearish red (or occasionally black) body indicates the price closed lower than it opened, signifying a decrease.
The Wicks: These are the thin lines stretching out from the body, pointing to the highest and lowest prices during that period. They are the echoes of price volatility, a hint of the tug-of-war between buyers and sellers.

2. Volume: The Heartbeat of the Crypto Market

Think of volume as the pulse of the cryptocurrency market. If the candlestick chart is the face, revealing the ups and downs, smiles and frowns of price, the volume acts as its underlying heartbeat, indicating the level of life and activity in the market. It’s one of the most fundamental indicators that traders use to understand market momentum and potential future price shifts.

Found nestled just beneath the candlestick chart, the volume is depicted as a series of vertical bars. Each bar signifies the quantity of a cryptocurrency that exchanged hands during a specific interval. Here’s the low-down on how to interpret these bars:

Height of the Bar: A taller bar indicates a higher trading volume, whereas a shorter bar signifies lower trading volume. The height is directly proportional to the number of coins or tokens traded.
Color of the Bar: The color often corresponds with the color of the candlestick above it. A green bar usually denotes that the majority of the trading volume was influenced by buyers, often leading to an increase in price. Conversely, a red bar suggests sellers were in the majority, potentially driving the price down.
Sudden Volume Spikes: Keep an eye out for these! A sharp increase in volume can be a harbinger of a significant price movement on the horizon. It’s like seeing a flurry of activity in a marketplace — something is definitely afoot.
Low Volume Periods: Extended phases of low volume can indicate a lack of interest or uncertainty about a particular coin. It’s akin to a quiet marketplace where traders are either content with their holdings or are on the sidelines, waiting for a clearer signal to jump in.

3. The Moving Average: Your Crystal Ball for Spotting Market Trends

If the crypto market were a bustling highway, the moving average would be akin to the painted lane lines, guiding traders safely through the ebb and flow of traffic. It serves as a powerful tool that helps eliminate the noise of daily price fluctuations, giving traders a clearer perspective on the market’s overarching trajectory.

Here’s a deep dive into the wonders of the moving average:

Understanding the Basics: At its core, a moving average calculates the average price of a cryptocurrency over a specified number of days. Instead of getting bogged down by daily price volatility, you see a smoother line that moves (hence the term “moving average”) along with the general trend of the currency.
Simple Moving Average (SMA) Explained: As the name suggests, the SMA is straightforward. It calculates the average closing price of a coin over a set period. For instance, a 50-day SMA would average out the closing prices of the last 50 days. The outcome? A flowing line that moves slower in response to price changes, presenting a broader view of the market’s health.
Exponential Moving Average (EMA) Unveiled: Think of EMA as the swift and nimble cousin of the SMA. It’s a tad more complex, prioritizing recent prices over older ones. This means the EMA will hug the current price action more closely, making it invaluable for traders who want a quicker reaction to recent market shifts.
Golden Cross and Death Cross: These are the moments of magic — or dread — in the life of a trader. When a short-term moving average (like the 50-day) crosses above a long-term one (like the 200-day), it’s known as a “Golden Cross” — a bullish sign indicating potential upward movement. Conversely, a “Death Cross” occurs when the short-term average dips below the long-term, signaling potential downturns.
Why Use Both SMA and EMA? Having both the SMA and EMA on your chart can be likened to having both a tortoise and a hare in a race. The slow and steady SMA provides a broader view of market sentiment, while the agile EMA reacts quickly, pinpointing potential buy or sell opportunities.

4. Relative Strength Index (RSI): The Pulse Checker of the Crypto World

Imagine having a thermometer for the crypto market. Just as a doctor would tell if you’re running hot or cold by your body temperature, traders use the Relative Strength Index (RSI) to gauge the ‘temperature’ of a cryptocurrency. This remarkable tool helps decipher whether a coin is sizzling hot (overbought) or chillingly cold (oversold).

Delving Into the Dynamics of RSI:

What Exactly is RSI? Originating from traditional stock markets, the RSI is a nifty momentum oscillator that measures the speed and change of price movements. In layman’s terms, it helps traders assess the internal strength or weakness of a cryptocurrency.
How is RSI Calculated? Without delving too deep into the mathematics, RSI is determined by comparing recent gains to recent losses over a defined period (commonly 14 days). The outcome is expressed as an index ranging from 0 to 100.
Breaking Down the 70 and 30 Mark: Just like the red and green traffic lights guide us on the roads, the 70 and 30 RSI levels serve as crucial indicators for traders. If the RSI jumps above 70, warning bells ring, indicating a cryptocurrency might be overbought and due for a potential pullback or reversal. On the flip side, when the RSI dives below 30, it’s akin to a green light, suggesting the coin might be undervalued, representing a potential buying opportunity.
RSI Divergence: A Trader’s Secret Weapon: Sometimes, the price and RSI move in opposite directions. For instance, if a cryptocurrency’s price is making higher highs, but the RSI is making lower highs, it indicates a potential bearish divergence, hinting at an impending price decline. Conversely, if the coin’s price is making lower lows, but RSI is making higher lows, it points to a bullish divergence, foreshadowing a potential upward price movement.
Not a Standalone Tool: While the RSI is undoubtedly invaluable, wise traders know not to use it in isolation. It’s best combined with other indicators and tools to confirm signals and make more informed decisions.

5. Support and Resistance Levels: The Invisible Handrails of Crypto Trading

In the ever-evolving maze of the crypto market, traders often find themselves navigating through uncertain terrains, making it essential to have some guiding handrails. Enter the world of “Support” and “Resistance” levels — the invisible handrails that provide traders with psychological markers, helping them steer through the twists and turns of the market.

Unpacking the Basics:

What Are These Levels? Think of support and resistance levels as the floors and ceilings of a building. While the support level acts as the floor, ensuring the cryptocurrency doesn’t drop any further, the resistance level serves as the ceiling, preventing the coin from soaring too high.
Psychology at Play: The creation of these levels is deeply rooted in market psychology. They represent collective decision-making points where traders recall past buying/selling behaviors. A price may hover at a support level because traders recall it being a good entry point in the past, while resistance might exist because people remember it as a point where the asset was previously overvalued and sold off.

Benefits of Understanding These Levels:

Anticipating Price Movements: Recognizing these markers can arm traders with insights on potential price reversals or breakouts. For instance, if a cryptocurrency consistently struggles to breach a certain resistance level, it might be wise to consider selling near that point, expecting a potential downturn.
Strategic Entry & Exit Points: For those looking to enter the market or sell their holdings, support and resistance levels offer clear indicators. Buying close to support levels or selling near resistance levels can maximize potential gains while minimizing risk.
Setting Stop-losses: Stop-loss is a critical tool in a trader’s arsenal, allowing them to limit potential losses. By setting stop-losses just below a support or above a resistance, traders can ensure they’re protected from significant unexpected price movements.

6. Navigating the Sea of Indicators: Beyond the Basics

The cryptocurrency market, with its inherent volatility, requires traders to be equipped with a robust set of tools to navigate its choppy waters. While we’ve touched upon some primary indicators, there’s a vast ocean of additional tools that seasoned traders employ to sharpen their edge. One such tool, rising prominently above the rest, is the MACD. But that’s just the tip of the iceberg.

The MACD Marvel:

What’s MACD? The MACD, or Moving Average Convergence Divergence, is a trend-following momentum indicator. It shows the relationship between two moving averages of a security’s price.
Understanding Signals: The MACD comprises the “MACD line” (the difference between two exponential moving averages) and a “signal line.” When the MACD line crosses above the signal line, it might be a good time to buy, and vice versa. Moreover, when the MACD line is above zero, it indicates that the short-term average is above the long-term average, pointing to upward momentum.

Delving Deeper: Other Tools in the Toolkit:

Bollinger Bands: This indicator consists of a middle band being an N-period simple moving average (SMA), an upper band, and a lower band. These bands adapt to volatility in the price of a stock. A band squeeze indicates a period of low volatility and is considered by traders to be a potential indicator of future increased volatility.
Stochastic Oscillator: Used to predict price turning points by comparing the closing price of a security to its price range. This tool can indicate whether a cryptocurrency is overbought or oversold, offering insights similar to the RSI but with different calculations.
Fibonacci Retracements: A favorite among many traders, these are horizontal lines that indicate potential support and resistance levels based on the Fibonacci numbers. They can help predict potential price reversals.
Parabolic SAR (Stop and Reverse): This provides entry and exit points. The SAR follows the price as the trend extends over time. It’s below the price when the price is rising and above the price when it’s falling, indicating the direction of the trend.

Why Should Traders Care?

These tools aren’t just fancy jargon to impress peers at a party. They provide layers of understanding, enabling traders to make informed decisions in a market where clarity is often masked by volatility. While it’s not essential to be a master of all, understanding a handful and employing them wisely can be the difference between a successful trade and a regrettable one.