Explanation of two types of analysis and detailed overview of different types of charts, information on the process and the way of reading charts as well as the description of useful trend line patterns.
There are two kinds of analysis in trading: fundamental and technical. Fundamental traders rely on news sources, economic and political developments. Technical traders analyze charts and recognize various patterns, which help them make profitable trades.
A line chart is the simplest of charts. A line chart consists of:
- x-axis, representing the timeline;
- y-axis, representing the price value of a single bitcoin, often in U.S. dollars;
- a line plotted by connecting points, representing closing prices over the period (hours, days, weeks, months, years).
An open-high-low-close chart gives much more information than a line chart. Instead of a line, an OHLC chart uses vertical lines. The height of the line shows the price range with the top and bottom ends representing the highest and lowest price. These lines also have ticks on either side. The left tick is the opening price, and the right one — the closing price. The color of the line shows whether the price went up — green, or down — red.
A candlestick chart gives exactly the same data but many people prefer them over OHLC charts as they are easier to perceive visually. A candlestick chart uses candlesticks to show the price range, and opening and closing prices. A candlestick consists of:
- a real body: if the candlestick is green, the bottom end of the body shows the opening price, and the top end — the closing price, if the candlestick is red, then top — opening, bottom — closing;
- an upper shadow: a vertical line sticking out of the top of the body, the end of the upper shadow shows the highest price;
- a lower shadow: a vertical line sticking out of the bottom of the body, the end of the lower shadow shows the lowest price.
Charts aim to present data visually so as to make it easier to perceive and analyze. However simple or complex charts can be, you can always recognize an upward or downward trend. Trends usually progress in a series of peaks and valleys. A bullish trend is a rising succession of highs and lows, while a bearish trend descends.
A trader must also know about support and resistance. A support point is the lowest price value of a bitcoin throughout a period, below which it is not likely to fall down. After reaching the support point, the price usually should grow up. It will rise until it reaches the resistance point, the probable highest price value. After that, the trend should descend again.
Support and resistance can also take form of ascending or descending diagonal lines, instead of points. Support and resistance lines are formed by connecting at least three downward or upward peaks. Support and resistance lines can form a rising or falling channel with the trend bouncing off the lines.
Another useful trend line pattern you would want to recognize is head and shoulders. Head and shoulders is a pattern with two small spikes with a bigger one between them. Figuring out such a pattern early can prove much beneficial to you, as you will know exactly when to sell and when to buy out.
Trends do not have a set time frame to work. Sometimes they form and break in a matter of hours, others can take months or years. Usually, long-term terms contain smaller short-term or intermediate trends. An experienced trader always looks for patterns by changing the scale of the chart.