Intro to Chart Analysis
Investing isn’t about luck. It’s about strategy. Historical charts can be a great tool to help you predict future prices in the commodity market. You can do this through something called technical or chart analysis. This can more simply be defined as the study of market action itself including the study of supply and demand. While technical analysis is most commonly applied to price changes, it can also be used to track trading volume, hash rate or the fear of other investors. Many patterns and signals exist. However, there are some charts that are common when it comes to forecasting trading and price movements.
This makes it, an effective method for forecasting future events, to gain a potential advantage in the market. Chart patterns tend to repeat themselves over and over again.
We’ll take you some of the tips and tricks to read them below. To get started, on the left-hand navigation locate the Analytics tab. This will open a number of historical charts for you to reference. From there, you can select between BTC, ETH, LTC, HEDG, and EOS.
Fear and Greed Index
At the top of your chart analysis, you will likely notice a scale labeled the “Fear and Greed Index”. This index indicates how much fear and greed exist in the market. Any market will have both these emotions since investors are human. This means the human mind and heart will continue to play a part in your investment decisions and should also be a part of your technical analysis.
When analyzing this chart, a value of 0 will indicate “Extreme Fear”, whereas a value of 100 indicates “Extreme Greed”. This index is based on 5 key indicators including volatility (25% weight), market momentum (25% weight), social media (15% weight), surveys (15% weight), and dominance (10% weight).
When making your own investment decisions, the most profitable decisions are typically the ones that run contrary to how others are feeling about market conditions.
Therefore, a quick rule of thumb:
- If people are greedy, you should fear that prices will take a turn.
- If people are fearful, be greedy, it is your time to buy.
This is because excessive greed can result in stocks costing much more than they are worth. The mentality slowly becomes, when things are going well no matter what you buy you will profit. Unfortunately, this belief only holds true for so long.
On the other hand, fear is what produces good deals, when crypto is selling at a price lower than its intrinsic value. Therefore, using the fear and greed index can help you (the investor) determine the ideal time to enter the market. This can help to identify when our favorite currencies are undervalued and can help us profit in the long run.
From All Time High (ATH)
As the name suggests, this chart suggests the percentage difference for the asset to hit its highest price on the market. Special rules apply to these uptrends since the currency is in uncharted territory. An asset reaching a new all-time high, or nearing it can suggest the continuation of an upward trend. If played right, you can enjoy some of the rise in price and profit accordingly. However, investors should also be wary that as the price continues to soar it will not continue in this direction forever.
It is important to note that this metric should not be the sole determinant of your strategy. However, it is good to consider when looking at the overall context in which the cryptocurrency is playing in.
Rank
There is also a rank rated on a scale of 0 to 100. This value is based on the current price compared to prices on the previous days. A high rank can signify an upward trend, the approach of an all-time high, and the opportunity to sell.
Note, investors can also use “rank” to compare cryptocurrencies to each other by looking at their market caps.
Exchange Diff
If you are looking at Ethereum, you might notice another chart at your disposal. This chart is known as the “Exchange Diff”. This represents the daily exchange flow difference between the number of coins bought and sold from the start of time. This means if there is a difference that is negative, the prices are likely to decrease since there is greater supply in the market than demand. On the contrary, more supply in the market drives down prices. This is when you should buy it.
Candlestick Chart
One thing you will notice under each of the different cryptocurrencies, there is a candlestick chart. To read this chart note that each “candlestick” has three parts. These parts are the lower shadow, the body, and the upper shadow. The body of the candlestick will typically be coloured either green or red. If it is read in colour, this means that the price closed at a price lower than it opened at. If it is green, that means the price is higher. The candlestick also represents four additional points. These are; the open (the first trade), high (the highest price trade), low (the lowest price trade, and close (the last trade).
Keep in mind that for new traders it can be easy to spot a pattern and be quick to act on it. Rather, it is important to look at the context of the situation in relation to the pattern you see on the chart. This will provide you with a better understanding of what is happening in the market and how you can leverage it to your advantage.
Patterns are often separated into bullish (rising) and bearish (falling) movements. Keep in mind that these patterns are tendencies in the market and will not guarantee the cryptocurrency will behave in alignment with that pattern. Technical traders, use chart patterns such as the pennant, the cup and handle, the ascending triangle, and the triple bottom.
Google Trends
Simply put, Google Trends is a great way to track the growth of active bitcoin users. Each number represents search interest relative to the highest point on the chart for the given region and time. The highest number indicated on the chart is 100. This represents peak popularity for the term “buy bitcoin”. Therefore, a score of 50 would represent half the popularity, and 0 suggests there weren’t enough searches. To read this chart, keep in mind a high engagement rate suggests users are actively checking the price of bitcoin. On previous occasions, search requests have correlated to major price surges of a cryptocurrency. This can signify as an investor it will be time for you to sell. On the other hand, fewer searches suggest lower popularity and potentially an undervalued asset. In other words, an excellent buy!
MVRV
The MVRV ratio is a valuation metric that can help you determine where the markets will hit a peak or valley. It can be calculated by dividing the Market Cap or market value of the asset by the Realised cap. Written out, this equation looks like this:
Market Cap / Realised Cap = MVRV
Here, market cap refers to the total market capitalization of a cryptocurrency. This can be calculated by multiplying the price of the coin by the number of coins that have been mined. The realized cap is the average price you paid for each of your coins. The realized value is important since it gives a “true” long term measure of the value of the cryptocurrency.
These two values make up the MVRV ratios on the chart. These values are then calculated on a daily basis and can be used to locate trends. To use this chart, keep in mind that this ratio accounts for an asset’s current market value being higher than its realized value. Therefore, if the ratio is greater than 1 the asset is overvalued. This means it might be time to sell since prices are expected to drop. On the other hand, if the value is lower than 1 your asset is considered undervalued. This might be a good opportunity for you to buy. Alternatively, for cryptocurrencies like bitcoin, the standard value might not be one. By bitcoin’s standard, a neutral value to compare is 3.7.
Using this metric you can determine investor behaviour and leverage it to your advantage.
BitMex Premiums
Under the currency bitcoin, you will notice another chart labeled, “BitMex Premiums”. This is a calculator of the premium index and interest rate every minute and then averaged over an 8-hour time-weighted-average-price (TWAP). In Layman’s terms, this is a calculation of the percentage change in price.
On their own these values may seem random. However, patterns might be easier to pick out than you think.
Daily Volatility
This chart shows us the volatility ratio of a given cryptocurrency. The market volatility ratio is a technical measure to identify price patterns and breakouts. When the currency rises or falls more than a percent over a period of time, we would consider the market to be “volatile”. In technical analysis, we can use the true range to gain an understanding of how a security’s price is moving on a given day. This over time, is compared to the cryptocurrency’s past volatility.
In most cases, the higher the volatility, the riskier the cryptocurrency is. This number is measured as either the standard deviation or variance between the returns of bitcoin each day. A highly volatile cryptocurrency provides the ideal opportunity for day traders.
More fluctuations also suggest that this is good for investors who aren’t nearing retirement. This is because more risk can be balanced out over time. For an investor who is hoping to retire, safer investments are the better bet.
Google Trends
Simply put, Google Trends is a great way to track the growth of active bitcoin users. Each number represents search interest relative to the highest point on the chart for the given region and time. The highest number indicated on the chart is 100. This represents peak popularity for the term “buy bitcoin”. Therefore, a score of 50 would represent half the popularity, and 0 suggests there weren’t enough searches.
To read this chart, keep in mind a high engagement rate suggests users are actively checking the price of bitcoin. On previous occasions, search requests have correlated to major price surges of a cryptocurrency. This can signify as an investor it will be time for you to sell. On the other hand, fewer searches suggest lower popularity and potentially an undervalued asset. In other words, an excellent buy!
UTXO’s in Profit
Under bitcoin, you will notice a chart labeled, “UTXO’s in Profit”. If this term is new to you, UTXO stands for unspent output from bitcoin transactions. Each bitcoin transaction begins with coins used to balance the ledger. UTXOs are processed continuously and are responsible for beginning and ending a transaction. This has since become one of the key factors in bitcoin valuation. The UXTO can also tell you the number of “lost bitcoins”. This accounts for coins that an owner has lost the private key to or died without passing the wallet on.
To use this chart in making trades, consider that trends in UTXO age distribution relate closely to the time and price of the currency. This means investors can use UTXO data to track buying and selling patterns in an upcoming market cycle.
In action, a technical analysis using UTXO’s could look something like this. Perhaps a long-term bitcoin holder (as indicated by a 5-year UTXO or coin that hasn’t moved in 5 years), begins to sell off all of their cryptos. This would suggest that there may be a trend towards a future drop in the price of the currency. Therefore, it might be time for you to get out of that market as well. On the other hand, if you notice that the selling pressure from long-term holders is being exhausted, this would suggest that there is likely a trend for an increase in price. It would then be wise for you to get into the market.
Hashrate
Next, you might notice a chart titled hash rate. This is a measurement unit of the processing power of the Bitcoin network. Keep in mind that crypto mining involves finding blocks through solving different mathematical puzzles. Each mining machine has to make as many guesses as possible for a second to find an answer to each puzzle. The hash rate is then defined as the number of guesses made per second (h/s). However, more common phrases that are used include mega, gig, and tera depending on the speed of hashing.
Looking at historic, bitcoin’s hash rate and price have been closely linked with a correlation of approximately 0.76. Therefore, the higher the hash rate the more expensive it will be to buy into this market. This is because people continue to gain confidence that bitcoin will be around and continue to push more to mine and more to invest. This gives the cryptocurrency a greater value.
Taking Technical Analysis To The Next Level
While this overview is a great place to start, you might be wondering how you can learn more about technical analysis for your cryptocurrencies. Don’t worry, we won’t leave you hanging. If you are a reader, there are 5 books about technical analysis for bitcoin that are a great place to start. After referring to some of these sources, you might also consider that along with charts technical indicators are essential to effective trading. Leveraging our crash course on technical indicators, you will be able to further optimize your investment strategy.
Finally, this article can also be added to your crypto toolbox along with other charting tools like TradingView and Coinigy.
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