Whilst trading any asset, including cryptocurrencies, charts are crucial in technical analysis. They are the heart and soul of technical analysis. By knowing how to read charts and observing the various patterns and trends on the charts, you can make an informed decision and increase your chances of making a profit. Using charts is very popular in the trading community.

This lesson explains how to read charts and what types of charts are important in technical analysis.

Content 

• Types of charts used in technical analysis

• How to read charts?

 

Types of charts used in technical analysis

Charts are graphical representations of changes in the price and volume of assets over a given period. This information can be presented on different types of charts in many ways.

An indispensable element of a technical analysis is charts. Technical analysts use various charts based on the information they need. Their job is to choose the right type of chart to see the hidden trend. There are many types of charts.

• Line charts

• Bar charts

• Candlestick charts

• Point and figure charts

• Renko charts

• Kagi charts

• Layered charts

Among them all, the most popular are line charts, bar charts and candlestick charts. Let's discuss them below.

Line charts

Line charts are the most basic form of charts and contain the least amount of information. These charts consist of a single line running from left to right, which connects the closing prices over a given period.

Line charts help to get an idea of the price movements of assets. Some investors who consider the closing price more important than the opening price, the highest or the lowest, prefer these charts. By looking at a line chart, you can see trends in price movements. However, this is not very helpful for day trading. Line charts are usually used in presentations and reports to get a picture of historical and current direction.

 

Bar charts

Bar charts are also called open-high-low-close (OHLC) charts. They consist of a series of vertical lines that indicate the range of prices over a given period.

Compared to line charts, bar charts provide much more information. This is because each thread on a bar chart is represented by a vertical line instead of dots. Each line has two horizontal lines on either side, representing the opening and closing prices. In turn, the top part of the vertical line shows the highest price. The lower part shows the lowest price of the asset. 

 

In addition to more detail, bar charts also give better insight into the volatility of asset prices. If the vertical line is longer, we can conclude that there is more volatility at a certain time. The period is the time interval chosen for analysis. It can be 5 minutes for a short-term analysis or even 6 months for a longer term.  
 

Candlestick charts

Candlestick charts accurately show much more detail than the ones mentioned above. They also describe four data points - opening, highest, lowest and closing prices. Candlestick charts are very popular among technical analysts.

Candlestick charts were among the earliest forms of technical analysis used by the Japanese. As the name suggests, asset price movements are represented in the form of a candle. Using these charts, you can interpret price movements on charts more intuitively.

There are three main elements of candlestick charts – the body, the sticks, and the colour. The main body shows the opening and closing prices, while the shadows/sticks tell us the highest and lowest price for the period. Both the main body and the shadows form the chart patterns.

Another important element of candlestick charts is the colour of the body. A falling candle is represented by the colour red or black, while a rising candle is coloured green or white. Candlestick charts give clear and precise information compared to bar charts. You can learn more about candlestick charts and formations in one of our other lessons in this course.

Heikin-Ashi charts

Heikin-Ashi charts are a technical analysis tool that helps traders better understand market trends and make more informed trading decisions. Unlike traditional candlestick charts, Heikin-Ashi charts smooth out price movements, making it easier to identify trends and eliminate market noise. Heikin-Ashi candles are formed on the basis of price averages, which makes them more liquid and less prone to short-term fluctuations. Candles without lower shadows indicate a strong uptrend, while candles without upper shadows indicate a strong downtrend. Candles with long shadows on both sides and small bodies indicate a period of consolidation or a potential trend reversal. 

By smoothing out price movements, Heikin-Ashi charts make it easier to identify long-term trends, eliminate short-term price swings and are simpler for novice traders to interpret. 

Use Heikin-Ashi charts to identify and confirm long-term market trends, trade entries and exits, and in conjunction with other technical analysis tools such as RSI or MACD indicators.

 

Chart comparison: When should you use which type?

• Line charts are ideal for beginner traders who want to understand basic market trends without too much complexity, and for analyzing long-term trends because they only show closing prices, eliminating market noise 
• Candlestick charts, on the other hand, are excellent for detailed analysis of short-term price movements and identifying candlestick patterns, offering a complete picture of price movements over a given period, including the opening, closing, highest and lowest prices. 
• Bar charts, similar to candlestick charts, provide complete information about price movements, but are less visually complex, which may be preferred by some traders. 
• Heikin-Ashi charts are ideal for identifying long-term trends and eliminating market noise, making it easier to confirm existing trends and identify moments of consolidation.

The choice of the appropriate chart type depends on the trader's trading objectives, experience level and analytical preferences.
 

How to read charts?

The charts simultaneously reflect both the value of a single stock and its value relative to another. On the vertical axis we have the value expressed in the quoted currency, while on the horizontal axis we have time.

Let's take the following chart as an example. This is a BTC/USD chart, where the vertical axis shows the value expressed in U.S. dollars to be paid at any given time (horizontal axis) for one bitcoin.

 

We hope you already have a better understanding of the different types of charts and know how to read them. In the next lessons, we will teach you more about chart patterns, point trends, entry and exit prices, and many other issues related to cryptocurrencies.