In a previous blog post, I explained support and resistance and how it can be used as part of your Bitcoin investment strategy. My intention is to help you make smarter Bitcoin investment decisions. The goal is to empower you to become a profitable investor.
What it boils down to is more money coming to you from your investing which can open the door to financial freedom.
Do you want to know the best part? While what I write is focused on Bitcoin, the knowledge and skill I’m giving you can be applied to any of the cryptocurrencies, and it doesn’t stop there. The approach can be used when investing in stocks, bonds, commodities such as gold or silver essentially, any type of investment where its price can be tracked with a chart.
In the last blog post, I revealed how to use price charts to spy on what other investors may be planning. By identifying support and resistance points on the chart, you can make low-risk investments and set your profit targets before other investors sell out and price moves against you.
To help you with your technical analysis there are some very sophisticated charting software packages out there, MetaStock, eSignal and NinjaTrader are three well-known firms. They’re expensive though so weigh up the costs versus what you’re looking for.
As well as charting software, these firms can act as intermediates for 3rd party brokerage companies. They might well offer the charting software at a reduced price, but they want you to become a brokerage client, so you’ll do all your buying and selling of your investments through them. The commissions you get charged for these investments is where they make their money from you.
Two free alternatives which just offer basic charting are Dailyfx.com and Barchart.com. For the charts, I show on the blog, and in the emails that I send to my subscribers, I use both these websites.
What Charts Should You Be Using?
In this blog post, I will explain a little more about the price charts I use as part of my technical analysis and which I think you should integrate into your investing process.
Whether you’re serious about your research or you just want to get the necessary knowledge, you’ll need to use and understand price charts. There are several chart types available to the investor or trader, the one you choose will depend on what information you’re hoping to get from the chart.
From the basic chart line chart through candlestick charts to market profile charts, each serves a different purpose. I’ll give you an overview of the 3 main charts: line, bar, and candlestick.
You’re probably familiar with line charts, they’re the most common type of chart, you may have seen used to display a country’s economic data such as unemployment figures or perhaps inflation data.
For us, as investors, they’re useful when we want to see necessary information displayed about Bitcoin. The data points are connected by a line, and each data point represents the closing price or rather the last traded price during the period for the market you’re looking at, such as the price of Bitcoin.
The period in question could be one month, one week, one day or even smaller time-frames such as hourly or minute. If you’re intent on quitting your job and becoming a day trader who makes a profit from moves during the trading day, you’ll probably use these smaller timing charts.
The line chart above is the Bitcoin price going back a few months. The line capture the closing price for every day going back to April 2018. For a bit more information, I’ve included the total volume for each day. If the closing price was higher than the day before, the bars are green. If the closing price was lower than the open, the bars are red.
Here’s a quick test to leave with you. From the chart, can you see if there’s a correlation between the higher volume days (shown by larger bars) and the corresponding move in price?
Investors who have a shorter time frame for their investment, a line chart will be limited. It won’t give any of the insight that other charts might. However, to get a ‘feel’ for how the market is performing the line chart can be helpful. For example, is the market moving up or down or even sideways.
Open High Low Close / Bar Charts
Open High Low Close or OHLC charts for short are also known as bar charts. They build on the simple information that line charts give. They add in the open, high, low and close (hence the name) of the market you’re analyzing.
The data point for each period capture these 4 pieces of information. The chart above covers the same period as that shown in the line chart. You can see there are many vertical bars.
Each one of those bars is one day. As with line charts, we could lower the time frame to hours, minutes even seconds. The principle is that each bar captures the open, high, low, close for the period of time in question.
Let’s take a closer look at the bars.
You can see that the bars have horizontal lines attached to them. One on the left side and one on the right. The left line represents the opening price, and the right line is the closing price.
The top of the bar is the highest point reached by Bitcoin during that time period. The bottom of the bar represents the lowest level for the Bitcoin price during the period.
If the opening price is lower than the closing price, the bar might be colored green or blue or black. This represents a rising market. Conversely, a falling market might be represented by a red bar. This is where the opening price is higher than the closing price.
Candle Stick Charts
Candlestick charts were first used in Japan over 300 years ago. Only recently have they found mainstream use by traders and investors.
Like bar charts, candlestick charts also show the price range for the period in question. The bottom part of the ‘wick’ as it is called is the lowest point price reached during the period. The top of the wick is the highest point price reached.
Sometimes the wick is shaded a blue or green to represent that price closed higher than it opened during the period. On these charts where price closed lower than the open, the wick will be colored red.
Take a closer look at the chart. The wick of each candlestick is attached to the ‘body’ of the candle. If Bitcoin price was negative during the period, the body is colored red. In this instance, the top of the body will represent the opening price of the period. The lower part of the body represents the closing price of the period. So if the body is red, we know that price was weak during the period in question.
Conversely, if the body is green as in the image above or blue, then we know price closed higher during the period. The lower part of the body was the opening price while the top part of the body was the close.
Finally, there may be periods in which the open and closing price are the same. When this happens, the candle will not have a body at all.