Intro to Chart Analysis

Investing isn’t about luck. It’s about strategy. Historical charts can be a great tool to help you forecast 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 in 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.

There are a number of different charts and techniques available for crypto traders to reference. We’ll take you through some of the tips and tricks of the trade (yes pun intended). So, let’s get started.

Fear and Greed Index

The Fear and Greed 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 particular 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 potentially profitable decisions are typically those 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 could be your time to buy.

This is because excessive greed can result in crypto or 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.

Ranking by Market Cap

Crypto investors often use “rank” in terms of total market cap to compare cryptocurrencies with each other. The market cap of a cryptocurrency is calculated by multiplying the current price by the circulating supply, which is the number of tokens currently circulating.

CoinGecko Top 5 Coins by MarketCap

Traders may often refer to market cap listings because they give a quick snapshot of the overall markets plus provide a wealth of other historical information for each coin.

Candlestick Chart

One thing you will notice under each of the different cryptocurrencies, there is a candlestick chart that denotes a daily closing prices for a selected time frame on a particular trading pair.

To read this chart, note that each “candlestick” has three parts: the lower shadow, the body, and the upper shadow. The body of the candlestick will typically be colored either green or red. If it is read in color, 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).

Candlestick Chart at Quadency.com

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.

Volatility Ratio

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.

24 Hour Bitcoin Volatility on TradingView

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.

Bitcoin’s volatility is often used as a technical indicator. For instance, the BVOL24H calculates Bitcoin’s volatility over the last 24 hours by using a logarithmic percentage change which is drawn from minute by minute Bitcoin spot prices.

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. 

Bitcoin MVRV Ration on Woobull.com

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.

UTXO’s in Profit

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

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.

Bitcoin Hashrate on BitInfoCharts

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, these 5 books about technical analysis for bitcoin 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.