Secret Of The Dark Arts: Chart Reading

Gm anon! Today we have an exciting edition for you. The esoteric and mysterious world of charts! For the seasoned veterans out there, this letter might be a little on the boring side, but if you’re new to crypto this is for you.

Charts can be frustrating for newcomers to the market, many are left scratching their heads not really sure what to take away from the images on their screens, numbers are flashing, and little candle sticks racing all over the screen. WHAT DOES IT ALL MEAN?!

Well, you’re in luck! That’s exactly what we’re going to get into today! Now, let’s set our expectations, you won’t be an expert overnight in this complex field, but we’ll give you the tools to get a gist of what a good chart looks like (and a bad chart!) and some great tools to start getting into this crucial and fascinating field. 

At the end of the day, without charts how would we interpret or even assess a project?

First off, we’re going to break down some essential concepts, then we’ll move on to analyzing some great-looking charts, and help you read them on a fundamental level, next, we’ll take a look at some terrible-looking charts and finally, we’ll give you the tools to start fishing! 

Be sure to keep an eye out for future editions in this series where we’ll be expanding on the information in this letter!

Reading The Hieroglyphs

Now we know what you’re thinking, green candles GOOD, red candles BAD. 

You would be right and wrong, but let’s zoom out…. good cannot exist without bad, light without dark and Coca-cola without Pepsi! 

Periods of accumulation and distribution and vice versa are the nature of markets, learning to read what phase a chart is likely in is key! Learn to analyze without the emotional bias of the red and green affecting you. 

Many traders will turn off the colors altogether, or even just view line charts in order to avoid the emotional bias that is triggered by the psychology of these colors! 

We need to rather view charts through the lens of a roadmap, what is the path of the price telling us, and remember price is everything…. Everything else is discretionary.

Before we dive into the details, let's set the stage first by understanding what markets are and their origins.

Setting The Stage

Markets represent the convergence of buyers and sellers. In highly liquid markets like Bitcoin, millions of participants operate across various time frames to extract value from the market. Leverage is often utilized by traders to maximize their gains. Understanding the psychological zones affecting price is crucial, leading us to our next point.

Remember, markets are fractal, and the time horizon you choose to trade on is entirely up to you. We would suggest higher time frames for beginners, as lower time frames are highly competitive and require significant skill to be profitable. 

Another key concept to introduce right now is

 TIME VALUE OF MONEY.

With all participants aiming to extract value from the market quickly, it becomes increasingly challenging to make money in the short term compared to the longer term.

For instance, attempting to double your money trading BTC in the next week versus buying and holding spot until the end of the year. Which would be an easier endeavor? Holding until the end of the year in a market regime that is trending higher, of course!

Now, let's delve into some key concepts. While there are numerous approaches to the market, we'll focus on the absolute essentials to help you get started.

Dow Theory

Developed in 1896 by Charles Dow, observes market trends based on higher highs and higher lows, or lower lows and lower highs.

• To identify the direction of the market's primary trend. This theory emphasizes primary trends and their confirmation through indices like the Dow Jones Industrial Average, operating on the efficient market hypothesis, assuming asset prices already reflect all available information, and distinguishing between primary, secondary, and minor trends.

• Dow's approach focuses on trend confirmation through volume and index movements, suggesting that trends persist until a clear reversal occurs. 

• Identifying trend reversals involves analyzing peaks and troughs, with reversals signaling changes in market direction. 

• Overall, Dow Theory aims to guide trading decisions by understanding and reacting to shifts in primary market trends.

So in summary are we trending higher or trending lower? The chart below is a good example of what this looks like 

This links onto…

Support and resistance are key concepts in trading. Support refers to a price level where a stock or asset tends to find buying interest, preventing it from falling further. 

• Resistance, on the other hand, is a price level where a stock or asset tends to encounter selling pressure, preventing it from rising further. 

• In simple terms, support acts like a floor, holding up the price, while resistance acts like a ceiling, capping the price. 

• Traders use these levels to make decisions about buying and selling, with support often seen as a potential entry point for buying and resistance as a potential point to sell.

Now, let's delve into the concept of a market range. 

In trading, it's common for assets to exhibit ranging behavior for a significant portion of the time. But what exactly does "ranging" mean in this context?

• Ranging refers to a market condition where the price of an asset fluctuates within a relatively narrow range or channel over a certain period, without showing a clear trend in either direction. 

• During ranging periods, the price tends to move horizontally rather than trending upward or downward. 

• This typically occurs when supply and demand for the asset are relatively balanced, leading to price consolidation within a defined price range. 

• Ranging markets are characterized by frequent price reversals near support and resistance levels, making it challenging for traders to profit from directional moves. 

• Traders often use various technical indicators and chart patterns to identify ranging conditions and adjust their trading strategies accordingly, such as employing range-bound trading strategies or waiting for breakouts from the range to establish new positions. 

Now onto the next crucial theory to understand after Dow Theory.

The Wyckoff Method

The Wyckoff Method is a trading approach developed by Richard D. Wyckoff that focuses on identifying market trends and potential price movements based on the principles of supply and demand. 

• Central to this method are the concepts of accumulation and distribution.

• Accumulation refers to the phase in which smart money or institutional investors are actively buying an asset, often at lower prices, with the anticipation of future price appreciation. 

• On the other hand, distribution occurs when these investors start selling their accumulated holdings to the broader market, often at higher prices, signaling a potential reversal or downtrend. 

• By understanding these phases and their accompanying price action, traders using the Wyckoff Method aim to make informed decisions about when to enter or exit positions in the market.

Finally, here are some concise notes on candlesticks and their interpretation.

Candlesticks

Candlestick reading originated in Japan in the 18th century, initially used by rice traders to analyze market emotions and predict future price movements. Reading candles on a fundamental level involves understanding the story they tell about market sentiment and price action. 

Bullish candles indicate buying pressure and optimism, while bearish candles signal selling pressure and pessimism. Patterns formed by consecutive candles provide insights into potential trend reversals or continuations. 

Analyzing candlestick patterns in conjunction with other indicators and fundamental factors helps traders make informed decisions about market direction and potential entry or exit points.

To read a candlestick in trading, you look at its components: the body and the wicks. 

• The body represents the opening and closing prices of a trading period, while the wicks show the high and low prices reached during that period. 

• A bullish candle has a green body, indicating that the closing price is higher than the opening price, while a bearish candle has a red body, indicating the opposite. 

• The length of the wicks shows the price range and volatility during the period.

Let's examine a practical application of the concepts we've just discussed in a real-world scenario.

Case Study – Technical Analysis in Action

Now that we've learned how to analyze charts and price trends let's try it out. Let's take a look at the Ethereum chart together.

The first thing you need to do is go to TradingView and choose your preferred timeframe for the Ethereum chart. If you are interested in intra-day price movements, then 1-hour and 4-hour charts could be pretty handy. However, we primarily use the 1-day (or daily) charts since they give us a more comprehensive outlook.

As you can see, the bulls have been in control with an up trending chart before we hit a wall above $4000. Now, there is a very obvious resistance area that we can draw at $3,500.

This resistance zone is prominent for two reasons.

First, the line had previously offered support in this channel 👇

Usually, when the price breaks below a strong support line, the latter ends up becoming a formidable resistance wall.

Secondly, “$3,500” is a strong psychological price point. Many traders may wait for the price to reach $3,500 before dumping their coins.

Regardless, breaking this barrier will be a super win for the bulls.

Let’s zoom out on this chart and look at Ethereum’s recent price action.

Ethereum has been on an upward trajectory since October 2023. Between October 2023 and March 2024, the price jumped by 169%, plotting several higher highs along the way. This shows that the ETH price action was extremely bullish during this period.

Prior to this explosion, notice this period of horizontal movement.

For two months, between August and October 2023, the Ethereum price trended in a tight range between $1,530 and $1,750. This is known as an accumulation period. In this period, the buyers are accumulating coins and prepping for a breakout.

Let’s go back in time a bit more.

This chart shows the brutal bear market of 2021-2022. We know… we hate watching this chart—but let’s power through it. The price plummeted from its all-time high (~$4,878) to ~$1,000 during this period. 

As you can see, the ETH chart had multiple lower-lows on its way down. The bulls desperately tried to stem the flow, but the bears ultimately broke through all the barriers.

What will ETH  do next?

Let’s try to use some basic technical analysis to get some idea about what ETH will do next. Now, before we proceed, bear in mind that technical analysis is not an exact science. You should never make your assumptions based only on technical analysis. It should be one of the  many tools that you can use to get a clearer picture of the overall narrative.

We have previously determined that $3,500 is a strong resistance barrier. $3,200 is our support wall. For ETH to reach new highs, we must conquer the $3,500 resistance. We can use an indicator to give us an idea about the price momentum.

Readers of our last email will be familiar with the relative strength index (RSI) indicator. This indicator is a momentum oscillator that hovers between 0 and 100. These are the conclusions you can make:

• RSI between 30 and 70 = Normal

• RSI less than 30 = Asset is oversold (bulls might take over soon)

• RSI more than 70 = Asset is overbought (bears might take over soon)

Given the RSI for ETH is currently around 45, there is potential for bullish momentum to drive the price higher before the asset enters the overbought territory. 

So, Ethereum definitely has the momentum and the space to break past $4,000.

How Can I Start Doing My Own Technical Analysis?

Just head on over to TradingView, select your charts and start playing around with them. The interface is very clean and highly intuitive. 

We also recommend reading this past week’s newsletter to get more insights on how to draw conclusions from technical analysis.

Be sure to read this Crypto Pragmatist piece, The Five Cardinal Sins of Crypto Technical Analysis to further up your game and avoid mistakes when it comes to TA.

That’s all for today anon! 

Today's newsletter was all about showing you how to use technical analysis. We hope it gives you a good start for doing your own research. If you have any questions or need help, just leave a comment below, and we'll get back to you!

Have a wonderful weekend!