Exchanges are complex systems. Even after learning the basics, such as how to buy and sell coins, there is still much to explore. Those who wish to make a living from cryptocurrency should be mindful of all the financial instruments that exchanges offer, especially if you plan on day-trading. They can make the difference between a small profit and a small fortune.
This guide is for those who have used exchanges in the past but are still confused by some of the inner workings and specific tools. This is in no way a beginner’s guide; I will assume that you have at least a basic knowledge of exchanges before we move forward.
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Many exchanges offer detailed charts which you can use to help make trades as well as look out for possible trends in the market. These charts are often set by default to a specialized format known as the ‘Candlestick charts.’ They are used in all forms of trading, including Forex, Precious metals, and stocks. Let’s look at one in action.
This is a candlestick chart for ETH/BTC on Bittrex. The candlestick chart is made up of numerous bars which are either green or red. Green indicates that the price of the coin (Ethereum) has risen from the last period that the bar represents (in this example each bar represents one hour). When the bar is red, it means that the price is lower than it last was. In trading terms, the rectangular part of the candle is called the ‘Real Body.’ On green candles, the bottom of the real body is called the ‘opening price’ (indicating the price at the start of the period), and the top of the real body is called the ‘closing price’ (indicating the price at the end of the period). For red candles this is reversed: the top is the opening price, and the bottom is the closing price. You’ll also notice that lines are coming out of the real bodies, these are called shadows, or wicks. The top line represents the highest price the coin was bought at during that period, and the bottom line of a real body represents the lowest price that coin was bought at during the period. Some people consider wicks to be anomalies or exaggerations of a price, whereas others see them as genuine indicators or what type of market we are heading into.
Most exchanges allow you to choose what period you want to view your candlestick chart in. One hour, thirty minutes, five minutes, and one minute are popular among day-traders. One daytime periods are occasionally used too.
The Order Book
The majority of exchanges allow you to see the order book for a particular trading pair. Order books are a tool used to see at what price people typically want to sell or buy. This is an order book for PRL/ETH (taken from Kucoin).
Let’s talk about the axes first. The X-axis shows the price people are willing to buy and sell PRL (Oyster Pearl) at, and the Y-axis shows how many orders have been made (so at the top of the green graph there are just over 100,000 orders for buying 1 PRL if it reaches 0.001 ETH). The green section shows buy orders, and the red section shows sell orders. An order is like somebody saying: ‘I want to sell my PRL when 1 PRL is at a certain price’, or ‘I want to buy PRL when 1 PRL reaches a certain price’. Right now, 1 PRL equals 0.0016 ETH, located in the middle of the chart.
The middle of the order book is where all the action happens. This is where most day traders are; they are buying and selling PRL for a price which is around 0.0016 ETH per token. If the price of PRL goes up, then the sell orders at the far end will get filled, and the graph will lower on the red side. If the price of PRL goes down, then the buy orders at the far end will get filled, and the graph will lower on the green side. People on the far end of the green want to buy the token when it is cheapest, and people on the right want to sell the token when it is more expensive.
Market Predictions: Bearing and Bullish markets
Just like stocks and Forex trading, the cryptocurrency market has moments where most prices are rising and moments where most prices are falling. When the prices of most currencies are rising, it is called a ‘bull market.’ Bull markets make investors happy because they validate their decisions by giving nice profits. Bull markets also promote more buying and spending. We were recently in a bull market around late December 2017 when Bitcoin made it to over $19,000 per coin. When prices are falling, we call this a ‘bear market.’ Bear markets make investors scared because it can seem like every decision they make is the wrong one. Most currencies fall during this type of market. We have been in a bear market since mid-January 2018. When bearish behavior happens, people panic because it can often look exactly like a full-blown crash rather than a simple market correction or dip.
If you are interested in learning more about market predictions, take a look at the Candlestick Pattern Dictionary provided by Stockcharts.com. It is designed for stocks, but the same principals apply to cryptocurrency.
Kai is a cryptocurrency copywriter and professional trader. He can often be found investigating various cryptocurrencies, whitepapers, and blockchain technologies. Kai has been a professional writer for 5+ years, and has invested in 50+ different coins and tokens. He also currently studies Law and Philosophy at university.