Trading with Toli: Charting Essentials

In this week’s column, we’ll begin to explore the basis of technical analysis. Starting with the most essential tool for any speculator worth his salt: the Candle Chart.

Indicators that seem simple  or even trite at first can, with the proper intuition, yield a bounty of valuable information. To train our intuitions to be sensitive to these signals, we must examine them from their first principles. You will be surprised by the sheer depth of information one can extract from simply breaking down a chart’s different, basic components.

Let’s have a look at a Weekly Bitcoin chart on TradingView:

Now I know some of you may be thinking: “Toli, brother…where are the exponential moving averages? The volume profiles and the Bollinger bands?” To that I say, let’s catch the fish before we skin it.

Trading Pair, Period and Exchange

The basics. Self-Explanatory. Every candle represents a week’s time of trading BTC/USD on FTX.

The important thing to remember here is that different exchanges can have completely different looking charts depending on the amount of liquidity for the asset and the different trading volumes on the exchanges.

Bid, Ask and Spread

Speaking of liquidity, the next indicators do a great job at representing how liquid a market is. The Ask is what a seller asks for his asset. The bid is what a buyer offers for the asset. A trade happens when either a buyer agrees to the sellers’ terms and buys up or a seller agrees to the buyers’ terms and sells cheaper.

The spread, or the difference between the bid and the ask, is a good indicator of a market’s liquidity. The smaller/tighter the spread, the more liquid the market. A good way to think about spreads and liquidity is to imagine more liquid markets have a greater amount of trade volume and so a greater number of interested buyers will want the best possible entry and a greater number of sellers who will want to realize the most profit.

Volume

Volume represents the amount of value exchanged between buyers and sellers within one candle’s open and close (in this case a week). It is a good indicator of a market’s liquidity. Generally, a market with lots of volume will be more active.

\\\”Volume is an important indicator in technical analysis because it is used to measure the relative significance of any market move. If the market makes moves a large amount during a given period, then the strength of that movement either gains credibility or is viewed with skepticism based on the volume for that period.\\\”

From looking at Volume and Spread, we can have a better understanding of slippage. Slippage either occurs in periods of high volatility or when a large order is executed but there isn\\\’t enough volume at the chosen price to maintain the current spread.

OHLC Values

For example, the NYSE opens at 9:30AM EDT and closes at 4:00PM EDT and there is no trading on the weekends. For FX and crypto it is a different story. The market is 24/7, 365. Because the stock market opens and closes at select times, opening prices might not end up right at the previous close but for the purpose of our learning, let’s focus on crypto.

The Open, High, Low and Close prices of an asset often reflect different things in different markets. 

Although the cryptocurrency markets are 24/7, 365, one could argue the daily and weekly candles still reflect a certain type of schedule that’s correlated to the biggest markets in the world. If you go down to the 4-hour chart, you will see that most of the volume occurs between 8AM-4PM EDT or 12PM-8PM UTC. As of right now, the financial center of the world still holds much influence.

• The Open: Whether it’s the Daily or Weekly chart, the opening price will generally reflect the activity of retail traders and beginners. They buy at current market prices and tend to not be as strategic as the pros.

• The Highest Point (Wick): Dr. Alexander Elder gives a great description for the high point of a Candle: the maximum power of the bulls for the candle’s given duration.

• The Lowest Point (Wick): You guessed it. The maximum power of the bears.

• The Close: On the daily chart, professional traders will generally watch markets throughout the day and respond to changes within the last few hours before close. As for the weekly, most of the action occurs on weekdays and when New York is awake. Ultimately, the close represents the outcome between the fight between bulls and bears. If price closes near the top of the wick, it means bulls won for that period, if it closes near the lowest point of the other wick, it means the bears won.

• The Difference between the Open or Close: Represents the intensity of the battle between bulls and bears. When the battle is fierce, volatility is high and more slippage occurs. Tall candles signal a bad time for an entry, generally.

See you next week…

Although markets are extremely chaotic, I find it rather insightful to view charts and price action from this human viewpoint. Next week, we\\\’ll begin scratching the surface on commonly used indicators. See ya then!