How to trade: Depth & Candle Charts
It’s important to emphasize that investment in cryptocurrency involves significant risks and it is possible that you may lose a substantial proportion or all of your investment in cryptocurrency. Before you invest, we suggest you read more about the risks here.
These series of posts help you get familiar with Bitso Alpha and teach you how to trade. If you want to start trading cryptocurrencies, but don’t know where to start, these posts are for you.
This is the fourth blog from the “How to trade” series. In our previous post, we learned about Fees, Limit Orders and Stop Orders in Bitso Alpha trading platform. This time, we’ll talk about Charts.
At this point, we understand how the order books represent the liquidity available in a given market, we know that there is a referenced bid price (highest purchase offer), a referenced ask price (lowest selling offer) and that trades happen when orders from the books are filled.
In this post, we’ll discuss how traders use different charting tools to analyze price patterns to predict future trends. We’ll walk you through linear charts, candles charts, and depth charts. During this post, we’ll use the BTC/MXN order book as our market example.
Once a trade happens, it becomes part of the price history of the BTC/MXN market. Bitso Alpha lists the recent trades on the left side of the platform. However, since long lists of numbers are difficult to track and understand, charts are used more commonly used.
In a price chart, time is represented on the horizontal axis and price on the vertical axis. It is a useful way to visualize how prices change over time.
The most basic way to show the price history would be a Linear Chart. Every trade can be plotted as a single point in time with the price line joining them together. It can be tempting to think that the price line is linear and follows a given direction.
That is not the case: remember, trades move between the ask and bid prices of an asset. The “line” goes up and down, fluctuating with every trade. To simplify the chart, trade points are averaged to “soften” the charts and make them more readable. See a comparison between the 30-minute chart and the 1-minute chart for the same time period in Figure 1 and 2.
Linear charts are not commonly used, as they are difficult to read and offer less usable information for traders. Instead, Candle Charts are used.
A candle chart aggregates and summarizes trade information into fixed periods of time and uses color codes to show how the price moved during that period.
Figure 3 shows how the 30-minute candles chart looks in comparison to the linear chart in Figure 1 during the same time period.
A candle chart resembles a bunch of candles, which is where its name is derived from. In Figure 4, we can see how candles are read.
Candles are a very effective and common tool to help visualize price information. It shows how the price of a coin or token changes over time in an easy, readable way. Traders use candles as a way to visualize and analyze what is happening in a market at any given time.
With candles, the color code is very important: green candles indicate that the price increased during a time period, whereas red candles indicate that the price went down. The candle body (the rectangle), covers the area between the opening price and the closing price of that period. The lines at the top and the bottom of the rectangle show the lowest and the highest price reached during that period. If a candle has a long body, it can quickly be identified that there was a lot of price volatility during that time frame.
See Figure 5 for a sample on how Bitso Alpha shows this information:
We can get a lot of information from a candle:
- This is a 30 minutes candle. DT is the timestamp of the start of the period. It covers trades from 6:30 AM to 7:00 AM on November 5th.
- The first trade went for 176,808.56 MXN, and the last trade, 177,292.28 MXN. The price went up, which is why it is a green candle.
- During this time period, the lowest trading price was 176,512.01 MXN, and the highest was 177,999.94 MXN, so it had relatively low volatility.
- Volume is the amount of BTC that was traded in this period. In this case: 1.92656491 BTC was exchanged in those 30 minutes.
Volume is the amount of cryptocurrency traded in a given period. It is useful to identify how much trading activity is taking place, especially during periods of volatility. On Bitso Alpha, Volume is also shown at the bottom of the chart when the full chart view is open, as in Figure 6.
We have covered the charts for historic price information, which is generated using real trades. Bitso Alpha also has the Depth Chart, a valuable tool that focuses on current liquidity (money available in the books). It shows how much Bitcoin is currently placed in buy and sell orders, and at which price levels. This is referred to as the depth of the book. See Figure 7.
This chart is a representation of the current order book for a market.
The green area represents the demand: the current bitcoin buy orders, with the quantity and prices. The red area represents the offer: how much bitcoin is for sale and at which prices. This gives us an interesting view of the status of a market. If there is a lot of demand but few offers, it is likely that the price will increase. The opposite happens when there are more offers than demand, the price will decrease.
The horizontal axis is the price at which the orders are set, and the vertical axis is the amount of bitcoin to be bought or sold in those orders, and they are added as we go deeper in the order book. In the middle, we can see the spread in the order books as the “gap” between the buying and selling orders.
For example, in Figure 7 we see the last transaction happened at 179,220.00 MXN, so the middle of the graph is around that price. We can see transactions for small amounts of bitcoin rounding that number, which is represented by the small steps in the middle of the graph. However, at some point, we start seeing big steps. These steps are orders for larger amounts of bitcoin waiting for the price to reach them. As we go left on the price scale, we can see how much bitcoin needs to be bought in order to reach a given price. You can see the same on the selling side.
At the top of the chart area, you can see the controls needed to modify the view depending on your preferences. You can change the period of the candles, zoom-in or zoom-out, navigate to dates in the past or use the full chart mode.
Full chart mode is a topic that we will cover in the future as it provides valuable tools to perform technical analysis.
Special thanks to Bitso user Luis Andrés Hernández González for your valuable contribution to this post.
Published at Tue, 12 Nov 2019 23:52:17 +0000
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