How to trade Candlestick and Depth charts

Trading or investing in crypto-currencies involves greater risks than traditional assets. We invite you to read more in our risk policy.

This series of blogs will familiarize you with Bitso Alpha and teach you how to trade. If you are interested in starting to trade in crypto money, but don’t know where to start, you are in the right place.

This is the fourth blog in the “How to Trade” series. In the previous blog, we learned about Commissions, Limit Orders and Stop Orders on Bitso Alpha, our trading platform. This time, we will review the topic of Charts.

At this point, we already understand how order books represent the available liquidity in a market, we know that there is a better bid price (the highest buy offer), a better ask price (the cheapest sell offer) and that trades happen when orders are filled from the books.

In this post, we will talk about different graphical tools that traders use to analyze price patterns to predict future trends. We will cover line, candlestick and depth charts. We will use the BTC/MXN market as an example during this post.

Once a trade happens, it becomes part of the price history of the BTC/MXN market. Bitso Alpha lists the most recent trades on the left side of the screen. However, it is difficult to understand how a market is behaving simply through a list of numbers. This is why charts are used.

Price Charts

In a price chart, time is represented on the horizontal axis, and the price on the vertical axis. This is a very useful way to visualize how prices change over time.

The most basic way to view price history would be to use a Line Chart. Each transaction is represented as a point that happened at a certain time and price, with a line joining all those points. It is tempting to think that the result would be a well-defined line moving in a certain direction.

This is not really the case. Remember that transactions move between the bid and ask prices of the book. The “line” goes up and down, fluctuating all the time. To simplify, the transaction data is averaged to “smooth” the charts and make them more understandable. We can see a comparison between 30 minute and 1 minute graphs for the same time period in Figures 1 and 2.

Volume

The volume is the amount of cryptomonies traded in a period of time. It is useful to identify how much movement there is in a market, especially in a period of volatility. Volume can also be found at the bottom of the chart in full mode, as shown in Figure 6.

Figure 6. Volume is shown at the bottom of the chart in full mode

We have covered historical price data graphs, which are generated using actual transaction data. Bitso Alpha also has the Depth Chart, which is also a valuable tool, but it focuses on current liquidity (money available on the books). It shows how much bitcoin is currently placed on buy and sell orders, and at what price levels. This is known as the depth of the book. An example is shown in Figure 7.

Figure 7. Depth Chart

The green area represents the demand: current bitcoin purchase orders, their quantities and prices. The red area represents the supply: how much bitcoin is for sale and at what prices. This gives us an interesting overview of the state of the market. If there is a lot of demand but little supply, it is likely that the price will increase. The opposite happens if there is more supply than demand.

On the horizontal axis is the price at which the orders are placed, and on the vertical axis we see the amount of bitcoin to be bought or sold on those orders, which are added up as we go deeper into the book. In the middle of the graph, we can see the spread in the order book as the empty space between the buy and sell orders.

For example, in Figure 7 we see that the last trade happened at MXN 179,220.00, so the midpoint of the graph is close to that price. We see small transactions close to that price. These are small steps in the center of the graph. However, at some point we start to see big steps. These are orders for larger bitcoin amounts, waiting for the price to reach the price at which they were placed. If we move to the left on the price axis, we can identify how much bitcoin needs to be purchased to arrive at a given price. The same is true on the sales side.

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