Types of Crypto Market States and What They Indicate
Over the past two decades, cryptocurrencies have created exponential growth in the digital world. Throughout the market’s development, one of its biggest challenges continues to be its price volatility. After all, the crypto market is still in its infancy and there is a lot to learn, especially for novice traders.
When it comes to the state of the market, there are several theories and factors that influence cryptocurrency prices.
Some believe that, like any other market, the price is just a reflection of supply and demand. Others believe that the price of cryptocurrencies is influenced by the whale accounts that control the market.
Both theories can be true, but may only paint part of the picture. In addition to the factors above, it is critical to understand the current market state.
Three Types of Crypto Market States
There are three main types of crypto market states, and you can generally discern the current market state by examining a price chart. Like any other technical chart, a crypto price chart graphically represents the price movements of cryptocurrencies, volumes of coins, price history, and real-time intervals.
For example, traders use the candlestick pattern to study crypto market prices.
If the starting price is more than the closing price, then the value of the asset has increased. If the closing price is less than the starting price, then the asset value has declined.
With that in mind, buyers and the sellers are the two prime players in the crypto market, and the price chart helps traders to understand who is dominating, and influencing, the market state. The three types of crypto market states are:
Trending
Ranging
Channel
Market Trend
A crypto market is trending if it is steadily moving in one direction. There will be temporary diversions, but eventually, the market will come back to its dominating trend.
If the price pattern is upward sloping, then the market is said to be ascending, or in an uptrend. The uptrend is characterized by higher highs and higher lows.
Similarly, if the market trend is downward sloping or descending, there is a downtrend. The downtrend market is characterized by lower highs and lower lows.
The law of demand and supply is helpful here. For example, if there is high demand and limited supply, then buyers will pay more to buy the cryptocurrency. Because of this, prices rise.
Similarly, if there is more supply than demand, then prices will fall. The uptrend is controlled by the buyers of the market. If the sellers control the market, then there is a downtrend.
In an uptrend, there are higher highs and temporary higher lows. In case of temporary pullbacks, the chart pattern will show a higher low, but it will eventually return to its original trend. The same logic goes for downtrends.
Trading Range
A trading range is the difference between the high and low prices within a given trading period.
The trading range is determined by its resistance price and its support price.
The resistance level of a price occurs with the emergence of a large number of sellers who want to sell the crypto at a given price. This trend can lead the price to become stagnant, or ranging, for a period of time.
A support level occurs when the price of a crypto asset remains static and does not fall below a point. This happens when more buyers enter the market and the prices go up, because buyers and sellers control the support and resistance levels.
Typically, a trading range starts from the support level, moves to the resistance level, and then again returns to the support level. This determines the overall trend of a market. During a ranging market, it is best to buy at the support level.
Trading Channel
Channel trading, also known as a price channel, highlights the areas between the resistance and the support levels. A trendline is drawn on the chart to show a visual representation of the support and resistance levels.
The trendlines are drawn parallel to depict the position of the support and resistance levels. It helps buyers and sellers to determine whether they should buy or sell their assets. It also helps to learn and understand the market volatility.
An ascending channel indicates a bullish market with higher highs and higher lows of the asset price.
A descending channel indicates a bearish market trend with lower highs and lower lows of crypto market prices. The trading channels help traders to visualize the uptrends and downtrends of crypto markets.
Bottom line
The crypto market is highly competitive and volatile. It is largely dominated by professional traders. If you are a novice, knowing the basics about market states will help you understand how the market works.
Learn about the overall market trend and understand the different aspects of the market. The global crypto market is growing, and there are ample opportunities.
