Bitcoin rainbow chart is a technical analysis charting tool that provides insights into future price movements based on Bitcoin’s historical price trends. The crypto market is highly volatile and while you see the prices rising, you may see a sudden downfall too in the blink of an eye.
Rainbow charts help traders have a long-term perspective of the price trends while navigating volatility. Let us discuss in detail, the uses of bitcoin charts and how to read them to make more effective decisions.
Quick insights
What is bitcoin charts?
Bitcoin rainbow chart is a colorful technical analysis tool that depicts the historical price movements of bitcoin. It is also called a “rainbow chart” for the reason it uses different colors to represent different price bands. The color-coded chart pattern provides a visual representation of bitcoin’s current movement compared with its past. This helps traders to understand the overall market behavior.
Rainbow charts are developed for the other cryptocurrencies and Ethereum as well. However, they have few similarities as well as differences with the rainbow charts of bitcoin.
How to use bitcoin charts?
In the midst of high volatility in crypto markets, it is difficult to judge the price movements of any digital asset. Traders need additional tools and advanced charting techniques that can
Bitcoin rainbow charts are useful in measuring the market strength and the investors’ sentiments that help to make informed trading decisions. These are a few steps to use bitcoins in an effective way.
Identify the current band
The first step towards understanding the rainbow charts is, identifying the territory in which the bitcoin price is hovering. It is also necessary to identify the underlying trend of bitcoin.
Identify the signal
The color of the phase, in which the bitcoin price is trading, signals buy, sell, or hold. According to the indication, investors wait for the right opportunities to make decisions.
Go with the trend
No matter what the bitcoin rainbow chart signals, it is necessary to keep pace with the underlying trend. There is a common saying “Going against the trend is suicide”. Even if the rainbow chart signal contradicts the direction of the trend, take into account the other indicators to support your decisions before entering into a trade.
Use other indicators
Generally, it is highly risky to depend on only one charting indicator to make decisions. Investors are generally advised to make use of two to 3 indicators at least, and not more than that, to reconfirm their views on future price movements of bitcoin.
How does the bitcoin chart work?
BTC rainbow charts use a logarithmic scale to plot the long-term price movements of bitcoin. The chart divides the price trend into different bands and each band is given rainbow colors. The color bands and their respective representations are as below:
- Purple – Avoid taking new positions.
- Dark blue – price is cheap and the right time to buy.
- Teal – a good buy candidate.
- Green – accumulate more or add more to your position.
- Light green – potential for accumulation in dips.
- Yellow – hold until further signal!
- Light orange – downfall may be likely and maintain caution!
- Dark orange – intensified buying!
- Red – market peaked out. Sell!
- Maroon – Sell immediately. Exit all your positions.
How do beginners use bitcoin charts?
Bitcoin is, by nature, more volatile compared with the other cryptocurrencies and it goes through cycles. Investors usually tend to buy at the bitcoin price lowest possible and tend to sell at the all-time high price.
Rainbow charts simply help traders spot where the market stands currently and how much more movement is left in the current direction. Beginners make buying or selling decisions in a way as simple as possible using bitcoin rainbow charts. When the price hits maroon territory they sell bitcoin and when the price hits blue territory they buy bitcoin.
Experts, however, use other charting tools also, combined with bitcoin rainbow charts, to confirm if all the indicators together lead to the same decision. This practice helps traders to avoid flawed decisions.
Pros and cons of bitcoin rainbow charts
Pros
- The color-coded spectrum of the rainbow charts is quite alluring and is easier to interpret the overall price information in a single glance.
- Bitcoin rainbow charts not only indicate the price trend but also help measure its strength.
- With the help of bitcoin rainbow charts, traders can easily find out if the bitcoin prices are undervalued or overvalued. Accordingly, they incorporate changes in their trading strategies and fix exit points for their trades.
Cons
- The accuracy of bitcoin rainbow charts is doubtful as they take into account only historical price data and assumptions.
- It is difficult to predict the future price movements based on the past price actions.
- The technical parameters used to plot the bitcoin rainbow charts are subjective and may lead to different conclusions.
- Solely depending on the rainbow charts signals for future price prediction is quite risky. It is wise to combine other technical tools to support your argument, before making decisions.
- The logic behind the rainbow charts may not apply as effectively as to the other cryptocurrencies.
Current phase in bitcoin – 2024
On a year-to-date basis, bitcoin made a rally from the low of $26,000 all the way up to reach the all-time high of $73,000 in Mar 2024. Ever since the halving event in April 2024, bitcoin has been trading in a consolidation range of roughly $57,000 to $68,000.
How to read crypto charts in 2024? The 2024 bitcoin rainbow chart displays the teal phase, which is a buy territory. Accumulation has already started and signals buy in every price dips within the consolidation range. Short-term traders buy in the support levels and sell at the resistance to profit from the price movement within the trading range. According to recent reports, Bitcoin investment is growing gradually among investors.
On the basis of technical analysis, only a conclusive break out of the sideways may lead to the commencement of a new uptrend or a downtrend.
Conclusion
Bitcoin rainbow chart serves as a fascinating tool for understanding historical price trends and measures potential market sentiment. It is essential to accept the fact that indicators are not to be used for predicting future prices but only for signaling possible pullbacks.
Traders who solely rely on a single indicator to make trading decisions may find themselves in trouble and face a risk of potential financial loss. Hence, they should use the charting tools only as a part of their broad-based trading strategy, which helps them to make informed decisions.
Pro Tip
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Frequently asked questions
1. What is bitcoin halving?
Bitcoin halving is commonly known as “the halvening” and it is a recurring event every 4 years once in bitcoin history. In the event of bitcoin halving, the number of bitcoins entering into circulation as block rewards, drops by half.
2. Is bitcoin rainbow charts accurate?
Generally, charting tools that use historical data as the basis, are subjective and do not support predicting future prices. The reason is that past data does not account for any changes in future market scenarios.
