Crypto traders prefer candlestick charts because of their ease of understanding and visual appeal. If you intend to trade cryptocurrency and Bitcoin in particular, you definitely need to know some candlestick patterns. Candlestick patterns date back to Japanese rice traders. Over time, they have undergone significant changes and have become a vital tool for most traders. This system has been used and updated over the years and is now one of the best methods of charting assets.
What is a candlestick chart?
A candlestick chart shows the change in the price of an asset over a specific period. Traders can choose the periods they study depending on whether they are deciding on a low or high timeframe. Each candlestick can be set for any time period, from one minute to an entire month. A candlestick has four main components: high, low, open and close. When trading, the price of the asset at the beginning of the trading period is denoted by the “opening price” and at the end of the period by the “closing price”. At the same time, the “high” and “low” are the highest and lowest price of an asset reached during a trading session.
How to Read Candlestick Charts
Traders use candlestick charts to display the price dynamics of an asset. These charts get their name from the long lines (wicks) and rectangular shapes that are used to show price movements over a period of time. With the help of candlesticks, you can get an idea of the price movements as well as familiarize yourself with the general mood of the market for a particular asset. Over time, many candlesticks form into large patterns from which crypto traders get signals to make critical trading decisions. At first glance, candlestick charts may seem too difficult to understand. However, the more you study them, the more information they provide compared to simple line charts.
A red candlestick
A red candlestick shows that the closing price was lower than the opening price. In other words, the price of the asset decreased during the specified trading period. For example, let’s assume that the red candle shown above is a minute candle. In this case it means that the price of the asset closed below the level at which it opened one minute ago.
A green candlestick
If the candlestick turns green, then the price of the asset has risen and closed above the opening price. Wicks simply represent the difference between the open/close prices and the maximum/minimum prices reached in a given period. For example, let’s consider a green 10-minute candle that looks like the one pictured above. The upper wick means that at some point during the 10 minute period, the price rose above the last closing price. The difference between the maximum price reached and the closing price is represented by the upper wick. Likewise, the lower wick represents the difference between the opening price and the lowest price reached during that 10-minute period.
Important candlestick patterns you should know
There are several methods of reading and using a candlestick chart. Pattern recognition is used to predict trends, price direction and general dynamics. For a better understanding, we have compiled a list of bullish (indicating rising prices) and bearish (indicating falling prices) patterns that you should know.
Bullish patterns
Hammer
When it comes to outward similarities, the Hammer is exactly the kind of pattern that is very easy to recognize. The base of the downtrend has a long lower wick, like a normal hammer. The body is often small and the upper wick is short or may not be there at all. The hammer may be green or red. Depending on the situation, this may indicate an anticipated price increase or a strong trend reversal. The image below shows that after a period of high selling pressure, the bottom was broken. Immediately thereafter, the buyers began to gain momentum, hence the long bottom wick. Once the hammer formed, the trend reversed and prices began to rise.
Inverted Hammer
The only difference between an Inverted Hammer and a regular Hammer is that the long wick is directly above the body, not below it. The Upside Down Hammer can be green or red. Equally as a regular Hammer, an inverted Hammer signifies the potential beginning of an uptrend.
Bullish Engulfment
Two candles form this pattern at the end of a downtrend. The first candle is red (bearish), while the second is green (bullish) and much larger than the first. Simply put, the body of the second candle is big enough to completely absorb the previous one. In addition, there should be a small gap between the opening and closing prices of both candles. In most cases, these gaps are not common in the cryptocurrency markets. This pattern shows that buyer pressure has increased significantly and is breaking the sellers’ pressure.
Penetrating Line
This candlestick pattern is formed by a long red bearish candle followed by a long green candle. It occurs at the end of a downtrend. There is a gap between the opening and closing price of both candles. Also note that the green candle closes about halfway down the body of the bearish candle. This pattern shows that despite a bearish start, buyer pressure is increasing sharply within the second candle. This means that the bulls are showing considerable interest in buying at the prevailing price.
Morning Star
This pattern is formed by three separate candles at the bottom of the downtrend. The first bearish candle is quite long and the second, known as the star, has long wicks and a short body. The “star” closes below the previous candle. However, the third candle shifts toward the bull market and closes just above the midpoint of the first candle. This pattern shows that the pressure of the downtrend is decreasing and beginning to shift into an uptrend.
Bear patterns
Hanging
This pattern is considered a bearish alternative to the Hammer. It is usually formed at the end of an uptrend with a long lower wick and a small body. It may be red or green. This pattern shows that the uptrend has weakened and traders consider this a signal to sell.
Shooting Star
This pattern consists of a single candle with a very small bottom wick and a thin body, while the top wick is quite long. Unlike the Inverted Hammer, this pattern occurs at the peak of an uptrend. It means a rejection of price immediately after a significant rise. Such a pattern is a sign of a bearish reversal.
Bearish takeover
A bearish takeover is formed by two candles. Like its bullish counterpart, the first candle is green (bullish), while the second is red (bearish) and big enough to engulf the first. The body of the second candle is bigger than the first. There is also a gap between the opening and closing prices of each candle. This pattern occurs at the top of an uptrend. This bearish takeover shows that seller pressure has increased and signifies the beginning of a possible downtrend.
Conclusion
No matter how effective and useful candlestick patterns are, remember that it takes a lot of experience to use these signals effectively. In fact, most traders use candlestick patterns along with other technical indicators for trading to more closely check and confirm trends.
