The crypto market is full of various tools for analyzing price dynamics. One of the most popular is the graphical method — the construction of candlestick graphs (or candlestick patterns). They enable investors to determine the current mood of the market and predict further movement of the asset price.
Interpretation of candlestick charts is among the core competencies of a successful trader. In this article we will analyze in detail the most common shapes and formations on the chart, consider their meaning and possible further movement of the value. It will assist investors of any level of training to analyze the chart correctly and take well-considered trading solutions.
Japanese candlestick: what is it?
Japanese candlesticks, or as they are also called — K-line, appeared in the 17th century on the rice exchange markets in Japan. Back then, rice traders marked the opening, closing, minimum and maximum prices for the day on bamboo sticks. Over time, this evolved into a graphical representation — the Japanese candlestick.
Every Japanese candle contains information about price limits for a certain period of time, usually from an hour to a day. The graph displays the open and close of deals, as well as the maximum and minimum price of this period.
The body of the candle shows the range of price fluctuations from the minimum to the maximum for the period. The upper (wicks) and bottom shades are the open and close values of the term. If the close value is larger above the open, the candle is bullish — white (or green). If lower, the candle is bearish — black (red) in color.
The main benefit of Japanese candles is that they clearly show the ratio of supply and demand. By analyzing the shapes of individual candlesticks and their combinations, a trader can determine the current trend and possible further trend of movement of the value.
Introduction of candlestick graphs and why they are needed
A candlestick chart is a sequence of Japanese candles displaying the movement of the value of a holding for specific time intervals — from a minute to a month.
Candlestick graphs are commonly utilized by investors to help them understand price dynamics and predict the future trend. In contrast to line graphs, candlestick graphs clearly demonstrate the opening, closing, minimum and maximum prices for each period of time.
The shape, size and color of candlesticks carry important information about the ratio of supply and demand in the market. Wide candlestick bodies having longer shadows testify to high volatility. The prevalence of bullish or bearish candles indicates the dominance of buyers or sellers respectively.
By combining individual candlesticks into sequences and figures, experienced traders determine the strength of the trend, probable supporting and resisting layers, and possible reversals. This allows choosing the optimal points for opening and closing deals, placing stop losses, fixing profits.
Using candlestick graphs enables investors to quickly adjust to changes in market conditions and choose more effective trading strategies. Competent analysis of candlestick patterns is the key to success in the financial markets.
Fundamentals of candlestick pattern analysis: basic rules of reading charts
Candlestick patterns are characteristic combinations of several candlesticks that reflect the mood of market participants. Understanding the meaning of patterns allows you to quickly identify signals to buy or sell an asset.
Before starting to search for patterns, it is important to determine the general picture on the chart. First, it is necessary to find the general tendency with the help of moving averages, trend bars, and technical analysis indexes. Then you need to determine the main supporting and resisting layers in order to understand possible trend reversal points.
Next, it is necessary to analyze the candlesticks directly — their size, color, shape of shadows. Then you can move on to analyzing specific combinations of candlesticks. Experienced traders can recognize dozens of different patterns indicating trend continuation or reversal.
Reading candlestick charts is an art that requires experience and skill. At first glance, «chaotic» candlesticks eventually build up into understandable patterns and figures. The main task is to learn how to identify these models.
Rising trend: bullish candle patterns
Bullish hammer
The Bullish hammer is one of the patterns signaling an upward trend reversal. It consists of a green stock candlestick that has a smaller corpus and a longer shade. The long shadow of the candlestick shows that the «bears» (sellers) were trying to force the value of the asset downwards, but failed because they met the resistance of the «bulls» (buyers). The «bulls» took back complete control of the stock and pushed the price off the lows.
The hammer model occurs frequently at high support levels. It can be used as a sign to start long trades.
Upside-down Bullish Hammer
The Upside-down hammer pattern is like the classic bullish hammer, but the first candle has a long wick. This model is generated at the lower end of a descending trend and warns about its possible reversal. The candlestick’s shadow shows the high activity of buyers, and the small body signals the weakening of the «bears».
An inverted hammer can be a signal to open a deal to buy an asset or to close a sell side.
Three white soldiers
Three white soldiers are 3 successive bullish candles that have minimal lower and upper shadows. This reversal pattern indicates a gradual, steady rise in price in a low volatility environment. Small shadows indicate the weakness of the «bears» and the dominance of the «bulls».
The appearance of the Three white soldiers is often a confirmation of a strong uptrend. This pattern can be considered as a signal to open or hold long-term positions.
Bullish harami
A Bullish harami is generated from a big (black) candle following by a smaller white candle with slight up and down shadows. It points to a lively purchase of the asset in the trend.
The stability of the bullish harami is due to the absence of signs of strengthening of the «bears» — short black (red) candlesticks or longer top shadows. It testifies to the complete dominance of the «bulls». This pattern is a signal to open and build up long positions while the trend remains strong.
Descending trend: bearish candle patterns
Hanged man
The Hanged man is a black candle with a long shadow followed by a large downward candle. This pattern indicates exhaustion of the uptrend and a potential downward reversal.
A long shadow candle shows that traders have encountered resistance and a downtrend may be about to begin. The Hanged Man can be a trigger for taking profits on longs and opening shorts.
Shooting star
A Shooting star consists of one large candle with a short lower shadow and a long wick. This pattern warns about the possible imminent finish of the upward tendency and the start of the descending one.
The long shadow of the candle indicates the dominance of the «bears» and the complete passivity of the «bulls» after the uptrend. Shooting star work well on long timeframes. When this pattern appears, you can wait for the quotes’ minimum and open a sell position.
Three black crows
Three Black Crows are 3 successive bearish candlesticks of approximately the same size with smaller top and bottom shadows. This model shows a gradual decline in the price of an asset in a low volatility environment.
The identical candlestick sizes and minimal shadows indicate that there isn’t any significant pressure from the «bulls». This indicates the strong positions of the «bears» and the potential beginning of a downtrend.
This pattern is considered one of the most risky, so the strategy should be as cautious as possible when the Three Black Crows appear.
Bearish harami
The Bearish harami is composed of a few candles (a longer bullish candlestick and next smaller black candlestick) with slight top and bottom shadows. This model demonstrates the stable dominance of bears and active selling of the asset.
The weakness of the bulls is confirmed by the absence of long white candles or big bottom shadows. This points to the complete dominance of the sellers. The bearish harami pattern recommends opening and building up short positions while the downtrend remains strong.
Candlestick patterns to identify consolidation
Three rising method
The Three rising method is formed by three consecutive bullish candles, each with a high higher than the previous candle. Each successive candle closes in the upper half of the previous candlestick’s actual corpus.
The Three rising candles indicate a gradual recovery of the bulls’ strength after the downturn. The price consistently breaks through the resistance, which indicates increased demand. This pattern indicates a period of consolidation within the uptrend. It is possible to examine the long positions discovery in the direction of the main trend.
Three falls method
The Three falls method consists of three bearish candles, with each subsequent candle having a lower minimum than the previous one.
Consecutive breakdown of the support level indicates increasing pressure from the sellers. The lows are falling lower and lower, confirming the dominance of the bears. This pattern indicates consolidation within the downtrend: you can open or hold short positions.
Doji candlestick
The Japanese Doji candlestick is a unique type of candlestick that occurs during times of lower market volatility and uncertainty. A distinctive feature of the Doji is the presence of a long corpus with minimum or no shadows.
Such a candle is formed when the price for the analyzed time frame (day, week, month) oscillates in a limited price range and closes at approximately the same level as it opened.
The long body of the Doji reflects the situation when there were attempts of both growth and fall of the price during the period. However, in the end, neither the bulls nor the bears were able to wrest control of the market. It resulted in closing the period practically at the opening level. Thus, the appearance of the Doji signals the absence of a clear trend and the balance of supply and demand at this stage.
There are three main varieties of Doji:
Tombstone Doji. A candlestick with a long fuse. The open and close values are next to its minimum. It indicates the end of the rising trend.
Long-legged Doji. A variant of the Doji, indicating complete uncertainty in the market. The presence of equally longer top and bottom shadows shows that both buyers and sellers exerted considerable pressure, but eventually balanced each other out.
Dragonfly Doji. This candle has a very long shadow and no body or wick, signaling very active selling of the asset. The Dragonfly Doji is a signal to prepare for a sharp price move after a period of uncertainty.
Wiggle candlestick pattern
This is an extreme variety of Japanese candles, where the open and close values of the time frame don’t coincide, but are very close to each other. Like the classic Dodgy, the Wiggle indicates low volatility and the absence of a pronounced trend. However, a slight divergence in the open and close values shows that either the bulls or the bears are outnumbered.
Basics of using candle patterns in crypto trading
The candle patterns offer precious data for making trading decisions in the crypto market. However, to effectively utilize their potential, there are a few important points to keep in mind:
- Learn the major kinds of candle patterns and how they are formed. Without understanding the base, it is impossible to competently analyze charts and recognize signals.
- Always consider the general trend and important resistance/support layers in the stock market. Patterns don’t exist in isolation from context.
- Use patterns in combination with other analysis tools. Although candlestick charts can provide valuable information, it is better to use them in combination with other indicators — oscillators, moving averages. This will allow you to make more accurate predictions of price movements.
- View candlestick charts on different timeframes to see the full picture. A pattern on an hourly timeframe may look different than on a daily time frame.
- Be flexible and take into account the current market situation. The same pattern may have different consequences.
- Keep statistics of successful and unsuccessful trades on patterns, analyze the reasons. Improve your trading strategy.
- Practice as often as possible on historical charts and in demo mode.
- Use stop losses and other tools of risk control at all times. Any prediction can turn out to be wrong, so capital protection is critical.
By following these simple rules, you will be able to efficiently use the information of candle patterns for successful cryptocurrency trading.
