Key Questions Answered
- What is a candlestick pattern: A candlestick denotes an asset’s price activity during a specified period. Traders can choose the periods they want to examine based on whether they are making low or high timeframe decisions.
- A red candle shows that the closing price was below the opening price. If a candle changes to green, the price of the asset increased and closed above its opening price.
- As time progresses, multiple candlesticks create larger patterns that crypto traders derive signals from to make vital trading decisions.
Crypto traders prefer candlestick charts because of how easy it is to understand and its visual appeal. As a cryptocurrency and Bitcoin trader, there are some candlestick patterns you should definitely know.
Candlesticks can be traced back to Japanese rice traders. Over time, it has evolved considerably and has become a vital tool for most traders. This system has been utilized and updated over the years and is now one of the best methods of charting assets.
What is a Candlestick?
A candlestick denotes an asset’s price activity during a specified period. Traders can choose the periods they want to examine based on whether they are making low or high timeframe decisions. Each candlestick can be set to represent any period of time – from a single minute to an entire month. Candlesticks have four major components: the high, low, open, and close.
When trading, an asset’s price at the beginning of the trading period is the “Open,” while the “close” shows the price at the end of the trading period. “High and Low,” on the other hand, are the highest and lowest prices the asset achieved during the course of the trading session.
How to read the Candlestick Patterns
Traders use candlestick charts to represent an asset’s price evolution. Candlesticks derive their name from the long lines (wicks) and rectangular shapes they employ to denote price action within a specified timeframe.
With candlesticks, you can get clues and insights from the price action as well as the general mood of the market for that asset. As time progresses, multiple candlesticks create larger patterns that crypto traders derive signals from to make vital trading decisions.
At first, candlesticks may be a little difficult to understand. Still, the more one studies them, the more information these will offer when compared to simple line charts.
The following image depicts how a candlestick is to be interpreted:
All candlesticks come in two colors: green and red (though most charting services will allow customized colors).
What is A Red Candlestick?
A red candle shows that the closing price was below the opening price. In other words, the asset’s price decreased during the specified trading period. For example, suppose the red candle depicted above is a 1-minute candle. In that case, this means that the price of an asset closed below where it had opened 1 minute ago.
What is A Green Candlestick?
If a candle changes to green, the price of the asset increased and closed above its opening price.
Wicks simply depict the difference between opening/closing prices and highest/lowest prices achieved during the specified period. For example, let’s consider a green 10-minute candle that looks like the one depicted above. The upper wick means that at some point during the 10 minutes, the price rose above the ultimate closing price. The difference between the highest achieved price and the closing price is represented by the upper wick. Similarly, the lower wick represents the difference between the opening price and the lowest achieved price during that 10-minute period.
Important Candlestick Patterns You Should Know
There are several methods to read and use a candlestick chart. Pattern recognition is used to forecast trends, price direction, and general momentum. To understand this better, we’ve compiled a list of bullish (indicating prices will increase) and bearish (indicating prices will decrease) patterns you should know.
What are the Bullish candlestick patterns?
When it comes to appearance, the Hammer is one candlestick that is very easy to recognize. The bottom of the downtrend has a long lower wick, just like a regular hammer. The body is often small, and it may have little or no upper wick. A hammer can either be green or red.
Depending on the situation, it may indicate a prospective price increase or a strong reversal trend. The image below shows that after a period of high selling pressure, a bottom was hit. Immediately after, buyers began gaining momentum, hence the long lower wick. Once the Hammer was formed, the trend was reversed, and prices began to increase.
The Inverted Hammer
The only difference between the inverted Hammer and the Hammer is the long wick directly above the body instead of below. An inverted Hammer can be green or red.
An Inverted Hammer signifies the potential start of an uptrend in the same way that the Hammer does.
The Bullish Engulfing
Two candlesticks form this pattern at the end of a downtrend. The first candlestick is red (bearish), while the second candlestick is green (bullish) and much larger than the other one. Simply put, the body of the second candle is large enough to fully engulf the previous candle. In addition, there should be a small gap between the opening and closing price of both candles. In most cases, these gaps are not often seen in cryptocurrency markets.
This pattern reveals that buying pressure has significantly increased and is overwhelming selling pressure.
The Piercing Line
This candlestick pattern is formed by a long and 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 prices of both candles. Also, notice that the green candle is closing about half-way up the body of the bearish candle.
This pattern reveals that though the start is bearish, buying pressure surges during the course of the second candle. This means that Bulls have a considerable interest in buying at the prevailing price.
The Morning Star
The Morning Star pattern is formed by three separate candles at the bottom of a downtrend. The first bearish candle is quite long, while the second – known as the star – has lengthy wicks with a short body. The star candle closes below the previous candle. However, the third candle shifts bullish closes directly above the first’s midpoint.
This pattern shows that the downtrend pressure is decreasing and beginning to shift into an uptrend.
What are the Bearish candlestick patterns?
The Hanging Man
This pattern is considered the bearish alternative of a hammer. Typically, it is created at the end of an uptrend with a long lower wick and small body. It can be red or green. This pattern reveals that the uptrend has weakened, and traders consider it a sell signal.
The Shooting Star
This pattern is composed of one candlestick with a very small lower wick and slim body while the upper wick is quite long. Unlike the Inverted Hammer, this pattern occurs at the peak of an uptrend.
This shooting start denotes a price rejection immediately after a substantial rise. The pattern is a sign of a bearish reversal.
The Bearish Engulfing
The bearish engulfing is formed by two candlesticks. Just like its bullish counterpart, the first candle is green (bullish), while the second candle is red (bearish) and big enough to engulf the former.
The body of the second candle is larger 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 engulfing reveals that selling pressure has increased and signifies the start of a possible downtrend.
As powerful and instructive as candlestick patterns can be, please remember that it takes a lot of experience to leverage these signals with consistent success. In fact, most traders employ candlestick patterns along with other technical trading indicators for stronger validations and confirmation of trends.