The candlestick charts were discovered in Japan in the 1700s by Munehisa Homma. Candlesticks are considered to visually represent market sentiment and can help traders make decisions accordingly.
Candlesticks can give crucial information about the market and are also quite flexible. This means they can either be used separately or in combination with technical analysis tools.
Understanding what candlesticks are, how they work and how they can help you identify price patterns in the future are all essential details to know before.
Here is a guide for beginners, discussing the basics of candlestick charts and patterns.
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What are Candlesticks?
Candlesticks visually represent four important price points, which include:
By analyzing the past patterns of a crypto asset’s price with the help of candlesticks, the traders can predict the possible movement of the price in the future. These charts can even help professional traders in reading the market sentiment before they place any trades.
Here is what a candlestick looks like using the price points mentioned above in a given timeframe.
Different colors are used to differentiate between bearish and bullish candles, however, in the image seen above, red represents bearish candles, and the green represents bullish candles.
The open price and close price are the most important price points to know about. If the close price point is above the open price, the candlestick is bullish. This means that the price of the digital asset has increased.
On the other hand, if the close price point is below the open price, then it indicates a bearish trend, meaning the price of the cryptocurrency has dropped.
The thin lines extending from the real body of a candlestick are called shadows. They indicate the highs and lows, depending on which side of the candlestick they are protruding from.
Different Candlestick Body Sizes
There are two types of candlesticks, long and short.
Long bodies refer to a strong buying or selling pressure, whereas short bodies indicate little buying or selling pressure.
A bullish candlestick can be identified as one where the close price point is above the open price point with a long body. This means that the buyers are influencing the crypto market for that given timeframe.
A bearish candlestick is characterized when the open price point is above the close price point with a long body. This indicates that the selling pressure has taken over the market for that period.
Candlestick Patterns to Know About
The price movements noted for digital assets can be random and form the candlesticks. They also form patterns that help traders in analyzing the market and trading crypto assets accordingly.
The patterns are identified as bullish or bearish, indicating whether the price of an asset is likely to surge or drop, respectively. The candlestick patterns represent the possibilities of where the price might go, which may change depending on market movement.
The Evening Star Pattern
The evening star pattern is a bearish reversal pattern that can usually be seen at the top of an uptrend. A reversal pattern means that the previous trend is changing into a new one. There are usually three candlesticks in this pattern that are:
- A bullish candle in the beginning
- A small second candlestick (bullish or bearish)
- A large bearish candle ending the pattern
The Doji Candlestick
One of the most prominent candlestick patterns is Doji. This pattern shows that the market opens and closes at the same price for a digital currency and indicates an indecisive period. This means the market is not moving in a specific direction and remains uninfluenced by both buyers and sellers.
If this pattern occurs in an uptrend or downtrend, it can mean that the market will possibly reverse.
The Dragonfly Doji
The Dragonfly Doji candlestick is a bullish pattern. It is formed when the closing and opening prices are completely or almost the same. The distinguishing aspect of this pattern is its long tail, which indicates that the buyers have been resisting and trying to push the market up.
The Engulfing Bar
To “engulf” means to consume something, which gives an insight into what this pattern is. The Engulfing Bar is formed when it fully consumes one or more previous candles.
There are two sub-types of this candlestick pattern that are:
- Bearish Engulfing Bar
- Bullish Engulfing Bar
The Gravestone Doji
This candlestick pattern is similar to the Dragonfly Doji, but it is a bearish candlestick pattern. In this pattern, the closing and opening prices are the same or close. The Gravestone Doji can be differentiated from the Dragonfly Doji due to its long upper tail.
The long upper tail indicates that the market is testing a strong resistance or supply area.
The Hammer candlestick pattern is formed when the open high and close are almost the same price. It is also distinguished because of a long lower shadow. When it is formed at the bottom of a downtrend, it becomes a reversal candlestick pattern.
The long shadow on the lower side signifies bullish rejection and that the buyers intend on driving the market higher.
The Harami Pattern
The Harami pattern is both a reversal and continuation pattern. It is considered to be a bearish market reversal signal when it is formed at the top of an uptrend and a bullish signal when it is formed at the bottom of a downtrend.
The Harami candlestick pattern consists of two candlesticks, one of which is a large candle called the mother candle and the second is smaller called the baby.
For the Harami pattern bullish inside bar, the second candle should close outside the first candle.
For this pattern to be valid as a bearish inside bar the second candle should close inside the first candle.
This candlestick pattern signifies that the market is consolidating or is stuck in an indecisive period.
The Morning Star
Just like the Evening Star pattern, the Morning Star pattern also consists of three candlesticks but is considered to be a bullish reversal pattern. It is mostly formed at the bottom of a downtrend. The three candlesticks are:
- First bearish candle, which means the sellers are controlling the market
- Second smaller candle (either bullish or bearish)
- Third bullish candle
The Shooting Star
This candlestick pattern is the bearish version of the Hammer pattern. The Shooting Star pattern is formed when the open low and close are nearly the same price. It is identified by a small body and a long upper shadow.
According to expert analysts, the shadow should be twice as long or bigger than the body.
The Tweezers Tops and Bottoms
As the name suggests, there are two sides to the Tweezers pattern.
The Tweezers Top formation is a bearish reversal pattern when it is formed at the top of an uptrend. The Tweezers Bottom formation is a bullish reversal pattern when formed at the bottom of a downtrend.
Both the formations have two candlesticks. In the top formation, the first candle is bullish and the second is bearish, whereas, for the bottom formation it is vice versa.
Here is an image of the Tweezer Top formation.
Here is an image of the Tweezer Bottom formation.
Learning the basics of candlestick charts and patterns can help you in determining what is going on in the market. The candlestick patterns can help you learn so much more about when you should open or close trading positions. These patterns play an integral role in crypto trading as they can help traders understand the market sentiments and predict any ups and downs in the price of an asset in the future. Even though trading crypto is quite risky and benefits are never guaranteed, learning as much as possible can increase your chances of having a good trading experience. Find the best cryptocurrency exchange platform for trading.
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