Crypto Technical Analysis 101: Identifying Candlestick Types, Trends and Patterns

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When it comes to cryptocurrency investments, understanding when and what to buy is crucial. As you dive into the world of crypto assets and look at the charts you will come across a distinctive visual tool known as a candlestick chart. Taking a moment to grasp the workings of these charts can greatly benefit your research.

Much like the more familiar line and bar graphs, candlesticks display time along the horizontal axis and present price data on the vertical axis. However, what sets candlesticks apart is their ability to convey more information at a glance. With a single look, you can discern the highest and lowest prices an asset reached within a specific timeframe, along with its opening and closing prices.

In this article, we will take a look at some of the most common candlestick trends and patterns that are crucial for any crypto trader. Let’s take a look:

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What is a Candlestick Chart?

The roots of candlestick charts trace back to 17th-century Japan, finding their initial application in the rice markets. Homma, a keen observer, discovered a correlation between the emotional state of traders and the supply and demand of rice.

What makes candlestick charts unique is their ability to visually represent market emotions. Through different-colored and sized candles, these charts convey how assets open and close within a specific time frame. The guiding principles of candlestick charts underscore the significance of price action over external factors, emphasizing that all essential information is directly mirrored in the price.

Buyers and sellers engage in the market based on the interplay of fear and greed, highlighting the emotional aspect of trading. Additionally, the principles acknowledge that market prices may not always align with the underlying value, and markets are in a constant state of flux.

Although the concept of candlestick charts emerged centuries ago, it has undergone evolution and refinement by experts throughout history. This enduring tool continues to provide valuable insights into market dynamics, standing the test of time as a cornerstone of technical analysis.

Formation and Components of Candlesticks

Understanding a candlestick involves decoding crucial information for a given period:

  • High Price: The highest point reached during the timeframe.
  • Open Price: The starting price at the beginning of the interval.
  • Low Price: The lowest point reached during the timeframe.
  • Closing Price: The price when the interval concludes.
Formation of a candlestick

Candlesticks come in two primary colors, conveying significant insights:

  • Red or Black Candle (Down Candle): Indicates a decrease in price compared to the previous interval.
  • Green or Hollow Candle (Up Candle): This signifies a price increase.

The timeframe for a candle can vary, ranging from as short as 1 minute to as long as 1 month, depending on the type of trade. For instance, in a chart where each candle represents 1 day, red candles mark days where the closing price was lower than the previous day, while green candles signify the opposite.

Compared to alternative charts, candlestick charts stand out for their simplicity and visual appeal. They provide a clear and concise representation of price movements, making them a favored tool for traders seeking to grasp market dynamics efficiently.

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Identifying Different Types of Candles

You can tell a lot about the price action just by looking at the way the candle is colored and shaped. Some of the main types of candles a beginner should know about include:

Long and Short Candle

Long vs Short

Shorter candles generally indicate that the price is stable and there is no intense buying or selling. Long candles, on the other hand, are an indication that the selling or buying pressure is increasing.

If a candle is long and green, it means that the buying pressure is increasing and things are turning bullish. However, a candle alone will not tell you whether the price action will be bullish in the next interval, and you have to consider the broader picture.

Similarly, a long red candle means that the selling pressure is increasing and the close is farther low from the opening price.

Long and Short Shadows

Long and short shadows

The shadows (also known as wicks) can also tell you a lot about the price movement that happens in a given timeframe. If a candle has a long upper shadow and a small lower shadow, it means that buyers dominated the session, but the price was pushed down again by sellers before the close. Similarly, a candle with a smaller upper shadow and a longer lower shadow means that sellers dominated the session, but buyers were able to push the price in the end.

Spinning Tops

Spinning tops

Spinning tops are the opposite of long and small shadow candles. Where long and small shadow candles tell you about who was in control during the session (bulls or bear), spinning tops represent indecision.

A spinning top candle (green or red) indicates that both the bulls and bears were active during this period, and neither was able to gain the upper hand. However, if the spinning top is green, it means that bulls are losing a bit of strength, and if it is red, it means the bears are getting a bit weaker. It does not necessarily mean that the trend can change.

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Doji

Doji

Doji candles are considered very important when it comes to reading candlestick charts. A Doji candle does not only tell you about the price action in the given period but it is also associated with some important patterns. It is a type of candle where the opening and closing price of the asset is the same or way too close. Doji candles have prominent shadows, and they can look like a cross or a plus sign.

In general, a Doji candle means that there is no bullish or bearish bias, and things are neutral. However, when you combine them with previous data and see them in the pattern, they can give you a bigger picture of where things are headed. A Doji with a longer bottom shadow means that bulls are holding the line well and vice versa.

Doji & Long Green Candle

Doji + Long green candle

A Doji after a long green candle could hint at a bearish trend reversal. It means that the asset has had a good run, and we can now see some bearish moments in the upcoming candles. Even though this means that buying pressure is diminishing, we will still need further bearish confirmations to act on this pattern.

Doji & Long Red Candles

Doji + Long red candle

Doji and Long red candles are the exact opposite of the above-mentioned pattern. It means that the selling pressure is diminishing, and more people are now interested in buying the asset. Similarly, more confirmations would be needed for a bullish trend reversal, but it could be considered as one of the signs.

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Long-legged Doji

Long-legged Doji

A long-legged candle shows both equilibrium and volatility in the market. It means that there was plenty of struggle between the bulls and bears, but the end result remained the same, and the market is still in indecision. However, these candles can still be viewed as an indication of trend reversal.

Gravestone and Dragon Fly Doji

Dragon Fly & and Grave-stone Doji

A Gravestone candle has the same open, close, and low with a tall upper shadow. It looks like a “T” flipped upside down and indicates that bears regained control after a price pump. Usually, a gravestone candle appears when you see a price pump, and it triggers a sell-off.

The candle indicates that the selling pressure is high, but it does not necessarily mean that we are going to see a trend reversal. That depends entirely on the bigger picture and previous candles.

A Dragon Fly Doji is the opposite of the Gravestone Doji and is shaped like a “T”. The opening, closing, and height of the candle are the same, and it also has a tall lower shadow. A Dragonfly candle means that bulls are in control and were able to push the price up after a sell-off.

Hammer and Hanging Man

Hammer & Hanging man

The Hammer candle and the Hanging Man candle look exactly similar but are different in color. A green hammer candle that appears in a downtrend is an indication of a bullish revival. The long shadow shows that there was heavy selling, but closing shows that bulls were able to regain control. You would usually see bullish candles once a hammer candle has appeared in a downtrend.

The Hanging Man is the same, but it usually appears in the uptrend and is red in color. It shows that the sellers were able to push the price lower despite the price increase. You are likely to see a sell-off after this candle.

Shooting Star and Inverted Hammer

Inverted hammer and Shooting star

A Shooting Star is a bearish reversal pattern that forms in the shape of a star on the overall chart. It is in the shape of an upside-down hammer and usually occurs at the top. It indicates that the bears were able to push the price lower despite a rise in the price. It is usually followed by bearish candles, which form a star-like pattern on the charts.

The Inverted Hammer pattern looks similar to the Shooting star pattern but appears in a downtrend. It usually shows you the support level and indicates a trend reversal. You can expect the price to move in the upward direction once this candle is formed.

Introduction to Common Candlestick Patterns, Trends and Structures

Candlestick charts create patterns and structures that can help a trader in making decisions. By getting familiar with the most common candlestick patterns and structures, a trader can learn the basic way of trading the market. Some of the most common Candlestick patterns and structures include:

Bullish Engulfing Pattern

Bullish engulfing

A Bullish Engulfing pattern appears when buyers get the upper hand on sellers. Bullish Engulfing can be identified when a small red candle is followed by a big green candle. It shows that the sellers are losing dominance, and buyers are regaining control.

Bearish Engulfing Pattern

Bearish engulfing

The bearish Engulfing pattern is the opposite of the Bullish Engulfing pattern and indicates that the sellers are gaining control. It shows that the buyers are getting exhausted, and the selling pressure is increasing. Usually, we can see a few bearish candles after this pattern appears.

Bullish Harami Pattern

Bullish Harami

A Bullish Harami candle is a small green candle that can fit into the previous red candle. It appears in a downtrend and usually hints at a change in trend. The Bullish Harami on its own does not mean much, but if another green candle appears, it could mean a trend reversal. This pattern works best on larger timeframes.

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Bearish Harami Pattern

Bearish Harami

A bearish Harami pattern is the opposite of a Bullish Harami and usually appears in an uptrend. It is formed when a big green candle is followed by a shorter red candle that can fit into it. If the small red candle is followed by another red candle, you can expect a trend reversal.

Bullish Rising Three

Bullish rising three

Bullish Rising Three appears when a big green candle is followed by three small red candles that slowly move downwards towards the first candle’s opening. It is then followed by another green candle that is almost the same size as the first one.

This pattern shows that even if the price moved downwards for three days, the bulls managed to regain control, and we can expect another leg up.

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Bearish Rising Three

Bearish rising three

Bearish Rising Three appears when a large red candle is followed by three small green candles that gradually move upwards, towards the opening of the initial candle. It is then followed by another big red candle and indicates that we might see another sell-off.

Ascending Triangle

Ascending triangle

An Ascending Triangle is a candlestick chart structure that indicates a gradual increase in the buying pressure. In an Ascending Triangle, the price is kept low by a horizontal line, but the more it stays below the line, the more it squeezes towards the upside. When the price reaches the neck of the triangle, a breakout can be expected.

Traders take a long position with this structure in two different ways. They either buy the structure break or the retest. The latter option is considered safer.

Descending Triangle

Descending triangle

A Descending Triangle is when the price is at strong horizontal support and keeps bouncing back despite the selling pressure. In a Descending Triangle, the selling pressure squeezes the price towards the neck of the triangle, and once it breaks below it, a sell-off can be seen.

Traders like to take short positions when that happens and enter the position mostly on the retest.

Symmetrical Triangle

Symmetrical triangle

An Asymmetrical Triangle is formed when the price starts to squeeze towards the middle and seems like a tug of war between the buyers and sellers. An Asymmetrical Triangle can break in either direction, and the outcome depends more on the bigger picture. However, once the price moves out of the triangle in either direction, it gives a nice opportunity for a long or short.

Downward Channel

Downward channel

A Downward Channel is created when the price is in a downtrend and is consistently creating lower highs. Even though the price moves towards the downside in a downward channel, it is considered a bullish pattern. Once the price moves out of the channel towards the upside, a big breakout can be seen.

Traders usually start buying when the channel is broken or on the retest of the channel structure.

Upward Channel

Upward channel

An Upward Channel is formed when the price is in an uptrend and is consistently creating new higher highs. This structure is considered a bearish pattern because as soon as the channel is broken towards the downside, a sell-off can be seen. As the price was previously in an uptrend, traders start to take profits when the channel is broken to be on the safer side.

Falling Wedge

Falling Wedge

A Falling Wedge is a bullish pattern, just like a downtrend channel, but it tells you more about when the break-out can happen. In a Falling Wedge, the price starts to squeeze towards the downside in-between two converging trendlines. It indicates a reversal, and once the price breaks out of the wedge, a nice spike can be seen.

It is always better to trade this structure on the retest after the breakout as it is safer.

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Rising Wedge

Rising Wedge

A Rising Wedge is the opposite of a Falling Wedge and usually indicates a bearish reversal. The price moves in an upward direction within a Rising Wedge between two converging trendlines. Sooner or later, the price breaks below the Rising Wedge on the downside, and a sell-off can be seen.

The safer way to trade a Rising Wedge is to short the price when it retests the wedge after breaking below it.

Head & Shoulders Pattern

Head & Shoulders Pattern

A Head and shoulders pattern is a bearish indicator and usually means that we can see a significant price drop. This pattern has three tops, and the middle top is always the higher one. The middle top is also called the head, and the two tops on either side are called the shoulders.

This pattern means that the price has already peaked in the trend and is now heading towards a correction. The bottom of the shoulders correlates with a horizontal line which is considered as support (neckline of the middle top). Once that support breaks, it is seen as a good opportunity to short the asset as a sell-off is expected.

The Head and shoulders pattern is considered to be one of the most reliable candlestick chart structures.

Inverse Head & Shoulders Pattern

Inverse Head & Shoulders Pattern

As the name suggests, the Inverse Head and shoulders is a pattern that is the exact opposite of the Head and shoulders pattern. An inverse shoulder has three bottoms instead of tops, and the middle one goes the lowest.

When this pattern forms, it is an indication that the price has bottomed, and now we can see a nice move towards the upside. Once the price moves above the neckline of the middle-top, it can be seen as a good opportunity to long the asset.

Bullish and Bearish Flag/Pennant

Flag pattern variations

A Bullish Flag is formed when we see a price spike followed by sideways movement. This structure indicates that the price is bullish and is taking a breather before making another move towards the upside. The breakout targets for this pattern are as high as the length of the flagpole formed on the chart.

On the other hand, a Bearish Flag is the complete opposite of this pattern, and you can see a similar sort of move toward the downside. However, a Bullish Flag is more credible than a Bearish Flag and is more likely to play out.

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Double Top Pattern

Double Top

A Double Top pattern is one of the most reliable bearish patterns and is formed when a price falls to get above an upper resistance twice. The decline between both tops is significant and means a sell-off is coming. It is confirmed once the asset’s price falls below a support level equal to the low between the two prior highs. It is also seen as the right time to short the price when the support is broken.

Double Bottom Pattern

Double bottom

A Double Bottom pattern is a bullish pattern indicating that the price is bouncing back sharply from a support level. A Double Bottom pattern is formed when the price fails to break strong resistance, and there is a nice bounce back each time it touches it. This means that the selling pressure is declining, and a spike in the price is expected. It is confirmed once the asset’s price rises above the resistance level equal to the high between the two touches.

Both Double Top and Double Bottom patterns are considered one of the most reliable patterns in candlestick charts.

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Conclusion

In essence, grasping these fundamental trends and patterns is essential for newcomers in the crypto market. Mastering the identification and trading of these patterns is important in the crypto trading business. These are foundational patterns with a long history, providing a solid overview of the market landscape. Once you get a grasp of these basics only then you can move on to in-depth technical analysis.

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