For example, if you set the D1 chart, each candlestick stands for one day. Researchers agree that a Japanese rice trader was the first to conceptualize candlestick. The body represents the open and close price of an asset. In a bullish market, the close will be above the open and vice versa.
Each candlestick generally has two so-called shadows, or wicks, though this is not generally a rule. The shadows represent the high and low of a price for a given period. Thus, the upper shadow stands for the peak, and the lower shadow shows the lowest point touched by the price. Sometimes one of the shadows might be visible. It happens when the high or low coincides with the open or close. The color of the body shows the direction of price movement. Usually, a green or white body suggests a price increase and a red or black body points to a price decline.
You will most likely see green and red bodies on most platforms. Consequently, if the body is green, its upper limit will indicate the close price. The candlestick chart is by far the most comprehensive style to display the price of an asset. Cryptocurrency traders borrowed this type of chart from stock and forex trading.
Unlike the line chart, which shows only the close price, the candlestick chart provides a ton of information about the historical price thanks to its structure discussed above. Candlesticks form chronologically one after another and may help you see the general trend and the resistance and support lines even without technical indicators.
Besides this, they can shape certain patterns that act as buy or sell signals. The use of the candlestick chart is especially relevant to cryptocurrencies, which are highly volatile and require detailed technical analysis. Starting with bullish patterns , which show up after a downtrend and anticipate a reversal.
Cryptocurrency traders usually open long positions when these patterns show up. The hammer candlestick consists of a short body with a much longer lower shadow. As a rule, you will find it at the bottom of a downtrend. The pattern indicates that bulls resisted the selling pressure during a given period and pushed the price back up.
While there may be hammer patterns with green and red candles, the former points to a stronger uptrend than red hammers. The inverse hammer is quite similar to the previously described pattern. It is different from the standard hammer in that it has a much longer upper shadow while the lower wick is very short. As a result, buyers come back with even stronger coercion and push prices higher.
Unlike the previous two patterns, bullish engulfing is made up of two candlesticks. The first candle should be a short red body engulfed by a green candle, which is larger. While the second candle opens lower than the previous red one, the buying pressure increases, leading to a reversal of the downtrend. Another two-candlestick pattern is the piercing line, which may show up at the bottom of a downtrend, at the support level, or during a pullback.
The pattern consists of a long red candle that is followed by a long green candle. The fact that the green candle opens much higher points to buying pressure. The morning star pattern is more complex because it comprises three candlesticks: a long red followed by a short-bodied candle and a long green.
Usually, the middle candle will have no overlap with the longer ones. Another three-stick candle is the three white soldiers. It is made up of three long green candles in a row, generally with microscopic shadows. The condition is that the three consecutive greens have to open and close higher than the previous period. It is regarded as a strong bullish signal that shows up after a downtrend. These patterns generally prompt traders to either close their longs or open short positions.
Here they are:. The hanging man is the same pattern as the hammer, only inversed. Thus, it is formed by a green or red candlestick with a short body and a long lower shadow. It shows up at the end of an uptrend. It suggests a considerable sell-off during a given period, but bulls could temporarily push prices higher, after which they lose control.
The shooting star is the opposite of an inverted hammer. It consists of a red candle with a short body and a long upper shadow. Generally, the market will gap a bit higher on the candlestick opening and will surge to a local peak before closing just below the open.
The body can sometimes be almost non-existent. The bearish engulfing is the inverse version of a bullish engulfing. The first candle has a small green body and is completely covered by the next long red candle. This pattern comes at the peak of an uptrend and suggests a reversal.
The lower the second candle continues, the more momentum the bearish move will have. Again, the evening star is the inverse version of the bullish morning star, and it represents a three-stick pattern. It consists of a short-bodied candle that comes between a long green candle and a large red candle.
There should be a gap between the closing and opening price, however this gap is rarely seen in crypto markets. Indications: This pattern indicates increasing buying pressure and the begining of an uptrend as buyers are likely to drive the price up. Appearance: The piercing line is a pattern made up of a long bearish red candle followed by a long green candle, occuring at the bottom of a downtrend. There's a gap down between the closing and opening prices, with The closing of the second candle more than half-way up the bearish candle's body.
Indications: The begining of the period looks very bearish. However, the buying pressure increases throughout the candle, indicating the bulls are interested in buying at the current price. Appearance: The Morning star is a pattern made up of three different candles in a downtrend. The first is a long bearish candle. The second, the star, presents very long wicks, a short body and closes below the previous closing price.
The third candle is a long bullish candle that closes above the midpoint of the first. Indications: The star signals that the current trend is losing steam, often confirmed with the third candle launching an uptrend. Appearance: The three white soldiers pattern consists of three green candlesticks inside of a downtrend. The second and third candles open within the body of the previous one's and close above it. The candles usually have little to no lower wicks. Indications: This patterns indicates a strong buying pressure which drives the price up and even indicate an upcoming price reversal.
The bigger the candles are, the stronger the pressure is. Appearance: The hanging man is the bearish equivalent of a hammer. It usually forms at the end of an uptrend with a small body and a long lower wick. It can be either green or red. Indications: This patterns signal the weakness of the uptrend and traders often associate it as a sell signal.
Appearance: The Shooting Star is made up of one candle stick with a small body and lower wick. Conversely, the upper wick is very long. Unlike the very similar Inverted Hammer, this pattern occurs at the top of an uptrend. Indications: This pattern indicates a strong price rejection after a significant push up. The Shooting Star is often associated with a signal of bearish reversal. Appearance: This pattern is made up of two candlesticks.
The first one is bullish green while the second is red and engulfs the other. In other words, the second candle's body is bigger than the first one. With gaps between closing and opening prices rarely seen in the crypto, this pattern occurs at the top of an uptrend. Indications: This pattern indicates increased selling pressure and the beginning of a potential downtrend.
It is made up of three different candles in an uptrend. The first is a long bullish candle. The following candle, the star, presents very long wicks and a short body. The third candle is a long bearish candle that closes below the midpoint of the first candle. Indications: The star signals that the current trend is losing strength, and traders may use it to sell positions. The confirmation occurs with the third candle which often launches a downtrend. Appearance: The Three Black Crows pattern is recognizable by three red candlesticks inside of an uptrend.
The second and third candles open within the body of the previous one's and close below it. Indications: This patterns indicates a strong selling pressure which drives the price down and can announce an upcoming price reversal. Appearance: The Dark Cloud Cover pattern is made up of a red candle that opens above the closing price of a previous green candle, but then closes below the midpoint of that candle.
This pattern appearing in an uptrend generally creates a new high. Indications: This pattern can indicate two things: a pullback or at least ending of the current uptrend. In both scenarios, traders tend to read this pattern as a sell signal. Unlike simple line charts, candlestick charts carry much more information and are a very useful tool for traders. However they of course have many limitations in isolation and are often used in combination with technical indicators such as RSI or Moving Average.
The patterns above are some of the most popular but far from the only ones, so stay tuned for a follow up post about more advanced patterns.
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