When starting the journey to understanding cryptocurrencies and how they work, there are different concepts and terms to be understood. Some of these terms can also become somewhat confusing to beginners, however, they are very essential information to know. One of the most important skills to know is how to read candlesticks. Candlesticks in crypto are used to measure the price movement of cryptocurrencies per time.
In this guide, you’ll learn the different types of candlesticks, how to recognize them, and how to read different candlestick charts.
Common candlestick pattern terms
Bullish candlestick – a bearish candlestick is a green candlestick that shows the market price is going up.
Bearish candlestick – this is a red candlestick that shows the market price of a particular cryptocurrency is going down.
High – the high of the candlestick indicates the highest level of the price attained during the selected time frame.
Low – shows the lowest point the price of the cryptocurrency reached during the selected time frame.
Close – indicates the last price of the particular cryptocurrency in the chosen timeframe.
Open – indicates the opening price after the previous candlestick closes and the next candle is formed.
Wick – The wicks are the lines that run from the top and bottom of the body of the candle. These are the asset’s highest and lowest prices during the trading period.
Body – The body of the candle indicates the open and close prices during the time frame of the candle.
What are Crypto candlesticks?
The cryptocurrency market is known for its volatility because it is highly unregulated. Due to this volatility, it is important for cryptocurrency traders to measure price movements so as to make informed and calculated decisions concerning placing trades.
Candlesticks are used to measure the price movement of a particular cryptocurrency over time. The candlesticks represent the price movement of a cryptocurrency measured per unit of time. Depending on the choice of the trader, the candles can represent 1 minute, 3 minutes, 5 minutes, 30 minutes, 1 hour, 4-hour, or even a month’s price movement.
This means that, depending on the time set, one candle could represent the price movement of the cryptocurrency within that time frame.
Candlesticks have four major components;
- The high
- The low
- The close and,
- The open
History of candlestick charts
Homma Munehisa, a rice trader in Japan, invented the first candlestick chart. The candlestick charts provided Homma and others with an overview of the open, high, low, and close market prices over a specific time period in the 1700s. Candlestick charts have become one of the most popular and commonly used chart patterns for traders due to the ease of reading and interpreting graphs.
There has been a lot of work done to relate chart patterns to multiple data points rather than just one since the 18th century. The resulting charts proved to be a reasonably accurate tool for forecasting future demand, according to the Japanese rice traders.
Candlestick charts get their name from the visual resemblance of each bar to a candle, with its wide body and thinner wick (or shadow). Candlestick charts convey not only a market’s price information but also the more difficult-to-quantify emotional sentiment of the market’s participants.
The book “Japanese Candlestick Charting Techniques” by Steve Nison is credited with introducing Japanese candlesticks to the West. Nearly a century later, in the West, the bar point and figure analysis were created.
Both today’s stocks and rice were governed by the same principles in ancient Japan. This brings us to our current subject:
The integrity, anatomy, and significance of contemporary candlesticks have not changed despite the times. As you’ll see, some candlestick patterns today still reflect some of their original meanings.
These charts, which contain a variety of frequently intricate patterns, can be intimidating to many beginning investors. Trading professionals can gain price action insights to help them plan their next moves, though even a fundamental understanding of how to read and recognize these patterns can be helpful.
Bullish vs bearish candlesticks
Candlestick patterns used in crypto trading represent different price movements. The green candlesticks represent an upward movement, or bullish candlesticks as they are called in crypto terms. whereas a red candlestick represents a downward movement or bearish movement.
A combination of these different candlesticks ultimately forms a pattern from which traders can determine if the price movement will be bullish or bearish.
Anatomy of Crypto Candlesticks
The Candlesticks’ anatomy has remained remarkably consistent over time, giving them their current form and significance. It has an open end, a closed end, a high end, and a low end. The four major pieces of information for that day are represented by four bars, which resemble a line chart and a bar chart combined.
Body: The candlestick’s hollow or filled portion.
Long Body: This signifies active trading with significant buying or selling pressure in one direction.
Small Body: This indicates that there has been little buying or selling and lighter trading.
Long, thin lines above and below the body are called the shadow.
High is indicated by the uppermost portion of the upper shadow.
The bottom portion of the lower shadow designates a low.
Types of Candlesticks
To fully understand crypto price movements, it is essential for beginners to first understand the types of candlesticks and what they represent. Understanding the charts becomes easier with proper understanding and identification of the different types of candlesticks and what they mean when seen on a live chart.
There are mainly two types of candlesticks.
- Bullish candlesticks
- Bearish candlesticks
Bullish Candlestick Patterns
Bullish candlesticks, as explained earlier, are usually green and represent an upward price movement of a particular cryptocurrency. Some of the most common bullish candlesticks include
1. Bullish engulfing
The bullish engulfing candle pattern is formed by combining a red and green candlestick, with the first candle being red (bearish). Following the closing of the red candle, a green candle emerges, engulfing the body of the previous candle, and closing above the high of the previous candle.
The bearish engulfing candle, on the other hand, is the inverse of the bullish body engulfing. A green candle should appear first, followed by a red candle that engulfs the first candle’s body.
2. Hammer candlestick
The hammer candlestick has a long wick on the bottom and a small, upward-facing bullish or bearish body. This kind of candlestick typically denotes the market exhaustion of an asset, which indicates an impending trend reversal.
In other words, sellers entered the market and lowered prices, but buyers retaliated by raising prices. The end of a downtrend is the best price location for the hammer candlestick pattern.
Waiting until the candle has closed is recommended if you want to open a trade based on the hammer candlestick. However, the time to enter is when the price crosses above the candle’s high.
3. Morning Star
The “rising three methods” is a bullish, five-candle continuation pattern that denotes a break in the current uptrend without a trend reversal.
Two lengthy candlesticks in the direction of the trend, in this case an uptrend, make up the candlestick pattern. three shorter counter-trend candlesticks in the middle, with two longer candlesticks at the start and end.
Bearish Candlestick Patterns
An inverted hammer is the opposite of the shooting star. It consists of a red candle with a long upper shadow and a short body. On the candlestick opening, the market will typically gap slightly higher and surge to a local peak before closing just below the open. The body can occasionally seem to be completely absent.
The opposite of a bullish engulfing is a bearish engulfing. The next long red candle completely engulfs the small green body of the first candle. This pattern, which appears at the height of an uptrend, portends a turn around. The bearish move will gain momentum as the second candle continues to close lower.
Once more, the evening star is a three-stick pattern and is the inverse of the bullish morning star. It is made up of a short-bodied candle sandwiched between an enormous red candle and a long green candle.
How to Read Candlestick charts
More than just price change over time, candlesticks can reveal a lot more. In order to assess market sentiment and predict where the market might be headed next, seasoned traders look for patterns.
Here are some examples of the kinds of things they seek:
For instance, a long wick on the bottom of a candle may indicate that traders are investing in an asset as prices decline, which may be a reliable sign that the asset is headed upward.
However, a long wick at the top of a candle may indicate that traders are looking to take profits, which could portend a significant potential sell-off in the near term.
If the candle’s body fills almost the entire space, with very short wicks (or none at all) on either side, that might signify a strongly bullish (on a green candle) or bearish (on a bearish candle) sentiment (on a red candle).
A trader can easily read the price on a candlestick chart from left to right because it is structured like a book. Although it is not difficult to read, there is a learning curve involved in chart analysis.
How to interpret a candlestick chart is as follows:
While there are no set rules for this, it is recommended to read candlesticks starting from the far left and working your way toward the first candlestick.
For instance, if you trade in a 15-minute timeframe or swing trade, you can only see data from the previous month.
You should pay attention to the trend’s speed and the candlestick formation at its end.
Also read: https://cryptowhat.com/cryptoversity-review/
One component of a trading strategy known as technical analysis, in which investors try to use past price movements to identify trends and potential future opportunities, is understanding what candlesticks might mean in the context of a specific asset or within specific market conditions.