Last updated on September 18, 2023 12:52 am
Crypto Candlestick patterns are used to forecast the direction of price movement in the future. Learn about 10 of the most frequent candlestick patterns and how to utilize them to spot trading opportunities.
What Are Candlesticks?
Candlesticks are a charting process that plots the price changes of an asset. These were initially created in Japan in the 1800s and were used to look for patterns that might show historical asset price trends. Cryptocurrency traders today use candlestick charts to forecast price changes and examine historical data.
Crypto Candlestick patterns, which are made up of several different candlesticks, can predict whether prices will increase, decrease, or stay the same. It describes the market situation and trading possibilities.
What Is a Candlestick Chart?
Consider looking at the price of an asset over an hour, a week, or a day (stock or cryptocurrency). Candlestick charts can illustrate this pricing information.
The body of the candlestick has two lines, called the shadow or wick. The wick, or shadow, of the candlestick shows the highest and lowest prices achieved during that time, while the body of the candlestick shows the range between the opening and closing prices within that time.
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The green line shows that the price has increased over this period. Conversely, a bearish candlestick has a red body, indicating a decline in price at that time.
They can provide insights into potential price movements. Here are some of the main candlestick patterns you should be aware of:
Doji- Crypto Candlestick Patterns
A doji occurs when the opening and closing prices are very close or virtually the same, resulting in a small or non-existent body. Dojis suggest indecision in the market and can be a signal of a potential reversal.
Doji means that none of the buyers or sellers in this coin had a strong side, due to which the stock remained volatile, This indicates that there is going to be a major change in the price of that stock in the coming time. Maybe the price of that stock falls too low, or it may also be that the price goes up too high.
Bullish Engulfing
This pattern consists of a small red (bearish) candlestick followed by a larger green (bullish) candlestick that completely engulfs the previous one. It often indicates a reversal from a downtrend to an uptrend.
A bullish engulfing pattern is a candlestick pattern that forms when a small black candlestick on the next day is followed by a larger white candlestick, whose body completely overlaps or engulfs the body of the previous day's candlestick
Bearish Engulfing
Like bullish engulfing, but in reverse. It occurs when a small green (bullish) candlestick is followed by a larger red (bearish) candlestick that engulfs the previous one, suggesting a potential reversal from an uptrend to a downtrend.
Smart traders consider the overall picture when using bearish patterns. For example, it may not be wise to take a short trade if the uptrend is very strong. Even the formation of a bearish pattern may not be enough to stop long-term progress. Still, if the overall trend is down, and the price has just seen an upward pullback, a bearish pattern could provide a good shorting opportunity as the trade aligns with a long-term downtrend.
Hammer- Crypto Candlestick Patterns
Hammer candlesticks usually appear following a price decrease. They have a slightly realistic body with a few lower shadows.
The hammer candlestick develops when sellers enter the market during a price decline. By the time the market closes, purchasers have overcome the selling pressure, bringing the market price closer to the starting price.
The closing price may be higher or lower than the starting price, but the actual portion of the candlestick must be close to open to remain small.
The length of the lower shade should be at least twice that of the body. Hammer candlesticks signal a potential price reversal. Following the hammer, the price should begin to rise; this is called confirmation.
Shooting Star
The shooting star is the opposite of the hammer. It has a small body with a long upper shadow and a short, or no, lower shadow. It appears after an uptrend and suggests a potential reversal to the downside.
The shooting star candlestick has a long top shadow, little or no lower shadow, and some real body at the day’s low. It appears that there is a downward trend.
A falling star, or candlestick, occurs when a security opens up, moves up a lot, and then ends the day.
To be called a falling star, a candlestick must be formed during a price rise. Also, the body shape of the shooting star should be between the opening price and the highest price of the day. The actual body should not have any shadows.
Morning Star
This is a bullish reversal pattern that consists of three candlesticks. It starts with a large red (bearish) candlestick, followed by a small candlestick (can be red or green) with a gap down, and finally, a large green (bullish) candlestick that closes well above the first candle’s open.
The morning star’s middle candle reflects a period of market turbulence when bulls start to overtake bears. A fresh upswing may be indicated by the third candle, which validates the reversal.
Technical experts view morning star, a visual pattern formed out of three candlesticks, to be bullish signals. The morning star moves downward, a sign of ascent. Changes the prior price trend. Traders look for the emergence of the morning star before they create further signals to verify the occurrence of a reversal.
Evening Star
The evening star is the bearish counterpart to the morning star. It also consists of three candlesticks, but in the opposite order. It starts with a large green (bullish) candlestick, is followed by a small candlestick with a gap up, and ends with a large red (bearish) candlestick.
Harami
A Harami pattern appears when a small candlestick is completely engulfed by the previous candlestick.
A bullish Harami forms after a downtrend and can signal a potential reversal, while a bearish Harami forms after an uptrend and suggests a possible reversal to the downside.
Three White Soldiers
This is a bullish pattern formed by three consecutive long green (bullish) candlesticks, each closing higher than the previous one. It indicates strong buying pressure and an uptrend continuation.
These candlesticks’ long lower bars indicate that there is significant purchasing pressure driving prices higher steadily. The chance of continuation or a potential retracement can be predicted based on the form of the candlesticks and the length of the wicks.
Three Black Crows
The three black crows’ pattern is bearish and consists of three consecutive long red (bearish) candlesticks, each closing lower than the previous one. It signals strong selling pressure and a potential continuation of the downtrend.
These are just some of the many candlestick patterns used in technical analysis. Traders and analysts often combine these patterns with other indicators and analysis techniques to make informed trading decisions. It’s essential to remember that no single pattern is foolproof, and it should be used in conjunction with other forms of analysis and risk management strategies.
Although candlesticks are not included in your trading technique, it is a good idea to know the patterns they show.
Although they can help in market analysis, it must be remembered that they are not completely accurate. They are ultimately important indicators governing the markets as they communicate buying and selling dynamics.
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