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Cryptocurrency is arguably one of the most talked-about topics in the world today, with multiple investment opportunities. With crypto trading on the rise, crypto traders are looking for an easy way to look at the market, setting the ground for the development of crypto candlestick patterns. Candlestick patterns are fast becoming the go-to option among traders since they are easy to understand with their visual appeal. This article is focused on understanding what candlestick patterns are and the different types Bitcoin and cryptocurrency traders need to know about.
What is a Candlestick?
A candlestick represents an asset’s price activity during a specific period. This data allows traders to choose specific time frames to help them trade based on low or high timeframe decisions. These patterns can represent varied time frames, ranging from a minute, seconds, days, or even a month. Candlestick patterns consist of four major components; high, low, open, and close. During trading, the value of an asset at the beginning of trading is classified as Open while the value at the end of trading is Close. On the other hand, High and low represent the highest and lowest prices of an asset during the trading session.
The Hammer candlestick pattern is characterized by a short body with a longer lower shadow. This pattern often presents itself at the bottom of a downtrend. Using this pattern, traders can identify the bull’s resistance to sell pressure in a given timeframe, pushing the prices back up. Despite there being other hammer patterns with red and green candles, it’s best to note that green candles indicate a stronger uptrend compared to red hammers.
Bullish engulfing patterns are made up of two candlesticks. One of the candles features a short red body covered by a larger green candle. The second candle opens lower than the red ones and is used to indicate an increase in buying pressure causing the downtrend to reverse.
A Doji pattern is formed when the Open and Close are similar or close. During trading, the asset’s value can rise or fall below the open but eventually ends at or close to the Open. This pattern indicates an indecision point based on the buying and selling points. However, interpreting a Doji pattern is dependent on the context. There are different descriptions for Doji, all of which are based on where the Open or Close line falls. These include:
The gravestone doji candlestick: is a bearish reversal candle characterized by a long upper wick with the Open and Close nearing the low.
A long-legged doji : is an indecisive candle that features an upper and lower wick with the Open/Close nearing the midpoint.
Dragonfly doji: this pattern presents itself as either a bearish or bullish candle based on the context. It’s also characterized by a longer lower wick, with the Open/Close being closer to high.
This pattern is also referred to as inverse hammer. Like a hammer, it features a long wick above the body. To identify this pattern, the upper wick should be twice or more the size of the body. This pattern occurs at the bottom of a downtrend and can indicate an upward reversal. The upper wick indicates a stop in the downward trend, even after a trader’s efforts to move it closer to open. This pattern is used to indicate a trader’s proximity to gaining control of the market.
Three White Soldiers
The three white soldiers’ candlestick patterns comprise three consecutive green candles, all opening within the previous candle’s body and closing above the last candle’s high. Usually, these candlesticks don’t have long lower wicks indicating continuous buying pressure to increase asset prices. Traders can leverage the length of the wicks and the size of the candles to make an informed decision on whether to continue trading or retrace.
Bullish Harami- Crypto Candlestick Patterns
A bullish harami pattern is characterized by a long red candle followed by a small green candle contained within the previous candle’s body. This pattern can take two or more days to present itself and often indicates that the selling momentum may be slowing down or ending.
Hanging Man- Crypto Candlestick Patterns
A hanging man pattern is a bearish equivalent to hammer candlestick patterns. It unfolds at the end of an uptrend and is characterized by a smaller body and long lower wick, which are either red or green. A hanging man is used as an indication of a weakening uptrend, signaling traders to consider selling.
A shooting star pattern features a candlestick with a long upper wick, with a little or no lower wick, and a small body. This pattern has a close similarity to the inverted hammer; however, it presents itself at the end of an uptrend. This pattern indicates that the market reached a high, but the traders regained control and lowered the price. To be sure, most traders wait for a few more candlesticks to unfold.
Three Black Crows
The three black crows pattern features three consecutive red candlesticks that start trading within the previous candle’s body and ends below the last candle’s low. This pattern is considered the bearish equivalent of the three white soldiers. Normally, these candlesticks don’t have long higher wicks that indicate a continuous selling pressure which lowers the prices. However, traders can use the length of the wicks and the size of the candles to decide on continuation or retracement.
Candlesticks have brought a whole new train of thought to trading, especially among those dealing with cryptocurrencies and Bitcoins. As a trader, you need to familiarize yourself with different types of candlestick patterns, even if you are not looking to employ them when trading. These patterns can prove helpful in analyzing the market to help you make informed decisions.