Even though the cryptocurrency market is relatively new, it has experienced tremendous growth in recent times due to significant interest from both investors and traders. Bitcoin, Ethereum, Ripple, and many other cryptocurrencies are now at their all-time highs and still going strong. Many new cryptocurrencies, too, are giving serious competition to them in terms of growth, and we frequently hear about a new coin giving out stellar returns (cue: Dogecoin).
The crypto market, which is active around the clock, attracts many users who try their hand at crypto trading to generate some sweet profits. While many traders just go with the flow, a significant faction relies on technical analysis and indicators to strengthen their trades and make informed decisions. Candlestick patterns or charts are one of the most common technical tools used by traders for centuries now, helping them analyze the price trends of an asset. This article will discuss the best candlestick patterns and how you can make your candlestick strategy to start crypto trading.
What Is Candlestick Pattern
Candlestick patterns have been longer than most people realise. They first originated in Japan in the 1700s, when rice traders realised that the emotion of traders strongly impacted the market, apart from the traditional supply and demand statistics. While the Japanese captured the emotion factor, more than 100 years later, the West developed the bar patterns and charts.
Candlestick patterns capture that emotion well by using different colours to represent the magnitude of the price movement visually. This makes them extremely useful than many other technical indicators, and traders use candlestick trends to trade based on frequent patterns. This helps them forecast the short-term price movement direction.
How To Read a Candle?
The candlestick trading patterns show contain a body and wicks, which offer the user details such as the market’s open price, closing price, market high and market low for the day. The candlestick’s wide part is known as its real body, and it denotes the price range of the asset between the opening and closing of that day’s trading. When the real body fills up, majorly in black, it means the closing price was lower than the opening price. On the other hand, if the real body is empty, it means the asset closed at a higher price than it opened at.
Body: The body of the candlestick denotes the range between the opening and closing of an asset. If the candlestick’s body is green, it represents a bullish trend, while a red body indicates a bearish trend.
Wicks: The wicks of a candlestick denote the range between the lowest and highest price within the specified period.
High Price: The high price is the highest traded price of the asset in the candle period.
Low Price: The low price is the lowest traded price of the asset in the candle period.
Opening Price: The opening price of an asset is the price at which it starts trading as soon as the market opens for the day or the analysis period starts.
Once the market hours close and the market stops for trading, or the analysis period ends, the final price of an asset is known as its closing price.
Types of Candlestick Patterns
Candlesticks are generated when the price of a cryptocurrency moves up and down. Even though the price movements may seem random, they sometimes form patterns that one can use to analyse where the price is headed. While there are many different types of candlesticks patterns, it will be impossible to talk about each one of them. Therefore, we bring you some of the most powerful and common candlestick patterns that traders use.
The Bearish Harami is a two-bar candlestick pattern that originated from Japan. This candlestick pattern contains a long white candle followed by a small black candle. While this pattern is not primarily to be acted upon, it is more of an analysis-friendly pattern that showcases buyer’s indecision. In this pattern, the second candle must be contained within the body of the first candle. Bearish Harami is often used in tandem with other indicators such as RSI to amplify the chances of profitable decisions.
As the name suggests, the Bullish Harami is the opposite of the Bearish Harami. It is a very common candlestick pattern among traders and indicates a bearish trend or market reversal. This indicator is charted as a long candlestick accompanied by a smaller body, which is completely contained within the vertical range of the previous body.
The Morning Star cryptocurrency candlestick pattern consists of three candlesticks, and it forms after a downward trend. This pattern is defined as a bullish sign by experts, and it indicates the beginning of an upward climb and a reversal in the previous price trend.
The Evening Star candlestick trading pattern is a price pattern used to deduce when trend reversal will occur. It is the opposite of the Morning Star and is a bearish indicator. Containing three candles, it is rare but one of the most powerful candlestick patterns and considered highly reliable by trading experts.
One of the top candlestick patterns is the Bearish Engulfing Pattern. It develops when an uptrend occurs and sellers outnumber the buyers. It has two candlesticks: the up candlestick (white or green) and a large down (black or red) candlestick. When a Bearish Engulfing candlestick pattern occurs, the down candlestick engulfs the up candlestick. Since the sellers outnumber the buyers, this pattern showcases that prices will continue decreasing.
Right on the opposite side of the Bearish Engulfing is the Bullish Engulfing candlestick pattern. It consists of a white candlestick, which closes at a higher price than the last day’s opening price, but only after opening at a lower price than the previous day’s close. When a small black candlestick is followed by a large white candlestick on the next day, completely engulfing the black candlestick, it is a Bullish Engulfing pattern. The Bullish Engulfing pattern is a two-candle reversal pattern and appears in a downtrend.
These are only some of the best candlestick patterns used by crypto traders for their technical analysis. If you believe that these patterns are too complicated for you, you start with some easy and common candlestick patterns to help you understand the technical indicator and make the most of it. Below, we’ll help you understand how to build an ideal candlestick strategy to trade with.
Finding the best candlestick patterns and building the ideal candlestick strategy is easy for traders, but only if they understand how to read the candles and have their trading goals defined. It doesn’t matter if you use the most powerful candlestick patterns, but if your thought process is not aligned with your strategy, nothing will come out of it. Therefore, before you start your cryptocurrency candlestick trading strategy, make sure you completely understand how to decipher a candle and what is the pattern trying to tell you.
To help you get started, we will discuss two of the most common candlestick patterns: the Bullish and Bearish Engulfing Patterns. We will discuss the patterns, what they tell you and give you an example of trade for comprehensive understanding. So, read on to learn about two of the top candlestick patterns.
Bullish and Bearish Engulfing Patterns
As mentioned above, the Bullish and Bearish Engulfing Patterns are some of the most powerful candlestick patterns used by crypto traders. The bearish engulfing pattern develops when the sellers outnumber the buyers, and the prices continue decreasing. It has two candlesticks, up and down, and when the pattern occurs, the down candlestick engulfs the up candlestick, and the prices fall. On the flip side, the Bullish Engulfing Pattern appears when the prices increase, and the buyers outnumber the sellers. It has a white candlestick that closes at a higher price than the last day’s opening price, but only after opening at a lower price than the previous day’s close. When a small black candlestick is followed by a large white candlestick on the next day, completely engulfing the black candlestick, it is a Bullish Engulfing pattern.
What Do These Patterns Tell Traders
Price Trend: The engulfing patterns support the ongoing trend and will indicate if the trend will continue or not
Trend Reversal: If there is a trend reversal, the patterns will signal it. When a bullish engulfing pattern is at the bottom of the downtrend, it signals uptrend reversal, and when a bearish engulfing pattern is at the top of an uptrend, it signals downtrend reversal.
Exit Points: This pattern can also be used as a signal to exit in the ongoing trend that is ending.
Here’s an example of trading using the Bullish Engulfing pattern
As you can see, once the second bearish candlestick engulfs the previous bullish candlestick, it is a Bullish Engulfing Pattern. This can help traders know when the trend is changing and if they should exit the market.
Here’s an example of trading using the Bearish Engulfing pattern
Once the second bullish candlestick engulfs the body of the first bearish candlestick, it is a Bearish Engulfing Pattern, which indicates that the prices will now start to increase. This can help traders enter the market efficiently.
This was just one example of the many candlestick patterns and charts out there. There are many other common candlestick patterns that you can analyse and build your own candlestick strategy. In the end, choose a pattern that works for you and your trading goals.
Isn’t it fascinating that we are using the same trading strategies in crypto trading that rice traders discovered nearly 400 years ago? Candlestick patterns are now a pretty common name in crypto trading and have captured the attention of traders of all kinds. The best candlestick patterns help traders deduce the emotion around a cryptocurrency and make better predictions about where the stock might head. Many a time, some candlestick patterns emit signals that are not reliable enough in these modern times, which is why it is imperative to choose the right candlestick strategy, to begin with.
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