How To Analyse Crypto Trends And Market Positions With Candlestick Patterns

How To Analyse Crypto Trends And Market Positions With Candlestick Patterns

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“A candlestick chart marks a security’s price movement and offers an efficient way to gauge investor sentiment.

You must be wondering what candlesticks are? Well, a candlestick is used to identify trading patterns that assist technical analysts in setting up trades. Meaning, these candlestick patterns are used to forecast the direction of price movements in the future. For centuries, traders and investors have used them to identify patterns that may indicate where the price is headed. 

Before diving into 12 powerful candlestick patterns, let’s first understand how to read candlestick charts.

How To Read Candlestick Charts?

The image below depicts a typical candlestick design. A price candle consists of three distinct points (open, close, and wicks). The first thing to consider is the open and close prices of the candles as it defines where the price of an asset begins and ends for a given period.

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Image Credits- Edelweiss

  • Open Price

The open price is the first price traded when a new candle is formed. The candle will turn green/blue if the price begins to rise (colours vary depending on chart settings) and when the price falls, the candle will turn red.

  • High Price

The highest price traded during the period is indicated by the top of the upper wick/shadow. If there is no upper wick or shadow, the highest price traded was the open or close price.

  • Low Price 

The price at the bottom of the lower wick/shadow is the lowest price traded.

  • Close Price

The close price is the last price traded during the candle formation period. In most charting packages, if the close price is less than the open price, the candle will turn red by default. The candle will be green or blue if the close price is higher than the open price.

  • Body

The body denotes the open-to-close range. In other words, it represents the price difference between the closing and opening prices.

  • Wicks

Wicks are also known as tails or shadows. They reveal an asset’s highest and lowest price during the candlestick period. If no wick is present, the opening and closing prices are the lowest/highest prices.

12 Well-Known Candlestick Patterns 

  1. Bullish Reversal Patterns

Bullish Reversal candlestick patterns indicate that the current downtrend will reverse into an uptrend. When the bullish reversal candlestick chart patterns form, traders should be cautious about taking short positions.

The following are the various types of bullish reversal candlestick patterns:

  • Hammer 

At the bottom of a downtrend, a candlestick with a long lower wick that is at least twice the size of the body. A hammer shows that the bulls pulled the price back up close to the open despite significant selling pressure. A hammer can be red or green, but green hammers may indicate a more aggressive bull reaction.

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Image Credits- Quadency

  • Inverted Hammer

It functions similarly to a hammer, but with a long wick above the body rather than below. The upper wick, like a hammer, should be at least twice the size of the body.

An inverted hammer appears at the bottom of a downtrend and may indicate a possible upward reversal. Although sellers were eventually able to force it down around the open, the upper wick shows that price has halted its downward trend. As a result, the inverted hammer may indicate that buyers will soon gain control of the market.

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Image Credits- Quadency

  • Three White Soldiers

The three white soldiers pattern is made up of three consecutive green candlesticks that all open within the body of the previous candle and close at a level higher than the previous candle’s high.

Ideally, these candlesticks should not have long lower wicks as they indicate the price is being driven up by continuous buying pressure. The size of the candles and the length of the wicks can be used to predict whether the trend will continue or if it will retrace.

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Image Credits- Quadency

  • Bullish Engulfing

Bullish Engulfing is a multiple candlestick chart pattern that appears after a downward trend and indicates a bullish reversal. 

It is made up of two candles, with the second candlestick engulfing the first. The first ca is a bearish candle, indicating that the downtrend will continue. The second candlestick is a long bullish candle that completely engulfs the first, signalling that the bulls have returned to the market.

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Image Credits- Quadency

  1. Continuation Patterns

A continuation pattern indicates that the price will continue to move in the same direction as it did before the pattern was completed.

The following are the various types of continuation patterns:

  • Rising Three Methods

This pattern develops when three successive red candles with small bodies are followed by the uptrend continuing. Ideally, the red candles should not cross the previous candlestick’s range. A green candle with a large body confirms the continuation, indicating that bulls have regained control of the trend’s direction.

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  • Falling Three Methods

A bearish five-candle continuation pattern, the falling three methods pattern indicates an interruption. Two long candlestick charts in the trend’s direction, a downtrend at the start and end, and three shorter counter-trend candlesticks in the middle make up the candlestick pattern. The candlestick pattern is noteworthy because it indicates to traders that the bulls still lack the requisite force to turn the trend around.

  • Upside Tasuki Gap

It is a bullish continuation candlestick pattern that forms during an uptrend. This candlestick pattern is made up of three candles: the first is a long-bodied bullish candlestick, the second is a bullish candlestick chart formed after a gap up and the third candlestick is a bearish candle that fills the space left by the first two bullish candles.

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  1. Bearish Reversal Patterns

Bearish Reversal candlestick patterns indicate that the current uptrend is about to turn down. As a result, when bearish reversal candlestick patterns form, traders should be cautious about entering long positions.

The following are the various types of bearish reversal candlestick chart patterns:

  • Hanging Man 

The bearish equivalent of a hammer is the hanging man. With a small body and a long lower wick, it typically forms at the end of an uptrend. The lower wick indicates that there was a significant sell-off, but bulls were able to retake control and drive the price up. Keeping this in mind, a sell-off following a prolonged uptrend may serve as a warning that the bulls may soon lose control of the market.

  • Shooting Star

When a candlestick with a long upper wick, little or no lower wick, and a small body near the bottom is formed, it is referred to as a shooting star. The shooting star is similar to the inverted hammer in shape; however, it forms at the end of an uptrend.

It means that the market reached a high point, but then sellers took control and drove the price back down. Some traders prefer to wait for the pattern to be confirmed by the next few candlesticks.

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  • Three Black Crows

Three consecutive red candlesticks open within the body of the previous candle and close at a level lower than the previous candle’s low form the three black crows.

Three white soldiers are the bearish equivalent. These candlesticks should ideally not have long higher wicks, indicating that the price is being driven down by persistent selling pressure. The size of the candles and the length of the wicks can be used to assess the likelihood of survival.

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  • Bearish Engulfing 

Bearish Engulfing is a multi-candlestick pattern that appears after an uptrend and indicates a bearish reversal.

It is made up of two candles with the second candlestick engulfing the first. The first candle, which is a bullish candle, indicates that the uptrend will continue. The second candlestick chart shows a long bearish candle, engulfing the first. If a bearish candle forms the next day, traders can enter a short position with a stop-loss at the high of the second candle.

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  • Dark Cloud Cover

The dark cloud cover pattern is formed by a red candle that opens above the close of the previous green candle but closes below its midpoint.

Indicating that momentum has shifted from the upside to the downside, it is frequently accompanied by high volume. Traders may want to wait for the pattern to be confirmed by a third red candle.

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Conclusion 

Candlestick patterns are important for any trader to understand, even if they do not use them directly in their cryptocurrency trading strategy. While they are unquestionably useful for market analysis, it is crucial to remember that they’re not based on any scientific principles or laws. Instead, they communicate and visualise the buying and selling forces that ultimately drive markets.

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