Trading charts have been around for hundreds of years. Literally hundreds. And all successful crypto traders learn how to read candlestick charts sooner or later. They paint a picture of emotions and price dynamics. They allow traders to analyze the market using a simple visualization. A graph.
There are many different charts. Different kinds have different pros and cons. But today we are going to talk about arguably the most popular type. A candlestick chart.
How To Read Candlestick Charts: What a Candlestick Is Made Of
A candlestick is a visual representation of asset activity. It shows this activity for a specific timeframe that traders can choose. Candlesticks consist of four components:
As we noted before, each candlestick represents timeframe and price dynamics. Green for growth, red for a decline.
Growth entities that the price at which the asset is trading is higher than at the beginning of the period. Or that the closing price was above the opening price.
A red candlestick shows that the current price is lower than it was at the start of a period. Or that when trading closed, it fell below the opening price.
At the bottom of a green candlestick is an “open”. An open points to the price of the asset at the beginning of a trading period. The “close” is located at the top of a green candlestick. It shows the price at the end of the period.
An “open” and “close” are reverted for a red candlestick as you can see in the picture below.
Then there are the “high” and “low” components. They show the extreme prices that the asset in question hit during a period. Both an extreme high and an extreme low.
How To Read Candlestick Charts: Features Of A Candlestick
There are two distinct features of a candlestick.
- The “body” of a candlestick is the thicker part that is red or green, depending on the asset price. It is the main indicator of value dynamics.
- The “wick” is the thinner lines at the top and bottom. They show price extremes during a period.
When it comes to cryptocurrency trading, we need to stay mindful of the high market volatility. That’s why while long term traders often choose to analyze the market by weeks or even months, crypto traders choose candlesticks that show shorter periods. It’s a good idea to start with one or two hours and work your way up to 12 hours.
How To Read Candlestick Charts: Common Patterns
Naturally, when trading begins candlesticks tend to take all kinds of forms. A shape of a candlestick can tell us a lot about where the market is going. Regardless of the assets in question.
But there is more to candlesticks than that. Consider the following. While the shape of a single candlestick tells us about the current price movements, it is the patterns that reveal where the market might go next.
Sometimes candlesticks align in a pattern across a price range. Some of these patters are very characteristic and they often indicate next market trends.
Let’s look at the three arguably most important patterns:
Doji is a sign of indecisiveness. You can identify this pattern when a candle has a very thin body. Sometimes so think you won’t even see it. At the same time, the wicks are very long on both sides of the candle.
This indicates that despite big price jumps, the trading period closed at the same or similar price to witch it was opened.
Hammers indicate that a bearish period is about to end. It shows that there is an opportunity to make money on the bullish run.
This pattern shows that the bulls took control of the trading (indicated by the wick) but quickly lost it (short body). As a result, the price returned close to the opening number.
In other words, the bears tried to sink the asset but bulls regained the initiative and didn’t let it happen.
You can identify a hammer by a lower-side wick. The wick is typically twice as long as the body of a candlestick.
A shooting star is like a hammer but reversed.
It means that bulls who were in control lost the initiative to the bears. Bears managed to sink the price close enough to the opening figure by the end of trading.
important to keep in mind that the longer the duration of the candlestick, the more powerful its effect is on the overarching trend.
In general, depending on the period the effect on the trend may be bigger or smaller. The longer the time period that the candlestick represents, the more powerful the effect.