You probably already know that when it comes to showing the past prices of something like a forex pair, company share, or cryptocurrency, there are a few different methods to choose from. The top three chart types that people commonly use are the line chart, bar chart, and candlestick chart. Out of these options, many traders tend to favour the candlestick chart because it offers a variety of patterns that can help predict whether a trend will reverse or continue, and it does so with a decent level of accuracy. These patterns, known as candlestick patterns, are used by traders to make educated guesses about where prices might be headed in the future.
In this article, we will discuss what candlestick patterns are and the top most used ones you should definitely check out if you are a crypto trader.
What Is a Candlestick?
Have you ever heard of a candlestick chart? It’s a neat way to visually depict the price history of an asset over a specific timeframe. Each candlestick represents a particular period, depending on how the trader sets it up. For instance, if you’re using a 1D chart, each candlestick represents one day.
What makes candlestick charts stand out is that they offer more useful information compared to traditional open, high, low, and close (OHLC) bars or simple lines that connect closing prices. These candlesticks actually form patterns that can give traders insights into the future direction of prices once the patterns are complete.
To make things even more interesting, candlesticks are colour-coded, which adds depth to this fascinating technical indicator. Interestingly enough, candlestick charts originated in the 18th century thanks to Japanese rice traders.
Top Candlestick Patterns that Indicate a Bullish Trend in Crypto
This pattern looks like a candlestick with a short body and a long lower wick, and it typically appears at the bottom of a downward trend. What does it mean? Well, it suggests that during a certain timeframe, the bulls (those who believe prices will go up) have managed to hold their ground against the selling pressure and push the price back up. This is significant because it indicates the emergence of strong buyers for the first time in the ongoing downward movement. It’s like a signal that the sentiment might be shifting, and the direction of the price could potentially change.
The bullish engulfing pattern is a fascinating duo of candlesticks in which The first candlestick is a small red one, but its whole body is completely engulfed by a larger green candlestick that follows it. Even though the second candlestick opens at a lower price than the previous red one, the buying pressure starts to intensify. This increase in buying power ultimately leads to a reversal of the downtrend. Additionally, we have another formation called the double bottom, or tweezers bottom, which acts as a counterpart to the bullish engulfing pattern. When you spot a double bottom, it suggests that a downtrend may be coming to an end and a potential upward reversal is in the cards.
Here’s how the Piercing line works: First, we have a long red candle, and it’s followed by an equally long green candle. But what’s really important is the gap between the closing price of the red candle and the opening price of the green candle. This gap signifies a powerful surge in buying pressure, as the price is driven up to or even surpasses the mid-price of the previous day. Now, here’s the key: The close of the green candle should cover at least half the length of the body of the preceding day’s red candlestick. It’s a signal that buyers are flexing their muscles and potentially turning the tide in their favour.
This pattern is a bit more intricate since it involves three candlesticks working together. First, you’ll spot a long red candle, followed by a shorter-bodied candle, and finally, a long green candle. The “star” candle, the one in the middle, doesn’t overlap with the longer-bodied candles. In fact, there are noticeable gaps in both the opening and closing prices. These gaps are significant because they indicate that the selling pressure from the first day is starting to fade away.
Three white soldiers
The three white soldiers’ pattern is a formation that unfolds over three consecutive days. In it, you’ll notice three long green (or white) candles in a row, each with small wicks. These candles open and close at progressively higher levels compared to the previous day. The main condition for this pattern is that each of the three consecutive green candles must open and close higher than the preceding period. This pattern is considered a powerful bullish signal, especially when it appears after a downtrend.
Top Candlestick Patterns that Indicate a Bearish Trend in Crypto
The hanging man behaves like a bearish twin to the hammer candlestick, sharing a similar appearance but appearing at the conclusion of a bullish phase. It takes the form of a candlestick, either green or red, sporting a small body and an elongated lower shadow. What this peculiar formation suggests is that a noteworthy decline occurred throughout the day, yet buyers managed to gain a resurgence in price. The substantial sell-off is frequently interpreted as a signal that the bullish forces are gradually surrendering their hold on the market.
The shooting star bears a striking resemblance to its counterpart, the inverted hammer, but takes centre stage during an uptrend. It consists of a candlestick with a small lower body and a mighty upper wick. As the candlestick starts to appear, the market tends to open with a slight upward gap and soar to a nearby pinnacle. However, as the curtains draw close, it decides to conclude just below the opening price. Sometimes, the body itself is so minuscule that it’s almost as if it’s barely there.
The bearish engulfing pattern typically shows up when an uptrend is about to come to an end. Imagine two candles on a stock chart. What happens is that this big red candle engulfs the small green one completely. When you see this pattern, it usually means that the uptrend is losing steam and a reversal might be on the horizon. The extent to which that second red candle goes down is crucial. The further down it goes, the stronger the bearish momentum becomes.
The evening star in any crypto chart is somewhat like the cousin of the bullish morning star. We have three candles- a little candle with a short body., a long green candle and a big red candle that closes below the middle point of the first green candle. This is seen as a sign that the uptrend is about to do a 180-degree turn and head in the opposite direction. When that third candlestick not only erases the gains of the first one but goes even lower, that’s when we know the reversal is particularly powerful.
Three black crows
The three black crows candlestick pattern comprises of three consecutive long red candles, with no real wicks to speak of. Each session starts off at a price similar to the previous day, but then the selling pressure kicks in, and the price keeps dropping lower and lower by the time the market closes. It’s as if the sellers are taking charge and overpowering the buyers for three straight trading days. You can think of it as a sign that a bearish downtrend is starting to take shape.
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Which pattern among these candlestick patterns, do you use the most to trade crypto? Comment below