Ultimate Guide to Candlestick Chart and Patterns

Technical Analysis 101: Ultimate Guide to Candlestick Chart and Patterns

Inexperienced traders and investors may find it difficult to read charts. Some investors place their faith in their instincts and go with their gut instincts when it comes to investing. In a positive market, this method may work for a short period of time, but in the long run, it is unlikely to succeed.

Probability and risk management play an important role in both trading and investing. Because candlestick charts are essential for practically any investment strategy, learning to understand them is a must. You will learn about candlestick charts and how to read them in this article.

Let’s Define Candlestick Chart

One sort of financial chart that depicts price changes in an asset over a specific period of time is the candlestick chart. Candlesticks are used to depict the passing of time, as the name suggests. Candlesticks can depict time periods ranging from a few seconds to several years.

When it comes to financial markets, candlestick charts are the most commonly used method of analyzing data. They’re instruments that, when used appropriately, can aid traders in assessing the likelihood of certain price movement scenarios. Traders and investors might benefit from them since they allow them to build their own ideas based on their market analysis.

Candlestick Charts: How to Read Them

Candlestick charts are considered easier to read than bar and line charts, despite the fact that they contain the same information. Candlestick charts are easy to understand and provide a straightforward depiction of price movement.

For a given length of time, a candlestick chart depicts the conflict between bulls and bears in the market. The greater the purchasing or selling pressure was throughout the time period analyzed, the longer the body was on average. A short wick indicates that the measured timeframe’s peak (or low) occurred close to the closing price.

This signifies that the asset closed higher than it opened if its body is green, regardless of the hue and parameters used in different charting tools. The close was lower than the open because the price fell during the time period being measured.

For certain chartists, black-and-white images are the preferred method of depiction. Hollow candles show up movements, whereas black candles denote downshifts on the charts.

Candlestick Patterns: How to Use Them

Candlestick patterns can be used to identify regions of interest on a chart. Day trading, swing trading, and even long-term position trading can all be done with these. The relative strength of buyers and sellers can be deduced from some candlestick patterns, while indecision or reversal can be deduced from others.

Keep in mind that candlestick patterns aren’t always indicative of a buy or sell opportunity. Instead, they are a means to examine the market’s structure and a possible sign of an impending breakthrough. It’s always a good idea to keep patterns in context while analyzing them. A technical pattern on the chart, as well as the larger market environment and other considerations, can be a background for this.

Continuation Patterns

• Doji

When the open and close are the same, a Doji appears (or very close to each other). Even though the price can rise and fall above and below the opening price, it always ends up back at or close to the opening price. As a result, a Doji may signify a point of hesitation between buyers and sellers. However, the meaning of a Doji is heavily influenced by the context in which it is used.

According to where the open/close line lies, the Doji can be categorized as:

Dragonfly Doji –- Depending on the circumstances, either a bullish or bearish candle with a long lower wick and an open/close near the high.

Gravestone Doji – Bearish reversal candle characterized by a long upper wick and an open/close towards the low.

Long-legged Doji – Uncertain candle with an upper and lower wick and an open/close at the middle.

Originally, the Doji was defined as having an open and a closure that was the same. However, what if the open and close aren’t the same but are really close to each other? A whirling top is what you have there. A perfect Doji, on the other hand, is extremely rare in the cryptocurrency market, because of the high degree of volatility. As a result, the Doji and the spinning top are frequently used as synonyms.

• Rising Three Methods

Red candles with small bodies appear in an uptrend, and the rise continues after three successive red candles with small bodies. As a rule of thumb, the previous candlestick’s range should not be breached by subsequent candles.

A large green candle with a massive body shows that the bulls have regained control of the trend’s direction.

• Falling three methods

The opposite of the rising three techniques shows the continuance of a downtrend instead.

Bullish Reversal Patterns

• Three white soldiers

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

A long lower wick indicates that the price is being driven up by constant demand. The size and length of the candles can be utilized to determine whether or not the trend will continue.

• Bullish harami

Long red candles followed by tiny green candles that are completely enclosed within the previous candle’s body form a bullish harami.

Over two or more days, the bullish harami is a pattern that indicates that the selling momentum is easing and may be coming to an end.

• Hammer

At the bottom of the downtrend, the lower wick of a candlestick is at least twice the length of the body.

Bulls pushed the price back up to the open even though selling pressure was severe, as shown by a hammer. In general, green hammers signal a stronger bull reaction than red ones.

• Inverted Hammer

It’s a hammer, but with a long wick above the body instead of below, and is sometimes referred to as the “inverse hammer.” The upper wick should be at least twice as large as the body, similar to a hammer.

In a downtrend, an inverted hammer may point to an upward trend reversal. Even though sellers were able to force the price down around the open, the upper wick signals that the price has now paused its downward trajectory. As a result, the inverted hammer may indicate that buyers are poised to take control of the market.

Bearish Reversal patterns

• Three Black Crows

They’re formed by three consecutive red candlesticks that open and close within the preceding candle’s body and close below the previous candle’s low.

Three white troops in bear form. Candlestick patterns that have very long wicks indicate that the price is being driven down by constant selling pressure. The likelihood of the candles burning out can be estimated by looking at the size and length of the wicks.

• Shooting Star

Small, thin candlesticks are great for shooting stars because of their ability to capture light from the lower atmosphere. The shooting star, like the inverted hammer, is generated at the end of an uptrend and has a similar shape.

As a result, it suggests that the market had reached a high point before sellers gained control and brought the price down to a more manageable level. The next few candlesticks can be used by certain traders as confirmation of the pattern.

• Dark Cloud Cover

Red candles that open above the previous green candle’s close but then fall below that candle’s midway are known as dark cloud cover patterns.

High volume is often a sign that momentum is shifting from an upward trend to a downward one. Traders may wait for a third red candle to confirm the trend.

• Hanging Man

The hanging man pattern is the bearish analog of the hammer pattern. It is most commonly seen at the end of an upswing, with a modest body and a long lower wick.

After a sharp decline, bulls have managed to retake control and propel prices higher. The recent sell-off could serve as a signal that the bulls are losing their grip on the market following a protracted period of upward momentum.

• Bearish Harami

The bearish harami is formed when a lengthy green candle is followed by a small red candle, both of which have bodies that are completely enclosed within the bodies of the prior candles.

The negative harami may arise towards the end of an upswing and imply that purchasing pressure is lessening if it unfolds over two or more days.

Bottom Line

Candlestick patterns are something every trader should at least be familiar with, even if they don’t directly include them in their trading technique. This is because candlestick patterns can be used to predict price movements.

It is vital to keep in mind that these methods do not adhere to any scientific rules or principles, despite the fact that conducting market analysis with them can surely be helpful. They instead communicate and make visible the dynamics of buying and selling that eventually drive the markets.

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