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For a newcomer to trading or investing, reading charts may be difficult. Certain individuals trust their instincts and make investment decisions based on them. While this strategy may work for a short period of time in a bull market, it is unlikely to be successful in the long run.
These charts, which feature a wide range of patterns and are often complex, might be confusing for many new investors. However, even simple awareness of how to read and recognise these patterns can provide traders with price action insights to assist them to plan their next moves.
When it comes to candlestick charts, time is represented by the horizontal axis, and the vertical axis represents price data. With candles, you can see more detail than with other types of graphs, such as bar graphs. You can see the asset’s highest and lowest prices, as well as it’s opening and closing prices, all in a single glance.
What are Candlestick Charts?
In finance, a candlestick chart is a type of graph that shows the price fluctuations of an asset over a specific period of time in a visually appealing way. It’s made up of candlesticks, each of which represents a certain period of time. When used as a time symbol, candlesticks can represent anything from a few seconds to many years.
Using candlesticks, you can see whether the price movement in a market was positive or negative and by how much. Candlesticks are extremely useful. It’s also worth noting that cryptocurrency markets operate 24 hours a day in contrast to stock markets. In other words, “open”, and “close” prices refer to the price at the beginning and end of the specified interval, respectively.
Anatomy of a Candlestick
- Body: The open-to-close range is shown by the body. To put it another way, it shows the difference between the closing and opening prices.
- Wicks: Another name for these are “tails” or “shadows”. They show the asset’s highest and lowest price points over the duration of the candlestick period. Opening and closing prices are the lowest and highest when there’s no wick to keep track of them.
- Highest Price: The top of the upper wick reflects the highest price exchanged throughout the period.
- Lowest Price: The bottom of the lower wick shows the lowest price at which the asset is traded.
- Opening Price: This is the price at which the first trade of the new candlestick time period occurred. When the price rises, the candle turns green; when the price falls, the candle turns red.
- Closing Price: The closing price is the price at which the candle was last traded during the candle’s formation period. The candle will be green if the price is higher than the opening price and red if it is lower.
Popular Candlestick Patterns
There is a lot more than just price movement that candlesticks can show you with their patterns. In order to evaluate market sentiment and make predictions regarding the future direction of the market, seasoned traders look for patterns.
The hammer is one of the simplest patterns to recognise. This pattern, like a hammer, is formed by a candlestick with a long lower wick at the bottom of a downtrend. Typically, the body is small, with little to no upper wick. A hammer can be red or green.
A hammer could indicate a strong trend reversal and a potential price surge. This pattern shows strong selling pressure, but buying pressure also regained control of the price action during the same time period.
It’s also known as the inverse hammer, and it works similarly to a hammer except that the wick is located above the body rather than below it. The upper wick, similar to a hammer, should be at least double the size of the body.
At the bottom of a downtrend, an inverted hammer may indicate a possible upward reversal. Even though sellers were able to force the price down around the open, the upper wick signals the price has now halted moving downward. As such, the inverted hammer may indicate that buyers are prepared to take over the control of the market in the near future.
Three white soldiers
The three white soldiers pattern is made up of three green candlesticks that open within the body of the preceding candle and close above the previous candle’s high.
Typically, the candlesticks should not have long lower wicks, which indicates that the price is rising due to constant buying pressure. The length of the candles and the height of the wicks can be utilised to determine whether or not the trend will continue or retrace.
Bullish harami/Bullish Engulfing
A long red candle followed by a small green candle that is entirely contained within the previous candle’s body represents a bullish harami.
The bullish harami can last for two or more days, and it’s a sign that the selling pressure is weakening and that the downtrend may be nearing its end.
The Morning Star
Three candles in a downtrend form the Morning star pattern. The first one is a long red candle, which indicates bearish momentum. On the other hand, the star has extremely long wicks, a short body, and closes below its previous closing price. The third Candle closes above the first candle’s midpoint and is a bullish candle.
Whenever a star appears, it indicates that the current trend has peaked, and an upswing will soon begin.
The Hanging Man
The hanging man is the bearish counterpart to the hammer. It is most frequently formed at the end of an uptrend and has a small body and a long upper wick.
The lower wick shows that a significant sell-off occurred, but bulls seized control and drove the market higher. Keeping this in mind, the sell-off following a sustained rally may serve as a warning that the bulls are about to lose control of the market.
The Shooting Star
The Shooting Star is composed of a single candlestick with a small body and a smaller wick. In comparison, the upper wick is extremely lengthy. In contrary to the pretty similar Inverted Hammer pattern, this one comes at the peak of an uptrend.
This pattern implies a significant price rejection following a major increase in price. The Shooting Star is frequently used as a bearish reversal signal.
Bearish Harami/Bearish Engulfing
It’s called a “bearish harami” when the first candle is green and the second one is red, and the bodies of both candles are completely enclosed within one another.
The bearish harami can take up to two days to develop, emerges at the end of an uptrend, and maybe an indication that buying pressure is weakening.
Three Black Crows
It’s made up of three successive red candlesticks that open within the previous candle’s body and close at a level lower than the candle’s low.
That would be a bear’s equivalent of three white soldiers. Longer wicks on these candlesticks indicate continual selling pressure driving the price lower. Size and length of wicks are good indicators of whether the trend will continue.
The Dark Cloud Cover
When a red candle opens above the closing price of a preceding green candle but closes below the midpoint of that candle, we have a Dark Cloud Cover pattern. When this pattern appears in an uptrend, it usually results in a new high.
This chart pattern can mean one of two things: either a downturn is likely or the current rally has come to an end. Traders interpret this pattern as a sell signal in both circumstances.
As opposed to ordinary line charts, Candlestick charts provide a great deal of information and is an excellent trading tool. They do, however, have numerous limitations when used separately. Hence they are frequently used with other technical indicators like the RSI or the Moving Average.