In technical analysis, there are different kinds of tools that crypto traders use to determine market trends. These tools determine the increase and decline in a particular crypto asset price.
Displaying the historical price of a crypto asset comes in different ways. The most popular are the line, bar, and candlestick charts. Of all three, the candlestick is most preferred because it provides with a degree of accuracy the grid patterns that anticipate trend reversals or continuation.
What is a Candlestick?
The candlestick chart is a financial chart used to represent a crypto asset's historical price movement in a particular period. The chart got its name from candlesticks because the graphical image is that of a candlestick. Each candlestick depicts the same amount of time, and depending on the trader's choice, they can virtually represent its period from seconds to years.
The history of the candlestick can be dated back to the 17th century. It was said to be pioneered by a Japanese rice farmer Munehisa Homma. It was adopted into the western world through Steve Nison's "Japanese Candlestick Charting Techniques" book.
Components of the Candlestick
To adequately understand the purpose of the candlestick, these vital components need to be explained:
Candle body: The body shows the open and close price. The open or closed points' position realizes whether the prices are bullish or bearish at a point in time. The price will be at the top in the bullish market, while it is at the bottom in the bearish market.
Candle shadow: Though not an absolute rule, each candlestick has two shadows representing the price's highs and lows at the given period. The upper shadow depicts the peak, while the lower shows the lowest point. If the shadow is not visible, the high and low coincide with the open or close.
Candle Colour: The color shows the trajectory of the movement. The green body shows an apparent increase, while the red indicates that the price is on a decline.
10 Popular Candlestick Patterns Commonly Used In Cryptocurrency
There are numerous candlestick patterns used in cryptocurrency trading. Below are the ten most popular ones:
- Hammer Pattern
The hammer candlestick pattern is usually found at the bottom of a downtrend, consisting of a short body with a much higher shadow. It shows that the bulls can pull the price back up after resisting the selling pressure during a given period. A hammer pattern can be red or green, but green indicates a stronger bull reaction.
2. Inverted Hammer
The inverted-hammer candlestick is similar to the hammer and has a long shadow above the body. Like the hammer, its upper shadow is twice the size of the body, which is found at the base of a downtrend. The upper shadow shows that the price has stopped moving downward. As a result, it may suggest that the buyer gains market control.
3. Morning Star:
The morning star pattern comprises three candlesticks; a long red followed by a short-bodied red and long green. The middle candle does not overlap the longer ones. This pattern suggests that the first period's selling pressure is fading, making way for a bull market.
4. Bullish Engulfing
A bullish engulfing candlestick pattern is a double candlestick pattern, with the first candle being a short red engulfed by a green candle which is bigger. In contrast, the second open is lower than the previous red one. This implies buying pressure is increasing, which reverses the downtrend.
5. Hanging Man
The hanging man candlestick is a reversed version of the hammer. It is formed by a green or red candlestick with a short body and a lower shadow. It is found at the end of an uptrend. The Hanging Man suggests a considerable sell-off during a given period, but the bull could temporarily push prices higher, after which they lose control.
The Doji candlestick is perceived as a trend continuation pattern. However, traders should be wary because it might also end up with a reversal, i.e., it goes both ways. Let other patterns appear after The Doji when the market is clear to avoid confusion. Doji candles are relatively small-bodied with a long shadow.
7. Bearish Engulfing
The bearish engulfing is the opposite of bullish engulfing. The first standard is green, followed by a red candle. The bearish engulfing appears when the uptrend is peaking and a reversal is on the horizon. The lower candle goes, the bearish the market gets bearish.
8. Shooting Star
The shooting star occurs when the market goes a bit higher on the candlestick's opening and surges to a local peak before closing just below the open. The body can sometimes be almost invisible.
9. Evening Star
The evening star is the opposite of the morning star. It is a three-candlestick pattern that consists of a short-bodied candle that comes between a long green candle and a large red. This pattern suggests high selling pressure, making way for a bearish market.
10. Three White Soldiers
The Three White Soldiers pattern is named after the three exceeding candlesticks that follow each other on the chart. They indicate the continuous buying pressure that drives the price of a cryptocurrency. The sizes of the candlesticks are often used to determine the continuation of the possible reversal of cryptocurrency prices.
Candlestick pattern reading is an essential knowledge that cryptocurrency traders must possess. It helps traders understand the market's trajectory to know when to buy and sell. Also, it equips traders with insights regarding the potential growth of crypto assets and the knowledge of the one that has reached its peak.
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