Since the dawn of cryptocurrency, we’ve seen a major increase in its value. The value and utility over paper currency is much better suited for our way of life in this new digital era. It’s possible that it may one day take over the future of currency; however that’s a bit over speculative for now. With so many benefits to offer, many who never thought about trading in their life are now tempted with these digital nuggets of gold.

 

Even if the concept of cryptocurrency seems foreign, trading is fairly simple when you get a handle on it. However, in order for it to be useful, you need to understand fundamental concepts of the market.

Much like institutional stock trading, it’s important to understand signals at the beginning of your trading journey. Understanding signals can be the difference between winning or losing your ass on a trade. One of the most important “signals” ‘you can begin to study is the candlestick.

 

What Are Candlestick Patterns?

Candlestick patterns have been in use for decades and have become very popular in terms of plotting the price action of a security or stock. Typically, a candlestick chart has a series of bars, called candles, which have different colors and heights. The colors and sizes depend on the price action of the security being studied at that point in time. It usually contains both opening and closing prices.

The bars of the candle depends on the unit of time, be it a minute, day or even a week. This, however, does not affect the candle’s color. If a bar is visible, it means that the closing price is higher or lower than the opening price of the currency. These are generally referred to as the “body” of the candle.

 

A red candlestick is used when the opening price is higher than the closing price, thus showing a downward pull, whereas a green color is used to show that the price rose from the starting period to the end.

Even though the candlestick chart will allow a person determine what rate the cryptocurrency is headed towards, technical analysis is also needed so that a better decision on movement can be made.

Popular Candlestick Trading Patterns

Let’s take a look at a few popular candlestick patterns that can often be found on any particular chart. There are two categories of candlestick patterns: continuations and reversals. A continuation pattern can predict the extension of the price action currently prevailing, whereas reversal patterns predict the change in price direction.

 

Take a look over the following nine bullish candlestick patterns. Look out for these when focusing in on strong reversal signals.

Hammer

Being a bullish reversal pattern, the hammer can be seen as a signal that the currency has almost reached the bottom of a downtrend. This typically means that the bears have been exhausted.

Hanging Man

The hanging man is the exact opposite of the hammer. Here, the signal is showing the cryptocurrency is nearing the top of an uptrend. If you see a hanging man, when the price is going up, do not buy. The prices will most likely be dip soon so it’s best to take your profits now.

Three Soldiers

Three “white” soldiers is a bullish candlestick pattern which predicts the reversal of a downtrend. As you can see from the image below, the pattern consists of three consecutive long body candlesticks. These candlesticks open within the previous candles body in close above the previous candles high.

Bullish Engulfing Pattern

The bullish engulfing pattern typically occurs when a large green a candlestick fully and goals the smaller red candlestick from the period before it. The opposite is true for the bearish engulfing pattern.

This pattern typically indicates a potential reversal of traders sentiment.

Morning Star

The evening star will typically indicate where an investor should look into exiting a trade. This candlestick pattern is based on three candlesticks. The first one is a long bearish candle. The second is a small bullish candle indicating indecision. The third is a large bullish candle substantiating the reversal.

Piercing Line

This pattern is formed with two consecutive candlesticks. The first candlestick is red in the second candlestick is green which indicates a potential reversal. Take note that the green candlestick must be more than halfway above the bottom of the first red candlestick.

Shooting Star

Is a type of reversal pattern that indicates a falling price. It looks exactly the same as an Inverted Hammer (below) however found at the end of an uptrend. The candles made up of a small lower body with a long upper wick. The wick should be two times the size of the lower body.

Inverted Hammer

This is one bullish reversal pattern and indicates the support level. The signal shows that bulls are attempting to raise the prices upward, this is also why you will see long shadows (also referred to as wicks). They aren’t strong enough to push the prices up at the moment, however when you see this signal, you need to stop selling your currency because there is a very high chance of an upcoming rally.

Doji

When you see a doji, you need to be cautious since the pattern means that the market is not very sure about future movement and is waiting for an external sign. This typically means a reversal is impending. The signals are not as strong as can be seen from the signals discussed above. If you spot one, don’t attempt to buy or sell since the uneasy market can mean you might end up losing the trade.

Recommendations

It’s better to use a variety of technical analysis and candlestick patterns in order to determine a clear plan of attack for future movement. Both upward and downward movements are more prominent when evaluating them over a long period of time, depending on if your day or swing trading.

When evaluating candlestick patterns, try to wait until the next candlestick forms before analyzing the previous one. Some candlesticks patterns are based on speculation. Any recent news event can turn the whole pattern upside down. Try trading on days when there aren’t any profound news events. This will allow the candlestick patterns to be properly represented within the market and won’t change drastically.

I highly recommend checking out our charts here and practice predicting certain candlestick patterns as they form. While you’re at it, print this candlestick cheat sheet until you achieve a solid understanding on how to spot candlestick patterns. Regardless of how long you’ve been trading, the cheat sheet should always be readily available.

For more easy to follow trading guides, visit our crypto trading resource page.