If you ask us what association we have with crypto, the answer will be “candle charts”. So in case you decide to trade, you need to know everything about this instrument. The definition of the candle charts is closely related to the term technical analysis. So while investigating it, you first need to know how to read candlesticks charts.
ENON article, we are going to answer all your quotations and concerns about this way of reading trends. And we will start with the detailed definition. What Are Candlestick Charts?
A candlestick chart is a popular and dynamic way to visualize the price movements of financial assets, including crypto. Each candle represents the trading activity within a specific time frame, such as minutes, hours, days, or weeks. The body of the candle illustrates the opening and closing prices during that period, while the wicks, or shadows, indicate the highest and lowest prices reached.
Candlestick charts offer comprehensive insights into market sentiment, allowing traders to analyze price patterns, identify trends, and make informed decisions. Various candlestick formations, such as doji, hammer, and engulfing patterns, provide valuable signals regarding potential reversals or continuations in the market trends.
The ability to interpret candlestick patterns empowers traders with a deeper understanding of market dynamics, aiding in the formulation of effective trading strategies.
Components of a Candlestick Chart
Generally, a candle chart has 5 main components that you need to understand how to read candlesticks.
Body: The rectangular area of the candlestick represents the opening and closing prices of an asset within a specific time frame. The color of the body depends on whether the closing price is higher (bullish, often green or white) or lower (bearish, usually red or black) than the opening price.
Wicks (Shadows): Also called “tails” or “shadows,” these lines extend from the top and bottom of the candle’s body and indicate the highest and lowest prices reached during the chosen time.
Opening Price: The price at which the asset begins trading during the given period, often the left side of the candle’s body.
Closing Price: The price at which the asset finishes trading within the specific time frame, typically located on the right side of the candle’s body.
Timeframe: Each candle represents the trading data over a chosen period, such as minutes, hours, days, or weeks, allowing traders to analyze price movements at different intervals.
You can see all the elements clearly in the picture:
Common Candlestick Patterns
After understanding the main part of the candle, let’s figure out what patterns this instrument can have and explore how to read candlesticks and their patterns. There are a lot of them, and we want to highlight 5 of the most common and used.
Hammer and Hanging Man
The Hammer and Hanging Man candlestick patterns exhibit small bodies and extended lower shadows. The Hammer typically manifests at the culmination of a downtrend, signifying a potential reversal in the market’s direction. Conversely, the Hanging Man emerges amid an ongoing uptrend, serving as a potential indication of an upcoming reversal in the prevailing market trend. These patterns provide traders with critical insights into potential shifts in market sentiment, often prompting decisions regarding entry, exit, or the adjustment of trading strategies.
The Morning Star and Evening Star
These candlestick patterns are powerful indicators of potential trend reversals. The Morning Star pattern appears during a downtrend and consists of three candles: a long bearish candle, followed by a small-bodied candle with a lower shadow, and completed by a bullish candle. This formation suggests a potential shift from bearish to bullish sentiment. Conversely, the Evening Star pattern materializes in an uptrend and also comprises three candles: an upward candle, followed by a small-bodied candle with a higher shadow, and finalized by a bearish candle. Recognizing these patterns aids traders in assessing market reversals, and facilitating timely decisions related to entry, exit, or adjustments in their trading strategies.
This candlestick pattern represents a state of market indecision, denoting equilibrium between buyers and sellers. It’s characterized by having the opening and closing prices at or near the same level, leading to a formation that resembles a cross or plus sign. Doji patterns can occur in various forms such as the classic cross, long-legged Doji, gravestone Doji, or dragonfly Doji, each conveying distinct market sentiments. Traders consider the appearance of a Doji as a pivotal point to reassess market dynamics, indicating a possible shift in momentum and potential upcoming market movements.
Three White Soldiers and Three Black Crows
These are significant candlestick patterns representing potential market reversals. The Three White Soldiers pattern consists of three consecutive bullish candles forming higher highs and closing near their highs. This formation typically occurs after a prolonged downtrend and suggests a bullish reversal, indicating a shift in sentiment from bearish to bullish. On the other hand, the Three Black Crows pattern comprises three consecutive bearish candles with lower lows, generally appearing after an uptrend. Each candle opens within the previous candle’s real body and closes near the session’s low.
The bullish engulfing pattern emerges when a larger bullish candle completely engulfs the preceding smaller bearish candle. This occurrence often denotes a shift in market sentiment from bearish to bullish. It typically appears at the end of a downtrend, signifying potential upward movement. Conversely, the bearish engulfing pattern unfolds when a larger bearish candle engulfs the prior smaller bullish one. This pattern usually materializes at the culmination of an uptrend and suggests an impending downward shift.
All these patterns are used with one purpose – to define the trend and to help the trader to understand the market situation better. So to use them you need to choose what you are going to do – buy or sell, and then select the right pattern for you.
Bullish and Bearish Patterns
Visually, a bullish candle (usually green or white) is formed when the closing price is higher than the opening price, showcasing an upward price movement. Conversely, a bearish candle (typically red or black) occurs when the closing price is lower than the opening price, indicating a downward trend.
Bearish Patterns Bullish Patterns Hanging Man Hammer Evening Star Morning Star Bearish Engulfing Bullish Engulfing
Each pattern is created under certain circumstances. For example, the Morning Star forms when a downtrend ends with a bullish candlestick, followed by a small-bodied candle signaling uncertainty. And then a bullish candle confirms the reversal.
The Evening Star develops when an uptrend ends with a bullish candle, followed by a small-bodied candle indicating indecision, and then a bearish candle confirming the reversal. And so on.
Conclusion: Last Tips for the Beginner
Now you know all the basics about candle charts and how to read candlesticks. For the safest trading with joy, we recommend you keep in mind some essential tips. First, start by understanding the basic candlestick patterns and their interpretations. Familiarize yourself with common bullish, bearish, and reversal patterns to recognize potential market movements. Use candlestick charts in conjunction with other technical analysis tools like moving averages, RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence), etc., to confirm signals and reduce risk.
And of course, always implement risk management strategies. Set stop-loss orders to limit potential losses and establish a risk-reward ratio to determine acceptable trade setups. Remember, mastering candlestick chart analysis takes time and practice. Start slowly, focus on understanding patterns, and gradually expand your trading strategies as you gain confidence and expertise.
How do you read candlesticks for beginners?
Focus on understanding the basics: study the candlestick patterns, and recognize bullish and bearish signals. Learn how to interpret the patterns' shapes and sizes about market movements.
What is the 3 candle rule?
It is a trading strategy where traders analyze the behavior of the last three candles on a chart to predict potential market movements.
What is the best timeframe to read candlesticks?
The best timeframe to read candlesticks depends on your trading style and goals, but commonly used timeframes include 1-hour, 4-hour, daily, and weekly charts.