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Candlestick

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Did you know it is possible to predict the market by reading the candlestick chart? Here's how you can translate these patterns into profits!

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Did you know that candlestick charts appeared over three centuries ago? The candlestick chart was invented in the 1700s by a Japanese rice trader — Munehisa Homma (or Homna, also known as Sokyu Honma or Homma). He used the candlestick elements (Open High and Close Low) to represent the prices in a trading period.

Today, almost all financial markets rely on candlestick charts for price representation.

Read on as we explain everything you need to know about candlestick charts, including how to read and trade with them for profit. 

 is a trading approach that analyzes financial instruments such as stocks, commodities and digital currencies through past price data and trading volumes. Market participants like traders and investors use technical analysis to pinpoint patterns and market movements that can guide them in choosing when to purchase, sell or hold a particular asset.

, which delves into the inherent value of an asset by evaluating a company's financial well-being, sector trends and other qualitative aspects, technical analysis focuses primarily on asset price and volume information.

Crypto charts provide traders with a visual representation of valuable information about the historical and current price movements of cryptocurrencies, as well as their trading volumes. Analyzing these charts allows you to gain insights into the market's behavior so you can make more strategic investment decisions. 

Key elements that crypto charts reveal include price trends, 

 and momentum indicators. These charts unearth patterns based on previous price action, providing a large context for information from indicators like 

 (RSI). Each chart pattern serves as a tool for identifying potential investment opportunities.

Using Trend Analysis to Understand Bull and Bear Markets

Trend analysis is essential for understanding 

, as it assists traders and investors in determining the market's overall direction. Market participants can make educated investment choices by recognizing and interpreting these trends. Here's how trend analysis can aid in understanding bull and bear markets.

A candlestick chart is a combination of multiple candles a trader uses to anticipate the price movement in any market. In other words, a candlestick chart is a technical tool that gives traders a complete visual representation of how the price of an asset has moved over a given period.

The candlestick chart is a crucial price action tool that shows detailed information about price, including the open, close, high and low for a particular time frame. Still, it’s confusing when compared side-by-side with a bar chart.

Here’s an example of the bar chart and candlestick chart:

The bar chart and the candlestick chart may look similar, but there’s indeed a difference. In a candlestick chart, the relationship between open and close is represented by the color of the body. In contrast, the bars have a single vertical line and two horizontal lines on either side of the vertical line.

 forms on a price chart, crypto traders can anticipate 

 or reversals. Therefore, both a single candlestick and a group of candlesticks are essential to define a crypto trading asset’s upcoming price movement. 

A comprehensive understanding of crypto trading charts is essential for anyone delving into cryptocurrency trading. These charts offer valuable insights into the market dynamics of digital assets, allowing traders to act decisively and capitalize on potential opportunities. Here's a breakdown of the critical components found in a typical crypto trading chart.

The trading pair represents two cryptocurrencies that can be exchanged for one another on a trading platform (e.g., BTC/ETH or BTC/USD). The first crypto quoted is usually the base currency, and the second crypto is the quoted currency.

Current Price, Mark Price, Last Traded Price

 The current price reflects the trading prices currently available for both buyers and sellers, as reflected by the 

 of the market. The mark price, also known as the fair price, is an estimated value that aims to provide a reasonable price valuation. It’s sometimes derived from an average across multiple exchanges or a combination of 

. Finally, the last traded price refers to the price at which the asset was traded in the most recent transaction.

The high and low prices indicate the maximum and minimum values reached by the trading pair during a specific time frame (e.g., 24 hours, one week, or one month)

The 24-hour trading volume represents the total amount of the trading pair exchanged within the past 24 hours.

 The unit of time corresponds to the time intervals displayed on a crypto trading chart, such as 1-minute, 15-minute, 1-hour or 1-day intervals.

 The price chart is a visual representation of the historical and current price movements of the trading pair over the selected time frame.

 Trading volume is the total quantity of the trading pair exchanged during a specific period, typically shown as a bar chart below the price chart.

 A limit order allows a trader to specify the maximum or minimum price at which they are willing to buy or sell a cryptocurrency.

 is an order type that automatically sells a cryptocurrency when its price drops to a preset level, helping to minimize potential losses.

The moving average line is a technical indicator that calculates the average price of a cryptocurrency over a specific period, smoothing out price fluctuations and revealing the underlying trend. Common moving averages include the 

Firstly, let’s have a look at a visual look of a candlestick:

Above we can see a bullish and a bearish candlestick, with opening and closing prices in opposite directions. 

The main body is the broader part of the candlestick that shows the opening and closing prices. In a bullish candle, the opening price is below the closing price, indicating the price has risen over the trading session’s period. 

On the other hand, the opening price is above the closing price in a bearish candle, showing that the price has decreased during the trading period.

The length of the candle’s body represents the market pressure. An extended length indicates strong movement, while a short length represents minor price movement.

Now, let’s learn how to read the red and green candlesticks in any crypto pair.

Typically, the green color (or buying pressure) of a candle represents a bullish candlestick, and red indicates a bearish candlestick. However, you can change the color at any time according to your choice and trading template. 

The wick is the thinner part of the candlestick, attached above and below the candle body. The wick above the candlestick’s real body indicates the highest price level during the trading time frame.

Opening High and Closing Low Price (OHLC) Explained

An OHLC (open-high-low-close) candlestick chart type shows the open, high, low and closing prices for a particular time period. 

The open level is the price at which the previous candle closes. This price will move up or down, and will create a new high or low. When the candle closes, it will point to a new closing price. The future price of a candlestick stock depends on how these levels (OHCL) appear. 

Let’s say that Bitcoin’s price has moved above $30,000 on a particular day, making a high above the crucial $30,000 level. However, the price then moves lower and closes the daily candle below $30,000 by forming a Doji or pin bar pattern.

It simply means that buyers tried to take the price above the $30,000 level but failed, and sellers thus took control over the price. This is a clear indication that the price has failed to achieve stability above $30,000, and that it may be a good idea to sell now.

Each candlestick forms patterns that traders can use to recognize major support and resistance levels. A great way to start is to first identify the candlestick patterns. Here’s what you need to know.

When Does a Candlestick Pattern Start to Show?

Candlestick patterns are a combination of some candlesticks representing a story about buyers and sellers for a particular time. However, price movement in financial markets depends on both supply and demand, and on traders’ emotions (which create “market sentiment,” or the market’s overall tone or mood). As soon as the price reaches a resistance or support level, candlestick patterns will start to emerge.

Therefore, when a price moves to a significant zone, candlestick patterns will become very important. 

For example, Bitcoin’s high psychological level of $60,000 in the spring of 2021 became a strong resistance level that attracted many buyers and sellers.

Let’s look at the BTC/USD graphic below.

Bitcoin creates an indecisive candle near the significant round number of $60,000, indicating a starting point of a pullback. Its price then falls with an impulsive bearish pressure toward the downside.

So, what will you do if you find an appropriate candlestick pattern at a critical support or resistance level?

You should closely track buyers’ and sellers’ activity, and enter a trade once the direction is set. The best solution is to wait for an appropriate candlestick pattern at either a support or resistance level, and enter your trade after a rejection.

Understanding Candlestick Chart Patterns and Trends

Trends are usually represented by the ups and downs of an asset’s price on the candlestick chart. The high and low points of several small trends are grouped to form a more significant trend.

: These appear when a chart has new low points, higher than the previous lows, and new high points that are higher than the previous highs. During an upward trend, traders are confident to trade, and the market is generally bullish. 

: As opposed to upward trends, a downward trend’s chart has new high points, lower than previous high points, and new low points that are also lower than previous low points. 

: The prices in a consolidation trend don’t move consistently in one direction. Instead, the movement switches between high and low, with the high and low points being relatively close to one another and forming a “channel.”

Candlesticks charts are like books in which a trader can easily read the price from left to right. They’re not technical to read, but there’s a learning curve to analyzing the chart. 

There are no specific rules, but it’s recommended that you start reading candlesticks from the far left until you see the first candlestick. Focus on the speed of the trend and candlestick formation at its end. 

Let’s take a look at a practical example to understand better.

Here we can see a daily Bitcoin chart in which the price has started to move higher with a 

. Later on, the trend corrects and moves lower. The price then forms another bullish engulfing pattern, moves higher and forms a new high.

Still, the best way to interpret the data of a candlestick chart is by using technical tools, such as stochastic and RSI indicators and moving averages, for an accurate price direction.

How to Read Candlestick Charts In Crypto Trading Like a Pro

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