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Crypto 201: Beginner Trading - Candlesticks

Candlesticks are one of the most important tools for cryptocurrency traders when it comes to finding buy/sell areas in price charts. This lesson is for you if you are new to active trading and the use of candlestick charts.

There are different chart types traders can use for technical price analysis, such as line charts, bar charts or – the famous candlestick charts we want to discuss here.

Although modernized in the late 1800s by journalist Charles Dow, the core principles of candlestick charting remain intact today. Both the modern and historical technical analysts who swear by the style regard price action as more important than earnings, news or any other fundamental principles.

In other words, all known information is reflected in the price, which is precisely displayed in the candlestick.

Once you understand Japanese candlesticks, you’ll be amazed how much you’ll see in their formations, but be careful about confirmation bias and seeing patterns where there are none.  If you're looking for a pattern, it's likely that you'll find it!

Candlestick charts are the most popular chart type since they carry a lot of information through their highs, lows, bodies, wicks and formations.

Many candlesticks have a name and indicate either a bearish, a neutral or a bullish market sentiment for the moment when they occur.

So the very next candlesticks afterwards are likely to move in the direction the preceding candle has indicated. There is no guarantee for that, of course, but in the majority of cases it will be like that.  The reason is that the majority of traders will think the same because of the preceding candlestick and either buy or sell because of that signal, which makes it kind of a self-fulfilling prophecy.

However, sometimes strong market makers might act against that bias and surprise traders with an opposite price movement in the next candles.

Candlesticks in crypto charts cannot be used to predict the price long term, they won’t tell you the coin’s value for next year, of course.

Rather they will tell you how likely certain price movements are immediately afterwards, concerning the next few candlesticks. For instance, they can indicate a trend reversal – so a trader knows when it’s time to buy or sell.

But of course time is an important factor when it comes to chart analysis, since you can watch candlesticks on a one-minute-chart as well as on a weekly time frame. In one case each candle represents a minute’s price action while in the other case it’s the open, close, high and low prices of a whole week. The weekly candles show you the bigger picture and frame work in which the lower time frame candles are moving.

Anatomy of a Candlestick

A candlestick represents the price activity of an asset during a specified timeframe through the use of four main components: the open, close, high and low.

The "open" of a candlestick represents the price of an asset when the trading period begins whereas the "close" represents the price when the period has concluded. The "high" and the "low" represent the highest and lowest prices achieved during the same trading session.

Every candlestick uses two physical features to display the four main components.

  1. The first feature, known as the body, is the wide midsection of the candlestick and it depicts the open and close during the observation period (most charts will allow you to set the range for the candlesticks)
  2. The close is represented at the top of the body in the green candlestick and at the bottom of the body in the red candle.
  3. On the opposite is true of the open, which forms the bottom of the green candlestick and the top of the red candlestick.
  4. The final two components, the high and low, are represented in the second feature of the candlestick known as the 'wick.' Wicks are simply displayed as the thin lines extended above and below the body.

Cryptocurrency traders tend to take advantage of the inherent market volatility by using charts on the intra-day time frames. Each candlestick typically represents one, two, four or 12 hours. (A longer-term trader will likely choose to observe candlesticks that represent a single day, week or month.)

A candlestick becomes "bullish," typically green, when the current or closing price rises above its opening price. The candlestick becomes "bearish," typically red, when its current or closing price falls below the opening price.

Here are the Japanese Candlesticks you must know as a Crypto Trader:

  • Bearish candlesticks indicate that for the moment it’s more likely that the price will go down
    (without telling how much down this might be).
  • Bullish candlesticks indicate that for the moment it’s more likely that the price will go up
    (without telling how much upwards this might be).
  • Neutral Candlesticks leave traders waiting – it’s a moment of market indecision.  Hard to guess what the next candles might look like.

A candlestick rarely keeps its figure for too long in the volatile cryptocurrency market.

For instance, if the 2-hour candlestick opens at a price of $10 and jumps to $13 an hour later, the shape of the candlestick will have drastically changed since opening.

But traders have also come to realize the same candlestick shapes occur at the same stage of a price trend, no matter what is being traded. It can be very lucrative to identify such formations because they can expose clues as to when a trend might reverse, continue or when market indecision is at its peak.

Single Formations

Double Formations

Triple Formations

Let’s have a look at some examples of candlesticks within charts, for a better understanding what you should expect from the next price action right after the specific candles.

Buy Signals And Sell Signals By Candlesticks

Candlesticks Showing Weakness Of Uptrend – Sell Signal

The more charts you see, the more your eye gets trained, and you’ll note such signals pretty quickly. In some cases the market might react differently and the trend might go on, but more often such signs of weakness are right.

Candlesticks Showing Weakness Of Downtrend – Buy Signal

The candlesticks on the end of downtrends often show a rejection of the bearish dominance with a very high closing price (last price within one candle stick), compared to the session’s lowest price. Such candlesticks show a tough fight of the bulls to gain the upper hand. This can either mean a break within the downtrend or actually a reversal, if the bulls succeed, like we see in the image above.

The Bitcoin Chart Candlesticks

The Bitcoin chart shows another interesting phenomenon regarding candlesticks and what they tell us:

In the chart you can see best how the candles are getting shorter and shorter in Bitcoin’s daily chart, during the last months. That’s also a case where the candles tell a lot about the market situation.

Those indicators (ever shorter candlesticks + support at around 6000) tell us that it’s more likely that the Bitcoin price will rise again soon, rather than dropping deeper. That’s why pro traders carefully buy back small amount in this area, rather than further selling.

I say “carefully”, because a pro trader is never sure – he just acts accordingly to likelihoods. But being more often right than wrong, because of understanding indicators, is enough to make money.

If a pro trader is wrong and price turns against him, he simply sells with a little loss. In relation to the gains he achieves when he’s right, the losses are no big deal.

The Best Way To Decide About Buying Or Selling

The best way to decide about buying or selling is to use several indicators in combination. If they all tell you the same, the likelihood that you are right is high and the trade is very likely to become successful.

Only the ones who are willing to invest in their knowledge – be it time or money, or both – will succeed and make money by trading cryptocurrencies.