When participating in the financial market, including crypto, you need to equip yourself with enough knowledge to understand how the market works, including technical analysis, fundamental analysis, and technical analysis property management techniques.
And the most potent technical tool is the candlestick chart, an essential skill when trading. In this article, ONUS gives you a complete and detailed guide on how to read candlestick charts to improve trading efficiency.
Understanding candlestick charts
Candlestick charts appeared more than three centuries ago, in the 1700s, by Munehisa Homma – a Japanese rice trader. Over the course of its development, Homma’s candlestick charts have been further refined by many, most notably Charles Dow – one of the fathers of modern technical analysis. Today, almost all financial markets use candlestick charts as price representations.
What is a candlestick chart?
A Candlestick chart is a type of financial chart showing an asset’s price movement over a specific time frame. Candlestick charts are made up of “candles,” Each candle will show price movements for an equal amount of time, from seconds to years.
Candlestick is a tool that displays detailed information about prices, including the opening price, closing price, and high and low prices for a specific time.
Traders can predict price continuation or reversal when a candlestick pattern is formed on the price chart. Therefore, a single candlestick and a set of candlesticks are essential for you to be able to determine the price movement of a trading asset.
Understanding a candle.
Each candlestick should have a candle body and a candle’s shadow (wick). In there:
- The main body of the candle is the broader part, showing the opening and closing prices.
- The shadow is the part attached to the top and bottom of the candle body, showing the high and low prices.
To understand the structure of a candle, let’s learn about the prices displayed in a candle.
- Opening Price – The price at which the asset is traded for the first time in a specific timeframe.
- Peak Price – The highest recorded asset trading price in a particular timeframe.
- Bottom Price – The lowest recorded asset trading price in a particular timeframe.
- Closing Price – The last recorded asset transaction price in a particular timeframe.
Example: If you use a 1-hour chart, the price candle at 11h00 AM UTC on November 11th, 2022, has the opening price at 11h00 AM UTC on November 11th, 2022, and the closing price at 11h59 AM UTC on November 11th, 2022.
Identify and read candlestick patterns.
When do candlestick patterns appear?
Candlestick patterns combine many candles, showing the story between buyers and sellers in a precise moment. Besides, the price movement in the crypto market depends on supply, demand, and traders’ emotions. Candlestick patterns will appear once the price reaches a resistance or support level. Therefore, the candlestick pattern becomes very important when the price moves to a notable area.
For example, the psychological level when Bitcoin hit $30,000 became a strong resistance, attracting many traders to buy and sell.
Therefore, you should keep a close eye on buying, selling, and entering trades only when the price direction has been established.
Read the candlestick pattern and identify the trend.
Trends are usually represented by the rise and fall of the asset value on the candlestick chart. Trends include:
- Up-trend: Then, traders will be more confident. Trends occur when a chart has new lows higher than previous and new highs higher than previous highs.
- Down-trend: Contrary to an uptrend, the chart has a new high lower than the previous high and a new low more melancholy than the previous low.
- Trend consolidation (sideway): The price will not move in a certain direction in this trend. The price will swing between high and low, while high and low points are relatively close.
Candlestick charts are considered easier to read than bar or line charts. However, they provide the same information because candlestick charts can quickly provide information about price movements. There are no specific rules for reading candles. However, ONUS recommends reading from left to right.
In general, to read candlestick charts accurately and effectively, you should:
- Use multiple timeframes
- Focus price action at essential support and resistance levels
A timeframe is an essential tool for traders. The higher the timeframe, the more accurate price direction is provided. Therefore, if you trade any cryptocurrency, you should watch the daily price direction or the H3 candle. You can exchange for profit when the lower and higher timeframe is in the same order.
Candlestick patterns in a random position on the price chart will only provide somewhat accurate signals. However, a candlestick pattern in trend and a perfect location can give highly accurate trades.
Therefore, you should pay attention to the support and resistance levels in the chart. In addition, the market context and many other factors, such as market news, and on-chain data, are valuable references to increase the success rate.
Some price action moves that often take place you can consider:
- Strong Movement: When the price moves up or down steadily, creating a new high or a new low.
- Volatility: Price breaks through old lows or highs without establishing a clear direction.
- Correction: After the price boom needs a revision.
- Non-volatility: Price fluctuates strongly in a specific direction.
Candlestick patterns play an essential role in technical trading. Candlestick patterns are beneficial for traders to determine the possibility of price movement and market trends.
Below, ONUS will inform everyone about the best and most popular candlestick patterns you need to pay attention to when trading.
Candles engulf rising and falling.
The bullish engulfing candlestick pattern is a combination of bullish and bearish candlesticks. Then the first candle is bearish. After the bearish candle closes, a bullish candle will appear that engulfs the body of the bearish candle and closes above the top of the bearish candle. The bearish engulfing candlestick pattern will be the opposite.
This pattern indicates that the price direction changes from bullish to bearish or vice versa. As seen in the design below, the bullish engulfing pattern is active at the strong support, causing the price to reverse.
The meteor candle has a long upper shadow and a small lower body. If you see a shooting star at a critical resistance level, that is a potential selling opportunity for which you should watch out.
The ideal price position of a shooting star is the end of an uptrend.
The hammer candle is the opposite of the meteor candle. A hammer candle has a long lower shadow and a small bullish or bearish upper body. This type of candle usually represents a trend reversal. The hammer shows that the bears have entered the market, pulling the price down but being opposed by the buyers.
The ideal price location of a hammer candlestick pattern is the end of a downtrend.
Candle the Hangman
This candlestick pattern is like a hammer candle. There will be a long shadow, two times higher than the natural body.
Pros and cons of candlestick patterns.
- It provides a visual visualization of price movements and flexibility for data analysis across different timeframes.
- Easy to understand, easy to learn, easy to apply
- The price is easy to predict because of the clear presentation
- Find potential buying and selling opportunities.
- We need to wait for confirmation, causing the delay.
- Candlestick patterns at random positions, with no strong support or resistance, will often deviate.
- It does not display volume information and does not consider the underlying factors.