Crypto trading is one of the most lucrative investments in the crypto market today. But like any other investment, there are risks that involve trading digital assets that could lead to losses. To engage in buying, selling, and trading virtual assets, a crypto trader should be equipped with the proper knowledge. One should know how to perform technical analysis using trading indicators. One of these indicators is the candlestick which could be useful to help traders decide when to open a long or short position, or when to exit the market. A red candle indicates that the closing price is lower than the opening price. On the contrary, the green candle indicates that the closing price is higher than the opening price. The candlestick has two parts. What are these?
The wide or colored part of a candle is the body that represents the range between the opening and the closing prices over a specific time period. Then you have the wicks (upper and lower) or the shadow that indicates the highest and lowest price of a crypto asset within the candlestick period. The top of the upper wick represents the highest price traded during the candlestick period. The bottom of the lower wick indicates the lowest price traded during the candlestick period.
In the candlestick formation, the opening price is the price at which the cryptocurrency was first traded while the closing price is the price at which the asset was last traded. If the price goes up, then the candle turns green but when the price decreases, the candle reverses to red. In the event that the closing price is above the opening price, the candle will be green otherwise it will be red.
The candlestick pattern can help determine a bullish trend or bearish trend. Here are some examples of candlestick pattern that indicates a bullish trend.
This candlestick pattern as the name suggests has the shape of a hammer and is the easiest to recognize. A hammer pattern indicates a strong reversal trend and a potential for the price to spike. It shows that sellers entered the market resulting in a downward trend but were later outnumbered by buyers creating a reversal in price action.
Inverted Hammer Pattern
It has the same appearance as the hammer pattern except that the long wick is above the body rather than below. This is a reversal candlestick that signals a potential bullish reversal.
Bullish Engulfing Pattern
This pattern consists of two candlesticks occurring at the bottom of a downward trend. The first one is bearish (red) preceded by a green candle with a bigger body that eventually engulfs it. This indicates buying pressure and the start of an upward trend as buyers are driven by the significant price increase.
Piercing Line Pattern
This is made of a long bearish candle (red) preceded by a long green candle which occurs at the bottom of a downtrend. In this pattern, you can see a gap between the closing and opening prices with the closing of the second handle which is more than half of the bearish candle’s body.
Morning Star Pattern
It is made up of three different candles in a downtrend. The first is a long bearish candle followed by the second candle, the star, consisting of very long wicks and a short body that closes below the previous closing price. The third candle is a long bullish candle that closes above the midpoint of the first candle. This pattern indicates that the current trend is losing control and the third candle confirms the start of an uptrend.
Three White Soldiers Pattern
This candlestick pattern is made up of three green candlesticks inside of a downtrend. The second and the third candles open within the body of the previous ones and close above them and would usually have no lower ticks. The pattern indicates a strong buying pressure resulting in a price surge which indicates a price reversal. The size of the candles indicates the intensity of the buying pressure. The bigger the candles, the stronger the buying pressure.
For someone to understand and execute a wise trade, knowledge of candlestick patterns is very important as they indicate the market trend. Using the candlestick pattern, how can a crypto trader determine a bearish trend? Next in our article, we will feature what are the candlestick patterns that signal a bearish market trend.