Candlestick Patterns | What To Look For

February 12, 2024
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Diagram of candle stick for graphs

Candle Sticks are often confusing, but we have the basics for improving your crypto trading.

In this article, we will also discuss different types of bullish and bearish candle structures with patterns.

What is a Trading Chart Candle?

‌‌Knowing what a candle shows you on a chart is essential. Most people investing in cryptocurrency use TradingView to analyse the price charts for projects they have invested in or are interested in.

A candle on a chart covers a particular time frame from a very short time, for example, a few minutes, to a longer time period or several months. Most investors will use the higher timeframes to analyse trends and investment levels, usually the daily time frame or longer. On the other hand, day traders use the lower timeframes (usually minutes) to find their entries for trades. The candles on the charts are made up of 2 main things, the body and the wicks.

The Body of the Candle

These show where the price starts (the open) and where it ends (the close) over a specific time frame you are looking at.

In a bearish candle, the body's highest point is where the price started (opened), and the lower price is where it ended (closed). These on a standard chart are generally red.

A Bullish candle is the opposite, where the price starts at a low point and finishes higher; these on the standard charts are green.

‌‌Wicks on a Candle

The wicks show the entire price movement and can highlight that the price has moved much higher or lower than the body's open and close. The longer or bigger the Wick, the more volatile the price action has been in the directions it has moved; sometimes, wicks are misleading when analysing a chart or a trend hence the phrase you may have heard, wicks play tricks.

I like to think of these candles like a tug of war between the bulls and the bears in the market, and each 'team' is trying to overpower the other, affecting price and candle structure. The wicks and the body of the candle can indicate the market sentiment.

Bullish candles

There are many Bullish chart patterns and candles to be aware of; some are easier and clearer to spot. These bullish patterns cover the possibility of reversing or continuing a positive price trend. Depending on the timeframe you are using will determine how quickly these patterns play out. Using the above basic knowledge, you can determine how the price has behaved that day and whether that is leaning towards being bearish to bullish. Looking at the chart further down the article, you can see many different candle structures.

One of the easier bullish candles to spot is a Hammer candle. You can see that the market opened, and the bears drove the price down, but the bulls could reclaim the day's momentum and go back up to a higher price than it started. The Wick to the upside of a Hammer candle is usually very small, but to the downside, it is longer. This is a good sign that the bulls have been able to overpower the bears and would be considered a bullish sign for a reversal of price action. Simply analysing a candle this way is ideal if you cannot remember all the different patterns and names.

A few more examples of reversal candles would be a Bullish engulfing candle, which is when the price has been driven higher than a previously bearish candle in one move, and a tweezer bottom, where you can see a bearish candle went the price down, bounced off a level and then the next candle re-tested the same level but made a solid bullish movement away from the level. There are many more candles, but this article will become very long if we cover them all. Hopefully, these fundamentals will help.

Bearish candles

These are the opposite of the candles described above. You can see the tweezer top has the Wick above the candles, and the price has been rejected from a level and then continued downwards; the hanging man is the opposite to the hammer candle, where momentum has been lost negatively, and the Bulls have not been able to regain any traction in price action, with this candle it has a very small wick to the upside.

The Shooting Star is a candle I like to spot; you can see it has a very long wick to the upside, but the body closure is below the opening price; I think you can imagine this like a ball that has been thrown straight up in the air and then losing all its momentum, and it starts to fall back to earth. This is a good sign that bullish price action is losing strength and potentially reversing/finding a top.

Indecision candles (Neutral)

The most common neutral or indecision candles to spot are the Doji or spinning top candle; you can see that they have equal-length wicks with a very small body to the candle where the price has ultimately returned pretty much to where it started, in this case, neither the Bulls nor the Bears have been able to take control of the market.

Important points to note

The candles on a chart can't be trusted to decide price action. Instead, they should be incorporated with other indicators such as RSI Divergences,  Fibonacci and Support and Resistance levels; you can use a combination of these indicators to help you decide on the most likely path for the market in the future.

Another critical point is always to wait for the candle to close; many will often spot a candle forming only for the price to change and invalidate the developing structure.

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