16 June 2020
What Are the Candlesticks in Crypto Trading?
No matter the level of experience you have trading cryptocurrency, you should have a firm grasp on using candlesticks. These are an essential part of trading as they help you form your strategy.
Candlesticks are one of the most popular types of charts that you will use when trading crypto, but what information do they tell you, and how do you use them in your analysis?
How to Read a Candlestick
Candlesticks will be green or red and can have a “wick” sticking out of the top, the bottom, or both ends. The colored portion of the candlestick is called the “real body,” while the wicks are the “upper shadow” and “lower shadow,” respectively. You may also hear them referred to as the wicks.
Every single aspect of the candlestick’s appearance tells you something about the crypto on the chart.
The real body of the candlestick spans the area between the open and the close prices within your given time frame. If the open price was higher than the close, the real body would be red, indicating a drop in value. If the open price was lower, the real body will be green, showing a rise in value.
No matter the color of the real body, the upper shadow comes in the form of a straight line that goes until the period’s high point. The lower shadow goes down to the low.
Information at a Glance
Because of all the information you get from a candlestick, just one plot on the chart shows you the high, low, open, and close of the cryptocurrency, and whether it rose or dropped between the open and the close.
Each candlestick on your chart will represent a given time frame. Since most cryptocurrency traders look at intraday charts to take advantage of the market’s volatility, you will likely use time frames, such as one, two, four, or 12 hours. If you happened to be trading cryptocurrency for longer periods, you would likely set up the candlesticks to indicate a day, a week, or a month.
Bullish Vs. Bearish
You will hear candlesticks referred to as bullish or bearish as well. Bullish refers to when the closing price or the current price is higher than the opening price, which usually correlates with green. By contrast, a bearish candlestick is typically red and has a closing or current price lower than the opening price.
Candlestick Shapes and Trends
In the volatile crypto market, the shape and size of candlesticks can change dramatically within a day. Experienced traders will notice that similar shapes occur in the candlesticks at certain stages in price trends. Three of these shapes are easily-identifiable and a good starting point.
When looking at these and other patterns, keep in mind that the longer your candlestick’s time frame, the more powerful its effect will be on the trend.
A doji candle lets you know that the market is indecisive. The wicks are equal in length, and the body of the candlestick is in the middle and very thin. There are also multiple doji variations, indicating trend reversal or trend exhaustion.
If you spot the hammer shape, there may be a significant downtrend, which could help bulls make money. A hammer only has a single wick pointing down and is about twice as long as the body. In other words, the body sits at the top, and there is just a long lower wick.
This candlestick forms if the price goes below its opening price, but then goes back up before closing and closes higher than the open. If this happens, it lets you know that sellers had temporary control during the trading period, but the market had a bullish close for the candlestick.
Visually speaking, a shooting star is the opposite of a hammer. It has a single long wick pointing up, and the body is at the bottom.
This occurs at an uptrend’s peak. It will happen if bulls rally at the beginning of the trading period before the bears take control and bring the close price lower than the open
When you trade cryptocurrency, you will be trying to identify patterns in the candlesticks. Patterns are price movements that can let you know where the price is trending. Start by learning the bullish engulfing pattern and move on from there. This pattern indicates that buying pressure is increasing, showing a future rally.