Crypto Trading 101: Must know candlestick patterns for a successful trade

Making successful trades in the volatile madness of crypto prices is not easy. But with a bit of know-how, you could be trading like a pro in no time. Add to it patience and strategy, and you have a winner.

Talking about strategy, identifying the right moment to enter the crypto scene requires more than just luck – it demands knowledge and research. That's where candlestick charts come into play. They form the foundation for technical analysis in trading.

Let's explore some essential candlestick patterns that will give you an edge when it comes to market analysis and successful callouts. With these simple tools in your arsenal, you'll be on your way to optimising investment strategies. Keep reading.

What is a candlestick?

Candlesticks are like tiny architects on your chart, crafting a visual history of an asset's journey. These building blocks reveal past prices and offer insights into future market trends. Understanding their basics transforms chart analysis into an intuitive art, guiding traders through the twists and turns of the market adventure!

Key Parts of a Candlestick:

Candle Body: It is a rectangular block representing the opening and closing prices of the asset during a chosen time, like a day. If the market is optimistic (bullish), the closing price is higher than the opening, and the body is often green or white. In a pessimistic (bearish) market, it's the opposite, and the body might be red or black.
Candle Wick/Shadow: The lines sticking out from the top and bottom of the candle body are the wicks or shadows. The upper shadow shows the highest price reached during that time, and the lower shadow shows the lowest.
Candle Colour: The colour of the block (body) is crucial. Green or white typically means prices went up during that period, and red or black suggests a decrease. If it's green, the upper edge of the block is where the price closed. If it's red, the upper edge is where the price opened.

Significance of candlesticks

Candlesticks are the little blocks which together make the price movement of an asset. The candlestick chart is like a super-detailed graphic for tracking an asset's price. Unlike simple line charts that only show the closing price, candlestick charts give loads of information because of their unique structure.

These candlesticks follow each other in a timeline. They are the most basic tools for spotting trends, resistance, and support lines, even without fancy indicators. Plus, they can reveal patterns that signal when to buy or sell. For cryptocurrencies, which are known for wild price swings, using candlestick charts is crucial for digging into detailed technical analysis.

Must know candlestick patterns for successful trading

Bullish candlestick patterns

Bullish patterns may form after a market downtrend, and signal a reversal of price movement. These patterns act as signals for traders to think about starting a long position to benefit from a possible upward movement.

Hammer

One such pattern is called the "hammer." Akin to its name, this candlestick is with a short body and a long tail at the bottom. This hammer appears at the end of a downtrend, indicating that even though there was selling pressure, strong buying forces managed to push the price back up. The colour of the hammer's body can vary, but if it's green, it signals an even more robust bull market compared to a red hammer. Essentially, spotting a hammer pattern might be a cue for traders to consider the possibility of a positive change in the market trend.

Inverse Hammer

A bullish pattern similar to the hammer is called an inverted hammer. The main difference is that it has a long upper wick and a short lower wick. What this pattern tells us is that there was a strong push from buyers, followed by some selling pressure. However, this selling pressure wasn't strong enough to bring the market price down significantly. Essentially, the inverted hammer suggests that buyers are likely to take control of the market soon.

Bullish engulfing

The bullish engulfing pattern involves two candles. The first one is a small red candle entirely covered by a bigger green candle. Even if the second day starts with a lower opening than the first, the bullish market strength drives prices upward, resulting in a clear victory for buyers.

Piercing Line

The piercing line is a two-step pattern in candlestick analysis. First, there's a long red candle, followed by a long green one. The key is a noticeable gap down between the closing price of the red candle and the opening price of the green one. This signals strong buying pressure, pushing the price at or above the midpoint of the previous day.

Morning Star

It's a three-step pattern: a short-bodied candle sits between a long red one and a long green one. The 'star' doesn't overlap with the longer bodies, creating a gap both on open and close. This pattern suggests that the selling pressure from the first day is easing, hinting at an upcoming bull market.

Three White Soldiers

The three white soldiers pattern unfolds over three days. It's a trio of consecutive long green (or white) candles with small wicks. Importantly, each day's open and close are higher than the previous one. This robust bullish signal emerges after a downtrend, showcasing a steady surge in buying pressure and signaling a potential upward trend.

Bearish candlestick patterns

Bearish candlestick patterns usually form after an uptrend, and signal a point of resistance. Heavy pessimism about the market price often causes traders to close their long positions, and open a short position to take advantage of the falling price. Let's unpack some candlesticks that signal a possible downtrend.

Hanging Man

The hanging man is like a bearish version of a hammer, showing up at the end of an upward trend. It suggests a significant sell-off during the day, indicating that the bulls might be losing control. Despite the sell-off, buyers manage to bring the price back up.

Shooting Star

This looks like an inverted hammer but appears during an uptrend. It starts with a small lower body and a long upper wick. Typically, the market opens a bit higher, surges to a high point, and then closes slightly above the opening – resembling a falling star.

Bearish Engulfing

This pattern shows up at the end of an uptrend, consisting of a small green candle engulfed by a subsequent long red one. It signals a potential peak or slowdown, suggesting an upcoming market downturn. The deeper the second candle goes, the more significant the expected trend reversal.

Evening Star

The evening star involves three candles, acting as the opposite of the bullish morning star. It includes a short candle between a long green one and a large red one, indicating a reversal of an uptrend. It's particularly strong if the third candle erases the gains of the first.

Three Black Crows

This pattern has three consecutive long red candles with minimal wicks, opening at similar prices each day but closing lower. Traders see this as the start of a bearish trend, showing that sellers have dominated for three consecutive trading days.

Dark Cloud Cover

The dark cloud cover signals a bearish reversal, casting a "black cloud" over the previous day's optimism. It involves two candles: a red one opening above the previous green body and closing below its midpoint. Short wicks suggest a decisive downtrend.

Continuation candlestick patterns

If a candlestick pattern doesn't indicate a change in market direction, it is what is known as a continuation pattern. These can help traders identify a period of rest in the market when there is market indecision or neutral price movement.

Doji

When a market's opening and closing prices are nearly the same, a doji candlestick looks like a cross or plus sign. Watch for a short or almost non-existent body with varying-length wicks.

Spinning Top

A spinning top candlestick has a short body centered between equally long wicks. This pattern signals market indecision, where bulls push prices up and bears pull them down, leading to little overall change. Spinning tops often suggest a resting period or consolidation after a significant uptrend or downtrend.

Falling Three Methods

This pattern forecasts the continuation of a bearish trend. It starts with a long red body, followed by three small green bodies, all contained within the range of the bearish bodies, and ends with another red body. This formation indicates that the bulls lack the strength to reverse the trend.

Rising Three Methods

Conversely, the bullish pattern, known as the 'rising three methods,' consists of three short red candles sandwiched between two long green ones. This pattern reveals that, despite some selling pressure, buyers are maintaining control of the market.

Practise reading candlestick patterns

Discover the power of candlestick patterns by getting your skin in the game - diving into real trades! The Scallop Exchange could be the ultimate classroom for this adventure. Practice makes perfect, and there's no better way to sharpen your skills than by riding the waves of actual signals.

But remember: candlestick patterns are your trusty sidekick, not the entire superhero squad. While they're fantastic at quick trend predictions, they thrive when paired with other technical analysis tools. So, gear up, trade smart, and let the candlesticks lead you to trading mastery!