5 Types Of Candlesticks Every Trader Should Know About

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5 Types Of Candlesticks Every Trader Should Know About

Summary

  • Candlesticks serve as powerful tools in trading, aiding traders in recognizing potential trend shifts or continuations and offering insights into market sentiment
  • A candlestick is a graphical representation of the price movements of an asset within a specific time interval such as an hour, a day, a minute, a month or year, etc.
  • Crypto candlesticks consist of different components including — a body and wick or shadow
  • The ability to interpret candlesticks can help to illuminate price action especially when combined with other technical analysis indicators. 

Table of Contents

Table of Contents

Introduction

In the early days, rice traders in Japan were looking for a better way to track the price movements of rice. During their analysis, they noticed that the price trends of rice were heavily influenced by market emotions, as well as the traditional supply and demand factors. These led to the development of the first candlestick charts and patterns. 

Candlesticks are very effective trading tools that help traders identify potential trend reversal and/or continuation while also providing insights into market sentiments. They are graphical representations of the price actions of assets over a given time interval. A group of candlesticks form the so-called candlestick chart or pattern. Candlestick charts are preferred by many traders over line charts because they show a more detailed picture of an asset’s recent and past price movements.

Over the years, technical analysts and traders have used the data provided by candlesticks to work on predictive models projecting how assets’ prices will move over time. However, when using candlestick patterns to make trading decisions, a trader needs to know what the key elements of candlesticks stand for and how and why they form certain patterns

What is a Candlestick?

In context, a candlestick is a graphical representation of the price movements of an asset within a specific time interval such as an hour, a day, a minute, a month or year, etc. In other words, candlesticks are used to display the historical price movement of an asset over a given period. They are widely used by technical analysts to understand the price trends of various cryptocurrencies, making them a primary indicator on crypto charts. Notably, each candlestick provides information about the opening, closing, high, and low prices of a cryptocurrency over a given time interval.

Components of Candlesticks

Crypto candlesticks consist of different components including — a body and wick or shadow. The thicker bar or rectangular part of a candlestick is known as the body. The body of a candlestick indicates the price range between the opening and closing prices of an asset during a particular interval. 

The colour of the candlestick body indicates the direction of price movement. The body could take any colour depending on the preference of a particular platform. However, most platforms use green and red colours. A green body often indicates a price increase, while a red body reflects a price decrease.

On the other hand, the thin lines extending above and below the candlestick body are dubbed wicks or shadows. While the top of the upper wick extends to the highest price an asset reached over a certain interval, the bottom of the lower wick indicates the lowest price of an asset during the same timeframe.  Overall, this part of a candlestick gives more information about the price range that occurred beyond the opening and closing prices of a crypto asset. 

It is important to note that a candle does not have a wick if the open or close price equals the high or low. The “opening” price of a trading pair indicates the price at which trading began during a certain time, while the “closing” shows the price at which trading stopped in the same time interval. 

5 Types of Popular Candlesticks

Hammer

This candlestick is characterized by a short body and a much longer wick. The candlestick, which often occurs at the bottom of a downtrend, is usually formed when the high, open, and close are approximately at the same price. Notably, the hammer candlestick is a single-candle bullish reversal pattern. It suggests that despite initial selling pressure, buyers managed to push the price back up, indicating a potential bullish reversal. 

Shooting Star

The shooting star, which is described as the opposite of the Hammer, occurs after or at the peak of an uptrend. It is a bearish candlestick that forms when a crypto asset opens, advances significantly, but then closes the day near the opening price again. The shooting star candlestick is characterized by a long upper wick, little or no lower wick, and a small real body near the low price of a particular day. Overall, the shooting star candlestick pattern suggests a potential bearish reversal, as buyers attempted to push the price higher, but sellers took control by the end of the trading session.

Doji

This rare candlestick is formed when the opening and closing prices for an asset are the same, no matter how high or low the prices were within the candlestick’s price range. The candlestick’s name comes from this irregularity in price movement, as “Doji” is Japanese for “mistake.” Notably, the Doji candlestick is further divided into three categories: “gravestone,” which has a lower body; “long-legged,” which has its body in the middle, and “dragonfly,” which has a body that is closer to the top. 

Symbolically, the Doji candlesticks typically take the shape of a cross, an inverted cross, or a plus sign. Since this candlestick shows buyers and traders to be at equilibrium, Doji signals a trend reversal or continuation in the market depending on its location within the trend. It also indicates indecision about the future price of an asset. 

Engulfing Pattern

This candlestick pattern is of two types including the bullish engulfing pattern and bearish engulfing pattern.  Both types typically consist of two candlesticks of different sizes. The engulfing pattern is said to occur when a smaller candlestick forms followed by a larger one that completely engulfs the smaller candle’s body. While the bullish engulfing pattern often forms at the end of a downtrend, the bearish engulfing pattern forms at the end of an uptrend. Therefore, the bullish engulfing pattern suggests a potential reversal to the upside while the bearish pattern indicates a potential reversal to the downside.

Hanging man

Similar to the Hammer candlestick, the Hanging Man candlestick pattern occurs after an uptrend. This bearish candlestick has a small body at the top of the range and a long lower wick. The structure of the Hanging Man pattern typically signals a potential reversal. It indicates that despite an attempt at higher prices, sellers managed to push the price lower.

Conclusion

Understanding the various candlestick patterns is a good starting point in your crypto trading journey as they help to signal bullish, bearish, reversal or continuation trends. Also, the ability to interpret candlesticks can help to illuminate price action especially when combined with other technical analysis indicators. Hence, candlesticks should not serve as the definitive indicator for crypto trading decisions, as past results do not often guarantee future outcomes. Remember that the market can always move against the expected direction indicated by candlestick patterns. 

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