Understanding Crypto Candle Charts: What is Candlestick Charting, How to Use It, Key Elements

General Overview

Those who take the first steps toward crypto trading have to study a great deal of new information and being able to read a Japanese candlestick chart is one of the most necessary skills. Without it, trading turns from the conscious process based on the detailed analysis into gambling where it is impossible to foretell results. In the end, this approach would result in a waste of the resources invested. In order to avoid unnecessary frustration, let’s find out about the most popular way to quickly analyze price action. We’ll give you a brief but detailed intel on the basic facts about this tool. With that said, let’s get started.

Japanese Candlestick Chart Explained

Now, you’re probably wondering: what this chart is really all about? Fair enough. It can be a little complicated to pinpoint an exact definition. For starters, this one is older than bar charts. Stock traders have known it for centuries. It can be best described as a more convenient and generally accepted way to represent the price. A decent alternative had not been invented yet. Yes, of course, there are many other types of data visualization.

However, a candle chart has dominated the traders’ greatest emotional response and awareness. And there are very specific reasons for that:

• such a type of price chart has proven to be very useful and informative;
• thanks to that, determining the price range for the past time interval is a no-brainer. But that’s not the most important thing here;
• above all, the charts that originated in Japan over 100 years ago are also a method of technical analysis (TA), which is called candlestick analysis.

Basic Components of a Candlestick

There are several elements of this tool that require attention. Each of them bears in itself valuable information:

• the body of the candle. For bullish candlesticks, the lower part of the body shows the open price and the upper side indicates the last quote at the end of the time interval. For bearish candles, you have it backward: the upper part is the open price, the lower part — the closing price.
• a shadow (or wick). It characterizes extrema — the maximum and minimum values of quotes achieved during the formation of the candle.

The Japanese Candlestick Chart technique in the crypto space is based on three basic principles:

1. The bigger the body, the more the probability of a trend movement in this direction. If a candle is growing, then at the moment, the desire of the price to move up prevails. And vice versa — if the candle is falling, then the cost will continue to fall.
2. The longer the candle shadow is on one side and the shorter the shadow is on the other side, the more likely the price will move toward a short shadow.
3. If the pricing formed a trading signal but for some reason did not go in the chosen direction, it will go in the opposite direction. That’s possibly more plausible. If we have a long shadow at the top of the market, and the next candle still goes up, the price will continue to waft to the upside.

By combining the data received from these sources, you will have no difficulties in developing your own scenarios and using these configurations.

In fact, there won’t be any need to. For the time being, thousands of patterns have been examined. The most common configurations have been statistically selected. There are about 70 to 80 of them. Now you have to do your part — to study them. We don’t need to learn all of them since each market has its own specific price behavior.

OHLCV: What Does It Mean?

The abbreviation is really quite simple. Let’s rewrite the term:

• O stands for the open price. This parameter tells a trader that the price was at the very beginning of this bar, that is, at the very beginning of a certain time period described in the bar. Thanks to that, a trader always knows at what price a given period in the market started.
• H (High) and L (Low). These indicators reflect the maximum and minimum values the price has had when forming one specific bar.
• C goes for the close price. This is a key element that is growing in relevance because it shows the price in a particular bar within a particular time frame. We feel we should point out that the close price does not necessarily match the open price of the next bar, especially when it comes to rapidly evolving prices (everyone has moments like that). Indeed, there is a rather lengthy interval between the close price of the old bar
• V is the trading volume. This is the total amount traded during a specific period.

Every experienced user will surely say that the main ingredient for good trading is the analyses. He can use the information contained in the bar to make an analysis and provide a qualitative conclusion about what’s going on in the stock market right now, what its behavior is, and what trends can be observed. For example, if the opening and closing prices are next to each other, located approximately in the middle of the bar, then neither the sellers nor the buyers surpassed each other during the specified time period. The market was relatively and generally calm.

Reading Candlestick Charts for Newbies

“I will never learn how to read the charts of crypto exchanges properly!” Relax, you’re not the first one who thought that way. Indeed, to the untrained ear, the indecipherable lines, confusing charts, and strange indicators don’t ring any bell. But mark our words, everyone can get the hang of handling information and predicting market behavior to some extent. We will help you pick up on all sorts of subtleties and give you a general idea of reading mysterious charts. So, use your brain and stop making excuses.

For starters, we would like to underline the importance of the following points:

• closing and opening prices;
• shadows;
• the length of the body (from closing to opening).

Further, we can distinguish three scenarios on the chart:

1. bullish candle (it has a long body);
2. bearish candle (shot);
3. a neutral candle, i.e. there is almost a draw between bulls and bears.

The main rule of reading charts and entering a trade is that the probability of continuing the trend is always higher than the probability of a reversal.

Therefore, the trend is our friend, not our enemy! Based on the above, if we have a purely bullish candle model and an uptrend, then it is more likely that the next candle will also be long.

Depending on the price behavior, candles vary in colors. Green means that the closing price is higher than the initial one. If it is red, that means it is lower. The palette may differ as well, e.g. black and white, it’s up to the exchange. The borders of the candle body correspond to the opening and closing prices. The vertical line shows the maximum and minimum cost thresholds during the displayed period.

When predicting market behavior based on a Japanese candle, usually pay attention to the length of the shadow. There are a number of signs that can help you respond to changing circumstances in time. At the initial stage, a trader should learn four of them:

• a rising candle, with or without a minimum shadow, indicates a stable upward trend. The value of the asset is likely to be soaring in the near future.
• a falling body signals a decrease in the price of the currency.
• a long lower shadow reflects a significant probability of a fall in the exchange rate during the next trading period (the longer the shadow, the more reliable the signal).
• the large length of the shadow at the top indicates that the asset price will almost certainly grow.

Those are some of the examples in a sea of signs that will help you to read crypto charts. Their number is therefore much higher in actual fact. But to start out with, it’s enough.

Concluding Thoughts

“Buy low, sell high” is not enough. Stepping into the world of crypto trading requires us to be able to read charts. To choose a very auspicious moment, the most profitable conditions and exchange rates for Bitcoin, you need to keep financial charts under review. There are a number of price patterns that are joined under the general heading of “candle chart”. Furthermore, dozens of specialized books marked on the subject describe in detail the features of using various patterns. They will help you to hit obstacles. The basic principles of candlestick charts will lead you to a more extensive and complex section: technical analysis. The combined use of several algorithms for assessing the market situation will let you develop your own investment strategy and start regularly receiving income from crypto investments.

Can one make a fortune on crypto trading? The answer is definitely yes, provided that the trader acts within the framework of the trading strategy. Remember: all you need is one strategy in the crypto market to make your living. Don’t waste your time on strategies that “sound cool”. Good luck!