May 4, 2022
Beginners trading guide: Candlesticks & Indicators
#CoinDCXpathbreaker
Introduction
It does not matter if you are a Crypto noob or a Veteran day-trading scalper — If you have even remotely read a word about Trading, you are sure to have come across Charts & Candlesticks…
The above chart has multiple bars in Green & Red — the squiggly lines are called Candlesticks. The green candlesticks show the strength of buyers & the red candles represent the strength of the sellers. Easy-peasy? But it does not end here, Candlesticks can form their own universe if they are segregated into Types, Patterns & become a more potent combination when paired with other technical indicators…So lets dive in:
Basic Candles:
A candlestick is made up by the following characteristics:
- The candle body (formed during Open/Close)
- Upper &/or lower wick
- Colour (red & green by default).
If the opening price of the asset is lower than the closing price, the candle will become green. If the opening price of the asset is higher than the closing price, the candle will become red.
The open/close of the candlesticks is determined by the timeframe of the chart. So on a 1HR chart, each candle represents one hour of data. Example below:
Similarly, if you take a chart with a timeframe of 1D, then every candlestick represents a 24-hour period. In India, a new daily-candle opens at 5:30am IST & the previous daily-candle closes at 5:30am IST.
Candle closes MAY not always be standardised and will varying from exchange-to-exchange & time-conversion from UTC. This confusion happens because there is no true standard for crypto because of its 24x7 operability. Although you will find that major reputed exchanges will almost always have identical candle closure times.
Candle-Patterns:
The above chart of BTC/USDT on CoinDCX Pro app shows how a cluster of candles form a pattern when zoomed-out. The charts above is either confirming a Double-Top at the $69,000 level, or its in the middle of forming a Head & Shoulders pattern. These patterns can only be detected through candlesticks — so yeah, they are pretty powerful if seen from a TA point-of-view.
These groups of Candle patterns can be found within an assets price structure to add or subtract from the confluence with other technical indicators as well.
As with any technical pattern in play, there are multiple continuation or reversal candles that form on a chart. No chart can have a continuous upward trajectory, since there will always be buyers & sellers in the market to push price in either direction.
Overall it is this continuous candle closures that form the crux of pattern trading.
Heikin-Ashi (HA) candlesticks
Heikin-Ashi candles use open-close data-points from the previous period, and open-close data from the current period in chronological order.
A candle open and close above the previous period suggests strong bullish momentum of the trend. Similarly, a candle open and close within the territory of the previous period suggests a loss of momentum of price trend.
Heikin -Ashi is a great tool for scalper, as a colour flip from green to red or red to green indicates the possibility of the beginning of a new price-action & the demise of the previous price-action. These flips in signals could be considered as a long or short entry signal. (This is not financial advice)
How to take a position with above study?
While trading the chart, on the 3rd or 4th consecutive coloured candle, the local top would also be broken, this adds confluence to ourentry signal. A Stop-Loss is placed either below a momentum-less candle or if manually close position if the candle changes colour.
Bill Williams Fractals- Advanced Metric
The Bill Williams fractals (BWF) work on a similar framework to Heikin-Ashi candles, but it acts as a lagging indicator when compared to HA.
A Bullish fractal within a Williams fractal consists of a Low-High-Low candle pattern, while a Bearish fractal consists of a High-Low-High candle pattern. According to the law of the BWF theory, bull trend should not break the bear fractals formation and a bear trend should not break bull fractals structure.
Point & Figure (P&F) Charts
One of the most under-utilised candlestick pattern used during charting, the pattern is represented by X & Os — X represent green and O represents red.
It was first developed by “Hoyle” in 1898 with an emphasis on the closing price.
This form of charting is used for measuring asset price-strcuture in conjunction with Wyckoff structure. This particular pattern is not dependant on time-frame but puts more emphasis on the macro price-structure of an asset.
Indicators
In regards to indicators, it is vital to remember that majority of indicators that give no data points at all, while a handful of indicators can be your most powerful ally. I prefer indicators which are able to draw themselves, use mathematical calculation, and filter out the noise. As a beginner, always focus on clean charts, rather than apply every indicator you can lay your hands on — the goal is to trade & not make an abstract NFT out of a chart. Some examples:
For my own personal trading analysis, I lean heavily on Ichimoku Cloud, Fib retracement, and Moving Averages. I absolutely detest the use of data-heavy metrics like Elliot Wave which can be very subjective and easily edited without any solid functionality attached to it. Its more like a tool for traders to suite their own bias.
How to use Ichimoku Cloud
The indicator is useful for:
- Trend Determination (Colour of Ichimoku cloud)
- Entry Signals (Price on the lower cloud band)
- Exit Signal (Candlestick closure below cloud band)
- Re-entry signals (price re-enters cloud band)
Downside of the indicator: It will invalidate your calls if the market is in a Chopsolidation phase, neutral sentiment and sideway action. In such situations, its more preferable to use Bollinger Bands
Positional Entry Signals while using Ichimoku Cloud:
- Price Above/Below Cloud — This is the absolute classic case of determining bullish or bearish price-action at any charting timeframe.
- Bullish/Bearish Cloud — The change in cloud structure in conjunction with the price-acrion forming, we can determine whether the asset is leaning towards a bullish or bearish trend.
- Bullish/Bearish TK Cross — A little more advanced level of study would be required here, to put it simply, this structure is very similar to EMA crosses, but it happens in relation to the Ichimoku Cloud indicator.
An Ichimoku Cloud positional entry includes all the signals that converge either to bullish or bearish price-structure.
TK Cross- In technical analysis, TK Cross refers to a crossover of the Tenken and Kinjun lines (TK lines) of the Ichimoku Cloud indicator.
When a Bearish TK crossover takes place above the cloud, this should not be considered as a signal to open a short position, but rather, a long-position exit signal. This is a classic display of a weak bearish sign and not full-blown confirmation.
Similarly, a TK Cross above cloud is an extremely bullish indicator of the upcoming price action being set-up by the assest, and should be inferred as a high probability long re-entry.
Conclusion
Trading will always a have steep learning curve, I myself have spent countless hours everyday for the past 2.5 years and I have barely scratched the surface.
Technical Indicators & Candlestick patterns study can surely help you in your journey to polish your skills or acquire new ones within the space.
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A huge thank you to CoinDCX for giving me this opportunity to create such detailed educational content for the crypto community out there, and making me a part of the #CoinDCXpathbreaker program 🚀
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