Candlestick analysis. Pattern analysis.
By Your Crypto Boss on The Capital
One of the most “ painful” questions for many traders, especially for beginners and non-experienced ones, is the selection of the analysis type for forecasting price movement. Most experienced analysts and investors always answer this question by stating that the best indicator is the price. Prices on the chart are most often expressed in the form of Japanese candlesticks, which carry a huge amount of the information. Candlesticks show the full picture of the trading process in the market, being the most advanced tool in forecasting further price movement, helping to understand the mood and psychology of traders. Let’s analyze what Japanese candlesticks and patterns are, as well as how to interpret the candlestick analysis correctly.
Japanese Candlestick — information about the price movement of a financial instrument that looks like a vertically placed rectangle with lines that are on both sides of its edging. The body of the candlestick is the rectangle itself, which shows the opening and closing price of a financial instrument. Drawings or tails on both sides show the maximum price fluctuation or the level where the price went, but couldn't get fixed there. One candle shows the price movement for a selected period of time: minute, hour, day, month, etc. Candlesticks have replaced the usual, linear chart: with their help, you can see four indicators — the opening and closing price, as well as the maximum and minimum price for the period. Due to candlesticks, it’s much easier to carry out graphical analysis, as among them you can easily find patterns that signal the further direction of price movement.
Each type of analysis has individual features. Candlestick analysis is also no exception and has a number of factors, the knowledge of which will reduce the time for its implementation, get more accurate information and without losing money:
- More accurate candlestick analysis data is shown on the hour and day timeframe, as they are considered the most frequently used. The fact that the market dynamics, first of all, is the behavior of traders psychology, so here you should take into account popular timeframes.
- In the patterns with a gap, there is more qualitative information than without it, as gaps occur during the impulse price movement, i.e. with a pronounced force of bulls or bears.
- Pattern has to be justified. If a bull’s candle appears, the next one must confirm it.
Candle analysis is used to find combinations of candlesticks, so-called patterns (from Japanese — model). Usually, a pattern contains from one to three candlesticks, but there are exceptions, however, they all have two main purposes:
- Warn about a price reversal.
- Warn about the trend continuation.
Pin-Bar — is the full name of the Pinocchio Bar pattern. Formally, the pattern is similar to the face of the cartoon character Pinocchio. Represents three candles, the central has a small body, and its shadow is several times larger, which reminds of a long nose “Pinocchio.” Pin Bar appears when the price was trying to reach or break an important level of support or resistance, but it didn’t succeed. Usually, it means a trend reversal.
Absorption- is a pattern of two candlesticks, where the second one is larger than the previous one and on the chart, it seems to absorb it. It’s divided into two types: bullish and bearish absorption. If a white candlestick absorbs black — the trend is upward, if a white candlestick absorbs black — the trend is downward.
Patterns like a hammer or a shooting star are basically a slightly weaker Pin bar. The appearance of all three patterns indicates the same behavior of traders in the market when they tried to overcome an important price level and the first time it didn’t work. The price, accordingly, rolled back dramatically, creating patterns of the Pin Bar, hammer, or shooting star.
An inverted hammer is formed at the end of the trend, as a result of the exhaustion of bulls or bears, depending on the current direction of price movement. It should be noted that the inverted hammer is not the most accurate pattern and is worked out according to statistics in 45% of cases. The pattern works best near strong support or resistance lines, as well as after a strong bullish candlestick appears in a downtrend or backward.
Patters of the trend continuation
Dodji- is a candlestick with a small body or no body at all. Shadows are longer than usual, due to the lack of a body. This pattern means equal forces among market participants or their absence. It most often appears during the sideways, when further price movement or trend is unknown. Some traders call the Dodji as a “yellow traffic light.”
The break or gap is a significant difference between the closing price of the first candle and the opening price of the second candle. Its accuracy and high frequency are due to the fact that it appears rarely and only in periods of high volatility. In moments when there is an impulse rise or fall, the demand of sellers and buyers starts to differ greatly. For example, a seller wants to sell a bitcoin for $10,000, but the nearest bid is at $9995, resulting in a price gap when one candle is closed and the next one is opened. Such moments indicate a serious advantage of sellers over buyers and the opposite.
Inside Bar Pattern
Inside bar pattern is formed within the current trend and as a rule, doesn’t overlap even 20% of the previous candlestick. This indicates the weakness of buyers or sellers, who are not able to turn the situation in their favor. The main reason is profit-taking and a set of positions to continue the current trend. As a rule, inside bar is formed after the sideways and in the moment of moderate volatility.
We considered the most well-known and accurate candlestick patterns, which are practiced much more often than any other candlestick patterns. The point is not, that the appearance of these formations provides market reversal or trend continuation, but that at a certain dynamics, the price makes traders act almost equally. It’s the traders’ behavior that creates these candlestick or price patterns, which carry information about the trend reversal or continuation. At the same time, do not forget that before opening a trading position, if you see any pattern, you should always wait for confirmation. Still, don’t forget that even the most accurate and proven patterns or other signals sometimes don’t work and you need to be prepared for this, by protecting yourself as stop-loss or hedge.
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