Tradedog 101: How to use candlesticks when trading crypto
Most of us have seen those green and red coloured bars, charts, and graphs related to crypto trading. Today we are talking about one of those patterns called the ‘Candlesticks’ that play a defining role in the way traders trade crypto.
Investing in volatile digital currencies goes far beyond buying and selling, it constitutes technical analysis, reading charts, and patterns that are vital in complementing your crypto trading strategy. Using candlesticks, moving averages, volume, and trend lines, traders can predict the price movement in the market in a given time frame. Yes, you guessed it right, technical analysis is indeed very important in cryptocurrency trading, and if mastered, you will start making near accurate predictions while watching and reading the patterns.
TradeDOG knows how tough and intimidating it gets while trying to bag in some worthy trades. We’ve created yet another series to understand the trading fundamentals and simplify the factors responsible for executing profitable trades. Capitalizing on analysis and patterns will result in perfect trades and Return on investments. Just sit back and learn the candlesticks pattern, which is an essential element of technical analysis.
So to begin with, What are candlesticks?
Candlesticks have underlying psychological implications and when coupled with other indicators such as support, resistance, moving average, trend lines, etc, they can be used to enhance your trading experience and carve a skilled trader out of you.
Interestingly, the use of candlestick patterns originated from Japanese rice merchants in the 1700s who used the model to track market prices and daily momentum of their trades. This model was later picked up hundreds of years later in modern trading and analysis of market trends.
Let us see what the terms mentioned in the picture mean for your trading strategy.
How are they read?
Candlesticks display the four main components of OHLC i.e Open, High, Low, Close Prices of an asset for a specific period. Each candle has 5 major terms which denote a specific trend or occasion. Each candlestick represents 1, 2, 4, or 12 hours and some long-term traders often choose to observe and follow candlesticks that represent a single day, week, or month.
This helps traders calculate the best entry and exit times in their trades.
The green candlestick represents the bullish trend or when the close price is greater than the open price. Candles depicting the Red colour tells that the opening price is greater.
Let us understand what they are and what they mean?
High: The top end of a candle represents the ‘high’ or the highest price of the day.
Low: The lower end of the candle represents the lowest price the asset achieved for the same trading session.
Opening price: The initial price of the asset when the trading session began.
Closing price: Closing price depicts the price of the asset when the trade session has been concluded.
The anatomy of Candlestick patterns
Bullish Candle: A bullish candle is represented by the green colour. Bullish candles indicate that the buying sentiment is strong; this indicates that the asset’s price is bullish and will likely increase for a given time span.
Bearish Candle: The bearish candle denotes a selling sentiment and a downward trend. This helps traders withdraw their trades in time to prevent losses. The bearish candle is usually Red in colour and helps identify if there is selling pressure on the markets.
The three other crucial candlestick patterns for gauging market sentiments or identifying a potential trend change are the ‘Doji,’ ‘Hammer,’ and ‘Shooting star.’
Doji: Represents Indecisiveness
The Doji represents trend exhaustion/trend reversal. As digital currencies are volatile, their prices swing in either direction before closing near their opening price, it is obvious from this that the market is indecisive about the asset’s true value. The ‘Doji’ is relatively neutral but important in depicting market sentiments and human emotions regarding the current trend.
Hammer: Represents confidence
It is a reversal pattern that is referred to as a ‘Hammer.’ The hammer forms when the prices move way lower after opening and then rally near the high. A hammer is a precursor to a potential downtrend reversal and can be used to make great profits when followed properly.
Shooting Star: Represents Skepticism
The shooting star is the opposite of the Hammer which signifies that the bull market may lose to bears and prices may drop.
How do pro traders utilize them to trade better?
Trend reversal: Avid traders can read the patterns and tell where the market sentiment lies and if the markets will follow a downtrend reversal. This helps traders anticipate a certain condition and speculate with some certainty as to where the market sentiment will shift.
Restructuring Strategy: Traders highly benefit from candlesticks as they are used to monitor an asset over a given time frame. Depending on the trend, market sentiment, opening, and closing prices, traders restructure their strategies to make optimum returns in different market conditions. Skilled traders can averse their risks and rethink their strategies based on these signals emitting from the candles. We suggest that every beginner should learn reading these patterns to make safer trades amid bearish market conditions.
- Candlestick patterns are visual indicators of how a cryptocurrency has moved in its price within a certain period. This period can last a minute, an hour, a week, a month, or any other set time frame.
- The shape of a candlestick keeps changing with the prices. For example, if a candlestick opens at a price of $10 and reaches $20 a few minutes or hours later, the shape of the candle will have changed drastically since its opening. This gives a clear understanding of how the prices have changed over time and contribute to restructuring your trading strategy.
- The appearance of a candlestick is momentary in volatile crypto markets and it is susceptible to change with the changing prices.
- There are many short-term trading strategies based on candlestick patterns which avid traders use profusely. Since candles emit patterns and reversal trends, they are the best option for beginners to include it in their trading strategies.
- White and green candles are considered more significant as they form a major price support level. Black and red candles, on the other hand, indicate that there is huge selling pressure on the market.
This was pretty much on how candlesticks look like and how they form patterns. Making use of candlesticks helps in predicting bottoms or a continuation of the uptrend and is essential for every crypto trader. In the next article of this series, we will guide you on other important factors related to the candlestick formations such as which crypto candlestick pattern is most reliable? how to start practicing them correctly and more.
Keep reading our blog for more insights on crypto trading and investment. TradeDOG is happy to equip you with the necessary stuff which you can use to hone your crypto trading skills.