Crypto Academy

How to read candles in trading

candles in trading

5 min reading

Imagining how to read candles in order to have perfect anticipation on a chart? This article is for you!

How to read candles in trading

how to read candles in trading

History

The fundamental concepts of candlestick analysis were developed in the XVII century by Japanese trader Munehisa Homma. In his mind, an ideal system for displaying price should also be a tool for analysis, which is exactly what happened – thanks to the advantageous distinguishing characteristics of Japanese candlesticks. Munehesa created an independent system that allowed any trader to accurately predict price changes in the market and, as a result, make sound decisions about when to buy and sell an asset.

Candlestick

Are you a newbie in the crypto market and are unable to circumvent the whole aspect of understanding when and when not to trade, then you have nothing to worry about? This article will elucidate on this.  A candlestick is a chart that shows the high, low, open, and close of a digital currency in a specific period. They are used by traders to represent the price movement of an asset. The candlestick chart has four key elements: the opening price, the high, the low, and the closing price. These elements vary over time. It can be an hourly, daily, weekly, or monthly time frame.

How they are formed?

Candlesticks are usually composed of two colors: green and red. The parts of a candle are the wick, the body, the highest and lowest price, and the opening and closing price. The parts of a candle are the wick, the body, the highest and lowest price, and the opening and closing price. The body, a wide midsection of the candlestick, indicates the difference between the opening and the closing range on the chart. The wicks (shadow) also known as the high and low reveal the highest and lowest price of an asset within a candlestick. 

They are simply thin lines extending above and below the body. The highest price indicates the price traded while the lowest price indicates the lowest price traded. The close is represented at the top of the green candlestick and at the bottom of the red candlestick while the open is the opposite, represented at the bottom of the green candlestick and the top of the red candlestick. The opening price is the price at which the first trade happened while the closing price is the last price traded during the period of the candle formation.

How to read candles?

Reading candlesticks is quite simple. Note that the red pattern indicates that sellers are in control while the green indicates that buyers are in control. As mentioned earlier, candlesticks vary by time and a candle rarely holds its pattern for too long, given the volatile nature of the cryptocurrency market. For example, if a two-hour candlestick opens at $20 and within an hour it moves to $40, you’ll notice that the shape of the candlestick will have changed dramatically. 

However, traders have found that the same candlestick shape occurs at the same stage of a price trend, regardless of the commodity being traded. It can be very beneficial to identify such changes, as it gives clues as to when there might be a reversal, a continuation, or when market indecision is at its peak. 

How to use it on bit4you?

In addition, candlesticks are read via pattern recognition and are made up of one, two, or more candlesticks. These patterns are divided into bullish and bearish patterns. On the bit4you charts, you can see both bullish and bearish candles. They are shown there on the charts in the section with indicators. In the bullish patterns, we have the hammer, the reverse pattern, the bullish engulfing patterns, the piercing line, the morning star, and the three white soldiers. Bearish patterns include the hangman, shooting star, bearish engulfment, evening star, three black crows, and dark cloud cover. We’ll look at some of these patterns.

The hammer

One of the easiest patterns to identify is that of a candlestick with a lower wick at the bottom of a downtrend. It could be either red or green. This may indicate a strong reversal trend and a potential price surge.

The bullish engulfing pattern

This pattern is made up of two candlesticks occurring at the bottom of a downtrend. The first is bearish while the second bullish engulfing the other. This pattern indicates increased buying pressure and the genesis of an uptrend as buyers are likely to drive the price up.

The shooting star

 It is made up of one candlestick with tininess and a lower wick. Unlike the inverted hammer, this pattern occurs at the top of an uptrend. This indicates that there has been a strong price rejection after a significant push-up. This pattern is often associated with a bearish reversal signal.

The bearish engulfing patter

 Just like the bullish engulfing pattern, the bearish engulfing pattern is also made up of two candlesticks. The red candlestick engulfs the green and this occurs at the pinnacle of an uptrend. This pattern indicates increased selling pressure and the rise of a potential downtrend. It is normal that questions will arise on its reliability. As you may have noticed there are many candlestick patterns that are thought to be reversals to the current trend on the chart. Most of the time these patterns are given logical reasons as to why they turn out in the way they did. Consider for example the bullish engulfing pattern which is called bullish because buyers managed to recover the fall of the previous day and close at a higher level. Despite the trustworthy and logical nature of these patterns, it is important to have in mind these are only projections of preconceived ideas about the market. However, candlesticks cannot be said to be reliable since it is based on projections and speculations. These could work for A and do not work for B given that the market is volatile and not everyone has the capacity to speculate correctly. 

Conclusively, no matter how instructive patterns can be, it is always advisable to remember that it takes a lot of experience to leverage these signals with success. A majority of crypto traders employ candlestick patterns along with other technical trading indicators for stronger validations.

Conclusions