Candlesticks are coloured lines used in price charts of cryptocurrencies and exchange products. They are used to indicate price changes. Such a chart consists of several candles, all of which indicate a certain time frame. It is possible to change the time frame yourself. For example, it is possible to view candles of one minute, five minutes, one hour or one day, and so on.
The colours of the candles may vary depending on the application in which they are displayed, although they are usually green and red. Green indicates a price increase. This means that the price has increased compared to the previous candle. A red candle indicates a price drop, which means that it is a price drop since the previous candle.
Candle body and wick
In addition to the colours, there are a number of differences between the candles. This concerns the body of the candle. For example, there is a section that is thicker, with a thin line protruding above and below.
The thicker part is the actual body of the candlestick. It represents the difference in price between the opening price (the ‘open’) and closing price (the ‘close’) within a given time. Suppose each candle represents a time frame of five minutes, then the body represents the price at the first and last second of these five minutes.
The colour of the candlestick determines whether the upper or lower part represents the open or close. In the case of a red colour (price drop), the upper part of the body represents the opening price and the lower part the closing price. If the body is green, the lower part of the body represents the opening and the upper part the closing.
In addition to the body, each candle also has two thin protruding lines, which are also called the ‘wick’ or ‘shadow’. The top wick represents the highest price the cryptocurrency has reached within the time frame that has been set. The lower wick indicates the lowest price the cryptocurrency has reached within the set time frame. When the wicks are very long, it could be concluded that there have been large price fluctuations in the set time period.
What is a candlestick pattern?
Candlestick patterns are certain repetitions of certain price movements. Candlesticks are more than a simple representation of price movement. Past prices provide a lot of data that can be used to determine a strategy. This can be done by means of candlestick patterns.
Because a lot of data is available, patterns can be recognised. Such a pattern may look different at first glance, but often there is a certain mathematical logic behind it.
By recognising certain patterns, a prediction can be made on what the future price of a cryptocurrency will look like. Of course, these patterns offer no certainty. However, it can be used as an aid in determining a strategy.
Support and resistance
To understand the most common candlestick patterns, it is important to know the support and resistance lines of a price.
The resistance level is the price level that a price does not seem to rise above. In the price, the resistance level can be seen as a peak in the price. The price first goes up, after which there is a price level at which the price goes down again. It is then possible to draw a resistance line across all resistance levels.
The support point is the price level below which the price does not appear to be falling. After an increase there is a decrease which stops at a certain price. The price then seems to rise again. The price at which the price stopped falling is called the support point.
Moving averages
The moving average of a price is used by many crypto traders when using a candlestick chart. It is a powerful tool because it shows what the average price of a cryptocurrency is during a certain period.
It can often be seen that this line continues below the candlesticks, so that it acts as a support line. However, there will then come a point where the line crosses above the candlesticks, after which it becomes a resistance line. Many crypto traders use this line to determine a pattern in the price reversal. This way they can capitalise on the price when they think the moving averages indicate a reversal of the price.
The main candlestick patterns
Past price movements may repeat themselves in the future, although this is of course never entirely certain. Therefore, by recognizing certain candlestick patterns, it is possible to make a plan for future trades. The candlestick patterns below are the best known and most important to know.
Hammer
The hammer signals a reversal after a price drop and thus insinuates a price increase. The pattern can be recognized when there are three candlesticks, with the first being red. The middle candlestick is green and both the opening and closing price are lower than the closing price of the previous red candlestick. A wick can be seen under the body of the candlestick. This wick should be twice the length of the candle’s body. We speak of a hammer pattern when the third candlestick is also green.
Bullish engulfing
The bullish engulfing pattern indicates a possible price increase. The pattern can be recognized when a red candlestick is followed by a green candlestick whose bottom and top both protrude above and below the red candlestick. This means that the closing price is above the opening price of the previous candlestick and indicates a solid change in sentiment.
Piercing pattern
A piercing line starts with a red candle. The new candle then opens at a price even lower than the closing price of the red candle. The fall in price caused the price to reach a level at which many traders started to get in. Therefore, the new candle is green with a closing price above the average of the red candle. The piercing pattern indicates a possible price increase after the pattern has appeared.
morning star
In many cases, the morning star indicates a future price increase. The candlestick in question has a small body and is located between two candles with a large body. The candlestick on the left is red, and the candlestick in the middle has a small body with a wick on top that is longer than the body.
Shooting star
The shooting star pattern may indicate a future price drop. After the price has first risen sharply, there is a candlestick with a small body and long wick sticking out at the top of the body. It indicates that the price has risen very quickly and buyers are having a hard time keeping up with the price increase. This ensures that there is a high protruding wick at the top, while the closing price ends up close to the opening price.
Bearish engulfing
The bearish engulfing pattern is the opposite of the bullish engulfing pattern. After a green candlestick, a red candlestick is visible that has a higher and lower end than the previous green candlestick. This may indicate that a price drop will follow after this.
Dark cloud cover
A dark cloud cover indicates a possible price drop. First a green candlestick can be seen, after which a next candlestick indicates a higher opening price than the previous closing price. The price is then, as it were, whistled back, so that the closing price of the new candle will end below the middle of the previous candle.
Doji
The doji pattern can be recognised by three candles, the first of which is green. Then comes a candlestick whose opening price is equal to the closing price. This means that, on average, supply and demand were equal. During this time, the price may have gone up or down once before returning to the same level as the opening price. Hence, a protruding wick is often visible.
A doji can indicate both a price increase and decrease, although this is often difficult to determine. In many cases, a doji is visible at the absolute top or bottom. The next candlestick often indicates the direction in which the price will go.
How can you recognise candlestick patterns yourself?
The above candlestick patterns are just a few of the many patterns that are known. Applying these candlestick patterns when trading cryptocurrencies is often more difficult than expected. Usually it makes little sense to go through the patterns only once. A pattern can be displayed in different forms, although this also depends on the time period that is set.
In addition, it is important to remember that a pattern does not guarantee a price increase or decrease. There is also a good chance that the price will eventually move differently than the pattern would seem to indicate. For this reason, other methods and tools are also widely used to predict the price of a cryptocurrency.
Summary
The price of a cryptocurrency is in most cases displayed by means of candlesticks. These candlesticks together form the chart that shows how the price of a cryptocurrency has behaved over a certain period. Each candle represents a pre-set time period. The colours indicate whether the price is rising (green) or falling (red).
Not only the colour of the candlestick is an important feature, the shape of the body also says a lot about how a cryptocurrency has been traded within a certain time frame. The thicker part indicates the opening and closing of the price, while the protruding part, the wick, indicates the highest and lowest price for which a cryptocurrency has been traded within the set time period.
All candlesticks together represent a chart. It is possible to spot certain patterns in these charts. Often, past events repeat themselves in future trades. Therefore, it is possible to use candlestick patterns to determine a strategy for future trades, although of course this offers no guarantees.