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Introduction to Candlesticks
A candlestick is a type of chart used to describe the price action of a financial asset. It is an insightful tool that gives detailed information on when the market opened/closed, and what was its high/close prices for that specific period.
Components of a Candlestick
Candlesticks are essentially made of three components. These components determine the open, close, high, and low.
The three components of a candlestick are:
- Wick – the highest point in the candlestick determining the high price (thin part at top)
- Body – the area between open and close determining the open price and close price (thick part)
- Tail – the lowest point in the market determining the low price (thin part at bottom)
Types of candlesticks
Based on the direction of the price action, candlesticks can be of two types:
- Bullish candlestick - price may go up
- Bearish candlestick - price may go down
Bullish Candlestick
A bullish candlestick can be defined as a candlestick whose close price is greater than the open price. In other words, it is a candlestick whose price action is in an upward trajectory.
To interpret the components of a bullish candlestick, let’s consider the below figure. The market opened at $100, the price dropped to $50, shot right back up to $200, and finally closed $50 lower (at $150). Thus, the area between Open and Close ($100 and $150) becomes the body, while the highest price ($200) and lowest price ($50) becomes the High and Low respectively.
Initially, the market was trading at $100. Later, since there were not enough buyers at this price, the market dropped to $50. From this level, the price started to rise because the buyers were willing to purchase the asset at a higher and higher price. As a result, the market closed at $150, higher than the open price, indicating that the bulls are in control of the market.
Bearish Candlestick
A bearish candlestick is the other type of candlestick where the close price is lower than the open price. The price action of such a candlestick is downwards.
Consider the below figure representing a bearish candlestick. Comparing this with the bullish candlestick, the first observation that can be made out is the colour of the candlestick. Secondly, it is seen that the Close is below the Open. However without the colour you wouldnt know which was which
The market opened at $150, tried to go higher up to $200 but got rejected and came right back down. This implies that there is pressure coming in from the sellers. Later, the market crashes to $50 and closes at $100. Since the closing price is lower than the opening price, it indicates that the bears are in control of the market.
The Candlestick Timeframes
Candlesticks are that tool which allows all types of traders to analyze and make trading decisions. In other words, candlesticks are useful to both short-term traders and long-term traders. This advantage comes from the variable timeframes in candlesticks.
Timeframes are a crucial factor to consider while analyzing the markets. Timeframes can get confusing at times because single asset can show different stories on a different timeframe. However, if you stick to either short-term or long-term, the speculation can be simplified.
What are timeframes in candlesticks?
A timeframe on a candlestick chart defines the period of a candlestick. In simple terms, it defines how long it takes to transit from one candlestick to the next candlestick. Alternatively, it is the amount of time taken to make a single candlestick. So when we comapre "Open" and "Close" prices this could be over 1 minute, 1 hour, 1 day, 1 month or many other options.
For instance, let’s say the timeframe of a candlestick chart is set to 1 Day. Thus, it can be said that it takes 1 Day to make each candlestick. In other words, every day, a new candlestick appears. Similarly, on a 4-hour chart, it would take four fours for the formation of one candlestick.
Interpreting Timeframes
Below is a candlestick chart on the 1 Month timeframe. There are two bull candles followed by two bear candles in the chart. Since this is a 1 Month chart, each candlestick is worth one month.
Comprehending the chart is simple. In the first couple of months the market was in a downtrend, but the next two months it trended north. Looking at the overall picture, the trend of the market is up, because the closing of the last candlestick is higher than the opening of the first candlestick.
Multiple Timeframes
Candlesticks are a powerful tool to analyze and predict the forthcoming trend of the market. The basic approach is to read the charts on a single timeframe, but the professional approach is to analyze the same market on multiple timeframes. Reading a market in different time periods gives traders an edge over other traders.
Multiple timeframe analysis is the way to analyze the markets using more than one timeframe on the same asset. A critical point to note is that the interval chosen between two timeframes must be within suitable boundaries. For instance, if you are analyzing the market using the 1-hour timeframe, then the other timeframe must be either 15-minutes or 4-hour.
What do Multiple timeframes tell you?
Multiple timeframes are primarily used to visualize the overall trend of the market. It is used to determine the dominant direction of the market. For instance, if we analyze the market for entries and exits on the 4-hour timeframe, then to understand the overall direction of the market, we jump into the 1-day timeframe. Based on the direction prevailing on the Daily timeframe, we enter and exit based on the 4-hour timeframe.
On the flip side, multiple timeframes are used to understand the fine price action of the market. And below is an example of the same.
The left figure represents the candlestick on the 4-hour timeframe, and the right one represents the same chart on the 1-hour timeframe. On the 4-hour timeframe, there is one bullish candlestick with a long wick and a short tail. On the 1-hour timeframe, it is seen that the market rallied for 3 hours and dropped the next hour. Moreover, it also shows the price action of all four hours, which the 4-hour timeframe fails to do so. Thus, multiple timeframes are an excellent way to get a detailed price action of the market.
Trendlines
Trendlines are considered to be the most vital tool in technical analysis. Despite being subjective in nature, trendlines hold high value in analyzing the markets.
Since there is no real rulebook to identify and draw trendlines, it can be a challenging concept to comprehend for beginners. However, if the concept is understood correctly, then one can easily master it with rigorous practice.
What are trendlines?
Trendlines are a technical tool used to envisage the trajectory of the market. Technically, it is a line that connects specific price points in the market. A trendline can either be tilted upwards or downwards.
There are many ways to draw trendlines. A trendline drawn by one trader on an asset might not be the same trendline drawn by another trader. As mentioned, this is because there are no fixed rules to draw trendlines.
Thus, to draw trendlines as precise as possible, we must understand the basic components that go into drawing a trendline.
Terminology
There are two terms that are considered in drawing trendlines. The better a trader interprets these terms, the more precise is going to the trendline.
The following are the terms used in drawing trendlines:
- Higher Low (HL)
- Lower High (LH)
Drawing Real Support and Resistance
Before understanding to mark HLs and LHs, we must be able to draw real Support and Resistance levels.
A real Support and Resistance level is the price region where the price reacts off aggressively on multiple occasions. If any level does not satisfy these criteria, it cannot be considered as a real Support and Resistance level.
What is a Higher Low and Lower High?
The meaning of these terms lies within its name. Below is a self-explanatory illustration of a Higher Low and Lower High.
The left figure shows that the lows are getting higher and higher, while the figure on the right illustrates that the highs are getting lower and lower.
Identifying Higher Lows and Lower Highs
Identifying higher lows and lower highs come from determining Support and Resistance level. In other words, HL is equivalent to Support, and LH equivalent to Resistance.
The below shows an example to draw real Support and Resistance levels. Observe that; we have considered these support levels as HL, and not the lowest points in the market. And note that, it is an incorrect approach to mark the lowest points as HL.
In the below chart, the real Resistance levels have been marked as shown. And these must be considered as LHs. Most importantly, we must not randomly mark the highest points as LHs.
How to draw trendlines precisely
If you interpreted the concept of LH, HL, and Support & Resistance correctly, then drawing trendlines is no big effort.
Connecting the lower highs or higher lows with a line makes an accurate trendline. It is the inclined line that is obtained after joining all the LHs or HLs.
Types of Trendline
Based on the trajectory of the market, we can have two types of trendlines:
- Up Trendline
- Down Trendlines
Up Trendline
A trendline inclined upwards makes an up trendlines. It is obtained by running a line through all the higher lows. There is a misconception in the market, where traders connect the higher highs to form an up trendline. However, the right method is to concentrate on the lows getting higher and higher.
In the below chart, the trendlines are drawn by connecting the Support levels (LHs). Note that, it is very unlikely to have a trendline where the market jumps higher as soon as the price touches the trendline. Typically, the market goes through a consolidation (sideways) state around the trendline, before rising higher. Additionally, one can expect wicks and false breakouts of the trendline.
Trading tip: Hitting the buy button right when the market touches the trendline is risky for business. A conservative approach would be to wait for the price transit and leave a couple of fake outs.
Down Trendline
As the name suggests, a down trendline is a trendline inclined south. It is drawn by connecting the lower highs. Note that, joining the lower lows does not make a correct down trendline.
In the below chart, it is seen that the price is making lower low and lower high sequences. To draw our down trendline, we consider the LH sequences and not the LL sequences. And the Resistance levels depict the Lower Highs. Connecting these LHs yields our down trendline.
The trendline does not work precisely. There will be instances when the price fails to touch the trendline, or fake above the trendline as well. However, based on the momentum of the market, we can anticipate when the market could see a turnaround.
Strength of a trendline
The strength of the trendline is dependent on the angle of the trendline. The steeper the trendline, the stronger the trendline. A strong trendline goes hand in hand with the momentum of the market.
A steep up trendline indicates that the momentum of the buyer is powerful. In essence, the buyers are buying the asset at significantly higher and higher prices. And since there is strength from the buyers, we can look for potential buying opportunities.
On the flip side, if an up trendline is not steep enough, it indicates that the buyers are buying the asset at higher prices, but not as aggressively as the previous instance. Thus, one must be a little cautious in buying from the trendline, as the momentum of the buyers is weak.
Top 5 Trading Indicators and How to Use Them!
Irrespective of which market you are interested in, be it Stock, Forex or Cryptocurrency markets, it is crucial to understand a bit of technical analysis. This analysis involves identifying potential trading opportunities by looking at the price chart of any underlying asset. Out of various tools traders use to analyze the price charts, technical indicators stand out to be the most popular ones that help the traders in accurately evaluating the market.
Therefore, if you are new to using indicators and planning to build your trading tool kit to interpret the trend and identify trading opportunities, this guide will help you a lot in doing so. It is crucial to know the rules of trading while using indicators and we made sure to mention all of them in the below sections.
We recommend you to follow the five indicators that we have shared below to generate reliable trading signals in the crypto markets. Make sure to try them on a demo account, or in our free crypto trading game, master them, and then you can use them on the live crypto markets once you are sure of them.
Stochastic Indicator
George Lane developed the Stochastic indicator in the late 1950s. In most of his interviews, Lane said that this indicator does not follow the volume or price action of an asset. Instead, it follows the speed and momentum of the asset’s price. Lane revealed that the reason for this is because the momentum or price of an asset changes even before the price changes.
The Stochastic is a range-bound indicator. It basically measures the level of a closing price of a crypto asset in relation to the high and low range of the price over a specific period. By default, the period that you witness will be 14. However, it can be adjustable according to your trading style. At the beginning, going with the default setting (14-period) will be beneficial for you.
The Stochastic indicator consists of two lines; the first one reflects its three-day simple moving average and another one is the actual value of the indicator. Since the price action follows momentum, the intersection of these two lines is considered to be a reversal signal.
In the below BTC/USD price chart, we have deployed the Stochastic indicator.
Since the Stochastic is a range-bound indicator, both the lines will always stay between the O and 100 levels. Using this, the overbought and oversold trading signals can be generated. Typically, when the price goes above 80 level, we can say that the buying momentum is exhausted, and the sellers can take the selling position. Conversely, when the price approaches the 20 level, it means the selling momentum is exhausted and going long from that point is a good idea.
The divergence between the Stochastic and the price action is a leading signal to trade the market. We consider it a divergence when the bullish trend reaches a new higher high but the Stochastic shows a new lower high. When this happens, it is an indication that the buyer momentum is exhausting and the price is heading towards a bearish reversal.
RSI Indicator
RSI (Relative Strength Index) indicator was developed by J. Welles Wilder in 1978. It is a momentum indicator that is typically used to measure the magnitude of the recent price changes in an asset which will help us in evaluating the overbought and oversold market conditions.
RSI consists of only one line graph which moves between the two extremes areas. Being a range-bound indicator, the RSI line oscillates between the 0 and 100 levels. The values of 70 and 30 is used by traders to interpret the overbought and oversold market conditions. If the RSI approaches the 70 level, it must be interpreted as buyers losing momentum and we can expect a reversal soon. Conversely, when the price goes below the 30 level, it indicates the sellers are having a hard time to move the market, and a buy-side reversal must be expected.
The below price chart represents the RSI oscillator on the BCH/USD price chart.
Most of the time, these two levels work quite well in representing the overbought and oversold areas. However, in a strong trending market, RSI line can stay in the overbought or oversold territory for an extended period. This is one of the most confusing stages for newbie traders using this indicator.
But learning how to use the RSI indicator according to the context of market trends can always be beneficial. Let’s say the market is in a strong uptrend and its momentum is also increasing. At that stage, if RSI is giving a reversal at the overbought area, try not to trade that signal. Instead, wait for the indicator to give the reversal at the oversold area to ride the ongoing uptrend.
RSI divergence is another significant signal provided by this indicator. Divergence is a situation where the RSI indicator moves in one direction but the price action moves in another. This implies the indicator is not agreeing with price and thereby we can expect a reversal. For instance, if the RSI line is at the overbought area followed by a lower high that matches higher high in the price, it indicates a bearish momentum. Therefore, the break below the overbought territory could be used to enter a short trade.
MACD Indicator
MACD stands for Moving Average Convergence and Divergence. This indicator was developed by Gerald Appel in the late seventies. This indicator is considered one of the most effective yet very straightforward technical indicators. This indicator turns two trend following moving averages into a momentum oscillator by subtracting the longer one with the shorter one.
Hence, MACD is a trend following indicator that shows the relationship between two Moving averages of an asset class. The MACD line is generated by subtracting the 26 period Exponential Moving Average (EMA) from the 12 periods EMA. The signal line is the nine-day EMA of the MACD indicator that is plotted on top of the MACD line and it functions as a trigger for providing buy and sell signals.
MACD is an unbounded indicator and it fluctuates above and below the zero line as the moving averages converge and diverge. We should note that this indicator is not useful in identifying overbought or oversold market conditions. Traders primarily use MACD to trade the signal line crossovers, centerline crossovers and divergence.
We have plotted the MACD indicator on the XRP/USD price chart below.
In short, the MACD indicator is about the convergence and divergence of the two moving averages. Convergence occurs when both of the moving average moves closer to each other, and the divergence occurs when both of them are moving away from each other. Note that, the bigger moving average is less reactive and slower, whereas the shorter moving average is faster and responsible for most of the moves.
When the 12 days EMA is above the 26 days EMA it indicates positive MACD. The positive values of the indicator further increases as the shorter EMA diverges from the longer one. This implies that the buying momentum of the trend is increasing. On the other hand, when the 12 days EMA goes below the 26 days EMA, it indicates the negative MACD values and these values increase when the shorter EMA diverges further below the longer EMA. This implies that the momentum of the downtrend is increasing.
Bollinger Band
Bollinger Band is a reliable technical indicator developed by John Bollinger in the 1980s. This indicator consists of three lines - the center line which is a moving average, the upper and the lower bands. These bands of the indicator are positioned on either side of the center line. The position of these lower and upper bands determines the strength of the ongoing trend.
When both the bands tighten during low volatility periods and they expand when there is high volatility in the market. Bollinger Band indicators can be used to identify the strength of the trend. If the trend is strong enough, the price action will hit the upper band constantly. We can exploit the opportunities to make the buy trades at that point.
The price chart below represents the Bollinger Band indicator on the ETH/USD crypto-fiat pair.
To take a buy trade, we must wait for the price to hold above the centerline for additional confirmation. If the price is moving between the upper band and the center line, it indicates the buyer strength in the market. In an uptrend, prices should not touch the lower band, and if it does, it indicates the buyers losing their momentum and we can expect a reversal soon.
Once the price fails to reach the new peak and is trying to go below the centerline, we must close our buy position. Please note that the Bollinger bands is a reactive indicator and not a predictive indicator. The bands react according to the price movements, but will not predict the prices. The effectiveness of the indicator varies from one market to another, so as a trader we must adjust the parameters according to the chosen markets.
But, buying at the lower band and selling at the upper band is a basic Bollinger band strategy which is often used by the scalpers to milk quick profits from the market. We always must choose to trade the market according to the trend. Hence, in a buying (up trending) market, choose to take long entries only and in a selling (down trending) market, choose to take short trades alone.
Moving Averages
Moving Averages is one of the most basic technical trading tools used by the technical traders to identify the trend direction and potential trading opportunities. The MA smooths out the price data by creating and constantly updating the average price of the asset. There are numerous moving averages available and the differentiation between them is the number of periods used in calculating the moving average like 2 period MA, 26 period MA and 200 period MA, etc.
In lower timeframes, traders choose to go with the smaller averages, and for trading in a higher timeframe, more significant averages are used. One major advantage of the moving averages is that it helps in cutting down the amount of noise on the price chart. By looking at the direction of the MA, we can clearly understand the underlying market trend.
If the MA is angled up, it means that the price is moving in an upward direction. Likewise, if the MA is angled down, it means that the market is in a downtrend. Finally, if the MA is moving sideways, it means the market is in a consolidation state. A typical moving average also acts as a dynamic support and resistance levels to the price action.
As you know, Moving Average has different lengths, so on the higher timeframe, MA may indicate an uptrend. But on the lower timeframe, the same MA may indicate a downtrend. Therefore it is crucial to not confuse yourself by checking the MA direction on all the timeframes. Consider your trading time frame and stick to the direction of the market in that timeframe using the Moving Average line.
The image below represents the Moving Average line on the LTC/USD pair.
Most of the technical traders use advanced moving averages like SMA and EMA to get the most from the market. Please do your research on what those averages are and how to use them for better understanding.
Top 10 Crypto Chart Patterns & What They Indicate?
Head and Shoulders
Head and shoulder is a technical chart pattern which helps traders in identifying the reversal once the uptrend is exhausted. The pattern itself has a distinctive appearance, which includes a left shoulder, head, right shoulder and a neckline formation. The image below represents the formation of a Head and Shoulders pattern on the LTC/USD pair.
In total, the pattern consists of three peaks where the left and right peaks are shorter and the middle peak being the tallest. The formation of this pattern indicates that the buyers are losing the momentum, and the sellers are all set to reverse the direction of the uptrend.
It is believed that the head and shoulder pattern is one of the most reliable patterns in the industry which most of the time accurately predict the upcoming market direction. We will witness this pattern on the price chart when the price of an asset rises to the zenith point and declines back to the most recent base of the prior upward move.
Further, the prices rise above the most recent higher high to form the head of the pattern and then declines back down to the pattern’s neckline. The last and the third move goes up again but fails to break the most recent high (head). It is a clear indication of the exhausted buyers.
There are several ways to trade this pattern. Some professional traders use this pattern to take the entry at the top of the third shoulder, and some wait for the price action to close at the neckline. You can use both the ways, but if you are new to technical analysis and price action trading, we would recommend you go with the second approach.
Rounding Bottom
A rounding bottom is a technical chart pattern that is suitable for long term traders only. The reason for this is that it rarely occurs on the price chart, and most of the time it takes nearly weeks together to occur. The Rounding Bottom is a reversal chart pattern that changes the market sentiment from bears to bulls. Graphically the pattern forms the shape of 'U', and mostly we find this pattern at the end of the downtrend.
The below represents the formation of the Rounding Bottom chart pattern on the LTC/USD pair.
Whenever we find this pattern, especially on the higher timeframe, we can expect the longer-term trend changes. At first, the market will be in a downtrend which indicates the excess of supply in a downtrend phase. Then we will witness the consolidation phase for the more extended period which shows the balance between the supply and demand. Furthermore, once the bulls start to take over the bears, we will witness the rise in the price.
Once the pattern is complete, the underlying asset will breakout the previous lower low and will continue its new uptrend. This pattern is an indication of the positive market reversal. Meaning, all the long term investors move out their money from sell to the buy side and we can see the effect of this on all the other timeframes as well.
Ascending Triangle
The Ascending Triangle also known as the rising triangle is a bullish continuation pattern that appears in an uptrend. It helps the traders in anticipating trade opportunities in an ongoing trend. This pattern consists of a rising lower trend line and a flat upper trend line which act as a potential support and resistance to the price action. When the price continues to print higher lows in an uptrend, it means the buyers are aggressive than sellers. We can witness the complete pattern formation when the price breaks the pattern to the upside.
The image price chart represents the Ascending Triangle pattern.
Traders often wait for the breakout to occur to take a trade. Once you identify the Ascending triangle pattern, the breakout is supposed to happen to the upside. However, if the prices break to the downside, the pattern gets invalid and we shouldn’t be taking any trades. If the breakout occurs to the upside, only then we must take our long positions.
The location of the Ascending Triangle pattern matters because at times we can see this pattern forming in a potential downtrend which indicates the fading of downtrend momentum before potentially changing its direction. However, we shouldn’t be trading this pattern in a downtrend what so ever. It is only advisable only to trade this pattern in an uptrend.
One major problem with trading this chart pattern is that at times it gives false breakouts. That means, it seems like the price has broken the Ascending triangle but after a few candles, the price tends to come back into the triangle again. To overcome this problem, we must wait for the price to hold above the breakout and take an entry only after getting an additional confirmation.
Wedge
A Wedge is a technical chart pattern, marked by the converging trend lines on the price chart. These trendlines are drawn to connect the highs and lows of the last 10 to 50 periods. The formation indicates the rising or falling wedge pattern on the price chart. The wedge pattern has three significant characteristics - the converging trend lines, declining volume, and breakout from either of the trend lines. The rising wedge pattern indicates a bearish reversal while the falling wedge indicates a bullish reversal.
The Rising Wedge pattern occurs in an ongoing uptrend. The trend lines drawn above and below the price action helps the traders in anticipating the upcoming reversal. The more the price reacts with the upper trend line, the higher the chance of breaking out to the bottom. Be sure to only take sell trades while trading the Rising Wedge pattern. We can clearly see the formation of the Rising wedge pattern in the below BTC/USD price chart.
The Falling Wedge pattern typically occurs in a downtrend. When the price action drops enough and if the sellers are having a hard time to go for a brand new lower low, we can expect the Falling Wedge pattern to appear. The trendlines drawn above and below the price action helps us in identifying potential trading opportunities. We must go long when the prices break the upper trendline. Also, make sure to take buy positions alone while trading the Falling Wedge pattern. The below BCH/USD price chart represents the formation of the Falling Wedge Pattern.
Bullish and Bearish Engulfing Pattern
The Bullish Engulfing is a dual candlestick reversal pattern where the second candle completely engulfs the first candle. Out of the two candles, the first one is a small bearish candle followed by the larger bullish candle. The second candle opens lower than the previous day lows, but the buying pressure pushes the price higher, and we will witness the closing of that candle higher than the previous day opening price.
This indicates that the buyers are gaining momentum while the sellers are losing it. When the price goes higher than the second day high, only then activate your buy positions. The price chart below represents the formation of the Bullish Engulfing pattern on the BCH/USD price chart.
The Bearish Engulfing is a bullish reversal pattern that indicates the beginning of the new downtrend. This pattern is just opposite to the Bullish Engulfing pattern than we have discussed above. It is a dual candle pattern where the first candle is green in colour, while the second candle is in red. The big bullish candle completely engulfs the first bearish candle in this pattern.
Most importantly, the market should be in a downtrend. The big red candle must open above the first green candle, but should close lower than the previous candle because of the selling pressure. We must wait for the price to close below the first candle to take the sell trades. Below is the formation of the Bearish Engulfing pattern on the BCH/USD crypto-fiat currency pair.
Shooting Star Pattern
A Shooting star is a bearish reversal chart pattern which appears at the end of an uptrend. This pattern consists of a candlestick with a long upper shadow with a small body. In other words, we can say that the Shooting Star pattern forms when the underlying asset opens, prints a brand new higher high and closes the day near the opening price. If the pattern appears in a downtrend or a ranging market, we can consider it as invalid to trade.
The BCH/USD price chart below represents the formation of the Shooting Star pattern at the end of an uptrend
The appearance of this pattern indicates that the bulls took over the market by forming a brand new higher high. Then the sellers immediately came into the show, and knocked the price back closer to its opening price. In the above chart, we can see that before the formation of the pattern buyers and sellers tried a few times to lead the market but in the end, sellers take over the show once the shooting star pattern is formed.
The long upper shadow indicates that the buyers are now in a losing position as the price dropped back to its opening price. The next candle that is formed has closed below the Shooting Star pattern, which confirms that presence of sellers and now we can witness a clear selling trend.
However, we should know that one candle isn't all that significant to take a trade. Therefore, to filter out all the low probability signals, we must pair this pattern with some other reliable technical tools for additional confirmation. You can exit your whole position at the most recent lower high, and stop-loss order should always be placed above the Shooting Star pattern. If this pattern appears near any significant resistance level, we can consider that as a higher probability trade.
Evening Star & Morning Star
The Evening Star is a technical chart pattern which helps us in detecting a reversal on the price chart. It is a bearish reversal pattern which typically appears in an uptrend. The pattern consists of three candles - a large bullish candle, a small-bodied candle, & a Red bearish candle. If this pattern appears at the top of an uptrend, it indicates that the uptrend is about to end and we can soon expect a downside reversal.
The image below represents the formation of an Evening star pattern on the LTC/USD price chart.
We can see this pattern on most of the trading timeframes but it is preferable to trade this pattern in higher timeframes alone. The first candle of this pattern is bullish indicating a strong uptrend. The second candle being small, indicates the modest increase in price. Finally, the last bearish candle opens below the second and closes near the middle of the first candle indicating a potential downtrend. After the formation of this pattern, we can take selling trade and ride for brand new lower lows.
The Morning Star helps us in detecting the bearish reversal on the price chart. It is a three candle pattern as well where the first candle is bearish. This indicates that the downtrend is strong enough. The second candle in this pattern is also a small bearish one which shows the modest decrease in the downtrend. Finally, the last candle being bullish indicates the buyers fighting back, and taking the control over the market.
The below BTC/USD chart represents the formation of the Morning Star pattern.
The first Red candle is long, the second Red candle is comparatively small, and the last candle opens above the candle but closes at the middle of the first candle. Go long at the close of the third candle and ride the brand new trend.
Hammer Pattern
The Hammer is a technical chart pattern which frequently appears in the Forex and Cryptocurrency market. This pattern mostly appears at the bottom of a downtrend indicating the upcoming reversal in the price action. The Hammer consists of only one candle with a small body and no upper tail. The long wick at the bottom shows the rejection of lower prices.
This pattern indicated that the price dropped to a new low, but the buyers forced the price to close higher hinting a potential reversal. When we find this pattern in a downtrend, it implies that the sellers are out of the show and now there is a chance of price making a new higher high. Take the buying entries at the closing of the hammer pattern and place the stop loss just below your entry.
We can observe the formation of the Hammer pattern in the below BTC/USD price chart.
Inverted Hammer - The Inverted Hammer is a technical chart pattern which appears at the end of a downtrend. This bullish reversal pattern indicates that the sellers are exhausted in the market and hence an upside reversal can be expected. This pattern consists of a long upper shadow which is twice the length of the real body.
The price chart below represents the formation of the Inverted Hammer on the BCH/USD pair.
The opening price and low of the candlestick are equal and that indicates the buyers are trying to take the price higher while the sellers are smacking the price back down. However, the sellers fail to take the prices lower than the opening price which shows that the buyers are really in control. After the pattern is formed, take buy entry and ride for the new trend.
Dragonfly Pattern
Dragonfly is a technical chart pattern which indicates a potential bullish reversal. The opening, high, low and close of the candlestick in this pattern is the same. This is also the reason why this pattern is rarely found in the market. Typically, this pattern appears at the end of a downtrend. In a crypto market where the sellers are trying to take the price lower, the long tail at the bottom is printed. However, aggressive buyers came into the show at the same time to take back the prices almost close to the opening price of the day.
At this point, both the buyers and sellers are fighting to lead the market but fail to do so. In the end, buyers are able to take the closing near the opening price, which indicates the failed momentum of sellers and hence we have witnessed the Dragonfly pattern formation to the north.
The image below represents the formation of the Dragonfly pattern in the LTC/USD price chart.
Most of the technical traders wait for the next candle to open and close above the dragonfly pattern to take a buy entry. This pattern tends to appear at the significant support level during the pullback. Estimating potential profit price could be difficult because these candlestick patterns never tend to provide price targets. Therefore, we can use any other technical indicator or any major resistance area to close our positions. The stop-loss must be placed below the entry.
Double Bottom Pattern
A Double Bottom is a technical chart pattern that appears at the end of a downtrend. It is a bullish reversal pattern typically found on most of the financial market price charts. This pattern is made up of the two consecutive troughs that are equal in size. The formation of this pattern indicates a change in the trend and momentum of an underlying asset. On the chart, this pattern looks like the letter 'W' and hence the name - Double Bottom.
We can see this pattern in almost all the trading timeframes. If you find this pattern on a higher timeframe, expect the price to travel further. This is because, the longer the price takes to print the second bottom, the higher are the chances that it will travel further. In the below image, we can see the formation of the Double Bottom pattern on the price BCH/USD price chart.
In the above image, the market was in an overall downtrend. Then the price action pulled back to the most recent resistance area. Sellers tried again but failed to print a brand new lower low. Here, the buyers came back to the show again and went back to the most recent resistance area forming the double bottom pattern.
We can only activate the buy trades when the price action breaks above the most recent resistance area. This confirmation is crucial to trade this pattern. Note that trading against a strong downtrend should be approached with caution. Always try to trade the pattern on time and if you fail to do so, it is better to avoid that trade and look for other opportunities.
Never force yourself to activate entries because, in this way, you are going to get the worst risk-reward ratios. The Double Bottom is a highly effective pattern if you can identify and trade it correctly. We must be extremely careful and patient enough to let the pattern develop completely and take the trades only once the pattern is completely visible on the price chart.
Conclusion
None of these patterns are going to make your crypto trading better if your risk management techniques are not correct. Crypto trading is risky because of its inherent volatility. Hence, protecting the funds in your account is more crucial than making profits while trading this market. Make sure to do more research on the indicators and patterns mentioned above to get a better understanding. Practicing the identification and trading of these patterns would take time and patience. So please be patient enough to master trading these patterns and the usage of indicators on the demo accounts before going live.
