The basics of Japanese candlestick patterns on crypto charts
23 Mar 2020
Used to describe and visualize price movements, Japanese candlesticks are the most popular styles used in crypto charts. It is used by most crypto traders for any type of trading style and applying any of the technical indicators we’ve discussed before such as Stochastic, EMA, Donchian channels and so on.
Japanese candlesticks are mostly used to predict possible price changes by analyzing past price movements. The design is based on the input that traders’ emotions have on market and its prices.
A closer look at Japanese candlesticks
Japanese candlesticks represent price changes in a visual way, using colors to show the differences in overall market movement. With this style, crypto charts are extremely useful for crypto traders allowing them to make price movement predictions decisions based upon historical movements.
One of their greatest strengths is that they provide a visual representation of supply and demand for every price movement. There is a lot of information packed in the printing of a single Japanese candlestick when you look at the details of the body, color and wick. Each candle shows four important components - the asset opening and closing price, as well as a high or low of that particular time frame.
Body, color and wick of the Japanese candlestick
The central part of the candlestick is called “body” and it represents the price range between the opening and the closing price.
Almost all charting tools let traders choose colors for the candles. The standard setting is green for bullish candles and red for bearish candles, as shown in the picture above. So, if the body is red, that means the closing price was lower than the opening price and vice versa.
The upper and lower wicks are attached to the body. The upper wick represents the price range between the top of the body and the highest price during the timeframe of the candle. The lower wick represents the price range between the bottom of the body and the lowest price within the timeframe of that candlestick.
Trading on the crypto markets with Japanese candlesticks
There are many different ways to use candlesticks when trading on the crypto markets. Trading a particular asset by using candlestick analysis is a very common trading technique, and arguably of the most basic tools in your crypto trading toolbox.
Let’s take a closer look at three popular trading techniques using the Japanese candlesticks.
The hammer pattern
The hammer candlestick pattern is a bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends. It is characterized by a very long lower wick, and a much higher closing price. The body of this candle is short while the lower wick has to be twice the length of the real body.
In the BTC price chart above we see a downtrend in Bitcoin as the price moves lower. The reversal happens when the price makes a new low, which is not confirmed with the closing price in the same candlestick. As a result, the price eventually bounces back higher as bears start exiting their positions.
This pattern implies that that the market tested to find where support and demand was located. Hammer is also often used for confirmation purposes to verify a failed break out.
Shooting star pattern
The shooting star pattern is another popular formation that works opposite to the hammer. It is a bearish reversal candlestick pattern that is formed at the top of an uptrend, signaling that a reversal is likely going to take place.
This pattern is very strong in combination with a failed breakout at an important resistance level. As seen in the price chart below, the long wick to the upside briefly travels above the resistance line but it ultimately closes below it. In this situation, there is a very high chance that the crypto asset will rotate immediately lower as the shooting star formation confirmed a failed breakout.
Doji is the name of the candlestick pattern where opening and closing prices are virtually the same. There are a few different versions of the Doji candlestick, but in general, they can look like a cross, an inverted cross or plus sign. Doji pattern is seen as a reversal pattern as it signals a potential change in the trend as indecision is manifested by both bulls and bears. However, the chance for a reversal with the Doji candlestick pattern is lower than with the hammer or shooting star, as Doji is more connected to the market’s indecision.
BTC/USD doji pattern (TradingView)
As seen in the price chart, Bitcoin moved higher before the Doji pattern occurred at the top of the uptrend. The asset created a fresh multi-week high before the Doji pattern signalled the market’s indecisiveness. As a result, the price action made a correction lower, which eventually shows itself in the two bearish daily candles.
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