When you start trading, it can be quite daunting to read charts. The charts will look confusing, with indecipherable lines that don’t seem to make any sense. To aid traders in reading charts, candlesticks were incorporated into most trading platforms.
Candlesticks are an essential tool for traders seeking insights into the cryptocurrency market. They provide a visual representation of price action, helping traders to identify potential trading opportunities and make informed trading decisions.
In this article, we will be taking a close look at candlesticks. We will be looking at what are candlesticks in cryptocurrency trading, how to read them and how to use them for trading in the cryptocurrency market.
What are candlesticks in cryptocurrency?
A candlestick is a charting tool used to visualize the price movements of a cryptocurrency asset over a given period of time. The chart displays a series of candles representing the opening, high, low, and closing prices of a cryptocurrency asset. Candlesticks are used to identify trends and support/resistance levels, helping traders to identify potential trading opportunities.
The most popular type of candlestick chart is the Japanese candlestick, which originated in Japan in the 18th century. This type of chart is used by traders around the world to analyze financial markets.
Parts of a candlestick
Within the candlestick itself, there is useful information that we can garner and use to make trading decisions.
A candlestick consists of three parts: the body, the upper shadow, and the lower shadow. The body of the candlestick shows the specific price action relating to the opening and closing price of a cryptocurrency asset for a specific time period. If the closing price is higher than the opening price, the body of the candlestick is colored white or green, denoting a bullish candle. If the closing price is lower than the opening price, the body of the candlestick is usually colored black or red, denoting a bearish candle.
The upper and lower shadows, also known as wicks, represent the high and low prices of a cryptocurrency asset for a specific time period. The upper shadow is a vertical line between the high and the closing price for a bullish candle and between the high and the opening price for a bearish candle. The reverse is the case for a lower shadow. The lower shadow is a vertical line between the low and the opening price for a bullish candle and between the low and closing price for a bearish candle.
Bullish and bearish candlesticks
Bullish candles indicate that the price of a cryptocurrency asset has increased over the time period of the candle. Conversely, bearish candles indicate that the price of the cryptocurrency asset has decreased over the time period of the candle. Each fully formed bullish or bearish candle you see on the chart represents the price action of a specific time period. For example, if you are looking at a 5 minutes chart, each fully formed candle represents the price action of the last 5 minutes. If you are on a 1-hour chart, each fully formed candle represents the price action of the last hour. The same is true with the 4-hour, 8-hour, daily, weekly, and monthly charts.
Since there are different time frames to trade on, ranging from the 1 minute to the monthly charts, you should choose the time frame you trade on based on your trading style. If you are a scalper that wants to quickly get in and out of trades, then you should use the 1-minute to 30 minutes time frame. But if you prefer swing trades or you lack the time to always check the charts for trading opportunities, then you should utilize the 1 hour to daily time frames.
Common Candlestick patterns
Candlestick patterns are used to forecast the direction of price movement in the future. They are helpful patterns that could indicate how price will move in the future and help traders decide if they should buy or sell a cryptocurrency asset.
There are several candlestick patterns that traders use to identify potential trading opportunities. These include the hammer, inverted hammer, hanging man, shooting star, bullish engulfing, and bearish engulfing patterns, to mention but a few. Each of these patterns has its own implications for the market and can be used to identify potential trading opportunities.
Benefits of using candlestick charts for trading
Analyzing candlestick patterns can help traders to identify potential trading opportunities and make informed investment decisions.
Candlestick charts provide traders with a wealth of information about the market. They are easy to read and understand, and they provide a visual representation of price action. Additionally, candlestick charts can be used to identify support and resistance levels. This can be useful for traders looking to enter or exit a position in the market.
How to read candlestick charts for cryptocurrency trading?
Reading candlestick charts for cryptocurrency trading can be a bit daunting at first, but with a bit of practice, it can become second nature. We listed bellow some tips to get you started.
- Look for patterns. Common candlestick patterns can tell you a lot about the potential direction of the market. Pay close attention to the size of the bodies and shadows, as well as the direction of the wick.
- Look for support and resistance levels. Identifying support and resistance levels can help you determine when to enter and exit positions.
- Be conscious of news and events that could affect the market. Pay close attention to news about the cryptocurrencies you are trading, and keep an eye out for potential trading opportunities.
- Use technical indicators. Technical indicators such as Moving Averages, Bollinger Bands, and Relative Strength Index can help you identify potential trading opportunities.
Candlestick charts are an essential tool for traders looking to gain insight into the cryptocurrency market. They provide a visual representation of price action, helping traders to identify potential trading opportunities and make informed investment decisions. In this article, we’ve explored what candlesticks are, how to read them, and how to use them for trading cryptocurrencies.
By following the tips outlined in this article, traders can make informed decisions and successfully navigate the volatile cryptocurrency market. With practice, traders can become proficient in reading and interpreting candlestick charts and use them to identify potential trading opportunities.
Diana is the CTO of Vestinda.
She’s an engineer with extensive experience in the payments space, passionate about mathematics and artificial intelligence.