Eighteenth-century Japanese rice trading might not be the first thing that comes to mind when you think about crypto, but the two have more in common than you may know. The similarity stems from a price chart called a candlestick chart, better known today as crypto candles.
In this article, we look at crypto candle charts, how to effectively read them, and how their unique patterns can influence your crypto endeavors.
What Are Crypto Candles?
Tracking price data and trends has evolved exponentially since the 1700s when farmers in Japan began looking for a better method for tracking the price movements of rice to yield a greater profit.
Once the farmers realized that trades in the market were influenced by emotion, they found a new way to gain insight into market trends. The trends shown through these candlestick charts reflected all known information surrounding the tradable nature of rice at a certain time.
So, how has this method evolved into crypto candles?
Today, candlestick charts are used to track cryptocurrency in a similar way they were used during early rice trades. Crypto candles represent emotion-based behavior related to the price of an asset during a specific period of time using a few crucial components.
Most simply, they are a quick and accurate visual of whether the price movement within a given market is positive or negative and how great either direction is.
Components Of Crypto Candles
A crypto candle’s anatomy is the main indicator for understanding an asset’s price activity while reading a chart. Let’s go over each part and see how it functions.
The body of a crypto candle is the wide bar that is visually similar to an actual candle’s body. This section depicts the difference between the closing and opening price during an observation period known as the open-to-close range.
The close or “closing price” of a crypto candle is the final price of an asset’s movement once the period of time has ended. A green candlestick has the close at the top of the body, while a red one has it at the bottom.
On the other hand, the open or “opening price” of a candle shows an asset’s price at the start of the trading period. An open is marked at the bottom of a green candle and the top of a red one.
A crypto candle’s wick (also known as a shadow) is the thin line protruding from the top and bottom of the body. These wicks highlight the lowest and highest prices reached while trading.
Sometimes, a candle won’t have any wicks. This means that the highest and lowest recorded prices were the closing and opening prices.
The color of a crypto candle is one of the most important aspects of reading these charts. If a candle is green, then this means the current or closing price is above the opening price. This is also known as a bullish candle — after a bull market — defined by rising share prices.
A red candlestick, also known as a bearish candle, is indicative of the opposite: a current or closing price that falls below the opening price.
Now that we’ve unpacked the anatomy of a crypto candle, we can use this information to better understand the art of reading these charts.
Reading Crypto Candle Charts
The best way to read a crypto candle chart is just like you would read a book: from left to right. You’ll also want to keep price trends, timeframes, and price action in mind.
When analyzing a crypto candle chart, you’ll first want to determine whether there are any trends. Below are the important trends to look out for.
An upward trend indicates a point in time when the market is bullish and traders are more confident in their trades. On the chart, this is shown by high points that are above any previous high points and low points that are above previous lows.
Downward trends are the inverse of an upward trend. These trends appear in the form of lower high points than previous highs and declining low points.
When viewing a consolidation trend, the direction of the candles is not consistent. Rather than an apparent upward or downward trend, this style will generally fluctuate with highs and lows that remain close.
A crypto candle can be formed within a range of various timeframes, though the one-day frame is the most common. In this type of chart, each candle depicts a daily price action of the asset every 24 hours.
Some traders argue that working with shorter timeframes (minutes or hours instead of days) is the best way to locate a trend. The reasoning behind this is that using a shorter timeframe is similar to zooming in on a graph to find smaller points.
One of the fundamental features of technical analysis while trading crypto is price action. These markers detail all of an asset’s price movements over a period of time.
A critical function of price action is determining the best time to trade an asset. This strategy aims to increase your odds of a successful trade based on the belief that many of these patterns often play out in similar manners.
In other words, if someone else’s trade was successful, then there’s a good chance yours will be, too.
So, what are some of the specific crypto candle patterns you can watch for while trading? Below are just a few of the most common ones and what they mean for the profitability of your assets.
Crypto Candle Patterns
A crypto candle pattern will either be made of one, two, or three candles. The number of candles in a pattern will often help determine the direction of a trend to a more accurate degree.
A hammer crypto candle is a single candle with a shorter body and a long, low wick. You’ll typically find these patterns near the bottom of a downward trend since they’re associated with a decline in an asset’s price.
During a hammer, sellers are entering the market during this decline. Once it closes, buyers feel pressure to sell and push the market back toward its opening price.
The Bullish Engulfing
The bullish engulfing consists of two candles. First, you have a red candle with a short body. Then, a larger green candle covers it. The green candle will open lower than its red counterpart, increasing buying pressure and reversing the downward trend.
The Bearish Engulfing
Opposite the bullish engulfing, the bearish engulfing sees its first candle as small and green while its second is a long red candle engulfing the first. The appearance of a bearish engulfing typically signifies a reversal once an upward peak is reached.
The piercing line is another two-candle pattern that has a long red candle and a long green candle. Much like the bullish engulfing, this pattern often appears at the bottom of a downward trend.
An important element to watch for with this pattern is the gap between the closing price of the red candle and the opening price of the green. The higher points associated with the green candle typically pressure people to buy.
Three White Soldiers
Finally, the three white soldiers is a three-candle pattern comprised of three long green candles and short (if any) wicks. The appearance of three green candles opening and closing higher than in earlier periods indicates bullishness following a downward trend.
Beyond these few patterns listed above, there are many different crypto candle patterns to look for when conducting a technical analysis. Whether it’s a shooting star pattern or a hanging man pattern, each unique formation will help play a role in price action.
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Crypto candles are an incredibly helpful way to analyze trends within the market so you can find the most lucrative trading opportunity. While these are not perfect measures, each feature and pattern suggest a new direction the price of an asset might head.
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