The candlestick charts Japanese are one of the most important tools when it comes to trading or investing in cryptocurrencies. Reading the patterns of candlesticks that form allows us to analyze the market, improve our decisions and execute trades more accurately.
In this guide, I’ll explain everything you need to know about Japanese candlestick patterns and look at some helpful tips when it comes to trading Bitcoin, Ethereum, Cardano, or any other cryptocurrency.
Bitcoin and Cryptocurrency Candlestick Charts
A candlestick chart is a visual representation of the price movement of a cryptocurrency or token over time.
It consists of several Japanese candlesticks, which provide additional information individually or by forming patterns between several of them.
Therefore, candlestick charts allow us to have a very complete view: we observe the market situation in general and, in turn, we can make a more accurate reading of the price action at a given moment.
How to read a Japanese candlestick
A Japanese candlestick represents the activity of a financial asset (in this case a cryptocurrency) over a certain period of time.
In the ETH (Ethereum) chart we saw earlier, each candlestick corresponded to one day. However, you can choose other time slots or time intervals like 1 hour, 4 hours, 1 day, etc.
The choice depends on whether we want to look at what happened on the chart over broad periods of time (months, weeks, days) or over very narrow periods of time (hours, minutes).
That said, to read a Japanese candle, you need to know its anatomy:
- Body: This is the widest part and shows the price range from open to close.
- Shadow or wick: these are the small lines that are on the body. They indicate the maximum and minimum price reached during the period.
- Color: Represents the price direction. Yes it is green, the closing price is higher than the opening price. Therefore, the cryptocurrency would have increased in value (bullish candle). Yes it is Redthe closing price is lower than the opening price, so the cryptocurrency would have fallen in price (bearish candle).
Knowing these parts, one can already quickly read a candlestick chart at a glance:
With Color we know if the price has gone up or down.
Next Bodywe know at what price it opened and at what price it closed.
thanks to shades we know the maximum or minimum prices reached.
Next size and closure from the candlestick, we can infer the strength of the market. For example, a body with a wide range and a high close indicates strong buying pressure.
It would be basic reading. The next step is to identify candlestick patterns to get a more accurate reading of what is happening in the market.
How to Read Japanese Candlestick Patterns for Cryptocurrencies
There are several ways to read a Japanese candlestick chart. One of the easiest ways to start trading cryptocurrencies is with pattern recognition.
Patterns are repetitive «shapes» that allow the interpretation of what is happening in the market and the possibility of estimating possible movements in the future: continuation of the movement, change in trend or indecision in the market.
They can consist of one or more candles and can be classified in different ways. In order not to complicate things, we will divide them into two groups: bearish and bearish.
BURLISH CANDLE PATTERNS
Ascending candlestick patterns indicate that there is a «high probability» that the price will rise.
Hammer
identifier: the hammer or mallet is a pattern consisting of a single candle. As the name suggests, its shape resembles that of a hammer. The lower part is a long shadow, and the body is very small, it can be green or red.
Meaning: The hammer is a reversal pattern that occurs at the end of a downtrend. It may indicate a sudden change in price: there is strong selling pressure until the buyers take control of the price.
Swallow the climb
identifier: bullish engulfing pattern or bullish engulfing pattern, it consists of two candles. The first is a bullish candle and the second is a bullish candle that completely engulfs the first.
Meaning: This is mainly a reversal pattern that occurs in a support zone. However, it can also appear as a continuation pattern in an existing uptrend.
This is one of the most reliable candlestick patterns and clearly shows how the selling pressure is completely absorbed, triggering a strong upward move.
The morning light
identifier: This pattern consists of three candlesticks. The first is a wide range bear candle. The second is usually a narrow range doji candlestick. Finally, the third candle is a broad ascending range candle covering at least half of the first candle.
Meaning: morning star or morning star, is a trend reversal pattern. After a bearish move, the selling pressure stops, reflected in a type of candlestick indicating indecision. The pattern is completed with the last candle where the buyers take control of the price.
Below we see an example of the morning star pattern in the cryptocurrency XRP (Ripple).
Penetration Guide
identifier: This is a pattern consisting of two candles, the first a bear candle, preferably with a wide range. The second is a bullish candle that first breaks above the low of the first and then closes above the midpoint of that candle.
Meaning: This is a pattern very similar to the engulfing candle, but less reliable. Its development is similar but it does not completely cover the first wing, being valid only if it exceeds 50% of the body. Therefore, this close denotes a decline in purchasing power.
BEARSH CANDLE PATTERNS
Bearish candlestick patterns indicate that there is a «high probability» that the price will decline. They are basically the opposite of the escalation patterns we saw in the previous section.
Shooting star
identifier: This is a single candle design with a small body and a fairly wide wick at the top. Its shape resembles an inverted hammer and its color can be green or red.
Meaning: shooting star or shooting star indicates a change in trend and usually appears at the end of an uptrend.
evening Star
identifier: It is the exact opposite of the morning star and also consists of three candlesticks. The first candle is a large bullish candle, the second has a very small body and finally a third bearish candle with a wide range.
Meaning: It is a reversal pattern that occurs in an uptrend and its meaning is clear with a simple step-by-step reading. The first indicates a continuation of the uptrend, to move into the second candle at a price stop, and finally confirmation of the trend change with the third wide bearish candle.
Bearish Envelope
identifier: The pattern consists of two candlesticks. The first is a bullish candle and the second is a bearish candle which completely engulfs the first.
Meaning: The bearish candle that completely engulfs the first indicates that the sellers are taking control of the price, which may indicate a change in trend. It can also indicate a continuation move depending on the context.
Let’s see the example of a bear swallow in BTC (Bitcoin):
dark cloud
identifier: Consists of two candles and starts in an uptrend with a wide range of green candles. The second red initially exceeds the previous one to eventually close below the midpoint of this candle.
Meaning: Indicates a trend change or at least a break in the main trend.
OTHER MODELS OF JAPANESE CANDLES
crack
identifier: There are several variations of the doji, but basically the idea of its identification is as follows: the open and close of the candlestick are at the same price level.
The close does not need to be completely precise, so the candle can have a green or red body. What is important is the idea behind the model.
Meaning: the opening and closing price is the same because there is indecision in the market. Neither bulls nor bears have price control.
damn
identifier: is a pattern consisting of two candles, where the second is inside the first. It is also called internal model or internal bar.
This is the opposite of the wrap patterns we’ve seen before. In this case, the second candle does not wind up, but is contained in the first.
Meaning: indicates that a contraction in volatility is underway, which generally leads to an expansionary movement. In other words, a big price move is expected, the direction of which will usually be determined by the context.
Tips for Reading the Bitcoin Candlestick Chart
Japanese candlesticks are a universal tool that can be applied to all markets.
However, I will make a few observations when analyzing Bitcoin charts (and the crypto market in general) mainly due to its high volatility and low capitalization compared to other markets.
- apps large time intervals to find safer models.
- Personally, I don’t like to stick to the generally established rules for placement stop loss in Japanese candlestick patterns. Due to the high volatility, I prefer to adjust for other factors or add a «safety cushion».
- The cryptocurrency market creates big trends and candlestick patterns can be useful in prolonged movements.
- They are also useful for read price action at key support and resistance levels. These levels are used in many cryptocurrency trading strategies to open positions, both by investors and traders.
- When large price declines occur, they are often triggered by news or preceded by over-leverage in the market. In these situations, there are usually no patterns in the large timeframes that allow us to enter the market. In general, we will have to use other techniques or use shorter time frames.
- If we are very strict and follow the classic patterns to the letter, we will see that many include small price discrepancies when forming them. This is something we should ignore in this market as it operates 24/7 so such price spikes usually do not occur.