What Do Candlesticks Mean in Crypto?
Have you ever come across red and green colored bars drawn over a price chart? Do you know that these bars are much more than just price indicators? In crypto markets as well others, experienced investors have been using candlesticks to predict the price actions of various assets. In addition, candlesticks have helped them to decide whether to sell off an asset or to hold it for dear life. But how do they do it? What do candlesticks mean in crypto? How should we analyze the various patterns of candlesticks? Here is everything you need to know about them.
What Are Candlesticks?
A candlestick is a method of depicting the different levels of prices of an asset in a given period of time. The history of candlesticks dates back to the 18th century when Japanese rice traders used candlesticks to display the prices in their markets. When mapped over a certain period of time, candlesticks indicate the nature of prices of the asset in consideration. This makes candlesticks a leading indicator.
Candlesticks are of two types, the bull candle, and the bear candle. The bull candle is green in color and occurs when the open prices of the asset are lower than the close price. On the other hand, a bear candle is red in color and indicates that the open price of the asset is higher than the close price. Now, what do we mean by open and close prices?
Open price is the price of the candle (asset) at the beginning of the candlestick charting period. In other words, the open price is the price at which the first trade of the charting period happened. In contrast, a close price is the price of the asset at the end of the charting period. The price of the last trade in the candlestick (charting) period defines the close price.
Importance of Candlesticks
Candlesticks are much more than the price indicators of an asset over time. When analyzed carefully as patterns, candlesticks can show very important things in the financial markets. Here are a few reasons why candlesticks are such an essential part of market analysis.
- When a long wick appears at the bottom of the candle, it means that investors are buying the asset when its prices are falling.
- Whenever a similar long wick appears at the top of the candle, it shows that the investors are looking to gain short-term benefits from the asset.
- When there are very short or no visible wicks at either side of the candle, it is indicative of a very strong bullish or bearish sentiment depending upon the color of the candle.
- The color coordination of the candlesticks allows the investors to get an easy summary of the price behavior over time.
- The top of the wick located on top of the candle signifies the highest price at which the candle (asset) has been traded during the charting period.
- The bottom of the wick present at the bottom of the candle indicates the lowest price at which the asset has been trader during the charting period.
Most Important Candlesticks Patterns
There are hundreds of candlestick patterns that exist in the crypto market. However, as a beginner in reading candlesticks patterns, it is important for you to know about these five bullish candlesticks patterns that can help you make decisions about whether to trade the assets or hold them for a longer time.
Bullish Engulfing Candle
This pattern usually occurs at the bottom of a downtrend and shows an increase in the buying pressure of an asset. A bullish engulfing candle pattern happens when the second candle’s body completely engulfs the body of the first candle (red candle). This happens when the price of a candle on the second day is higher than its opening price, meaning that the buyers have now entered the market.
A bullish hammer occurs when there is a long wick at the bottom of a short-bodied candle. It indicated the bottom of a trend and that the bears have managed to push the price of an asset downwards during the time period in consideration. Experienced traders consider a candle as a bullish hammer when the closing price is even slightly below the opening price of the asset with a long tail and a small body.
Three White Soldiers
Three white soldiers is one of the most important patterns of candlesticks where three long candles having small wicks open and close at a higher price when compared to the price on the previous day. It indicates the advent of a buying pressure period and often occurs after a downtrend. It happens when the buyers take over the market.
Rising Three Methods
In this pattern, a series of three short bearish candles exist between two long bullish candles. This means that buyers are holding control of the market in spite of a lot of pressure for selling the assets. This pattern signifies the continuation of a bullish period.
It is a pattern of two candles when one long green (bullish) candle follows a long red (bearish) candle. The most important indicator of this pattern is the considerable gap between the closing price of the first candle and the opening price of the other. It indicates that the bulls are now controlling the market and are buying the asset at the current price.
So, the next time you see blue and red candlesticks on a price graph, you will know what it means. We advise you to take a proper look at the price chart of an asset over a long period of time if you wish to hold an asset for long. If you are a day-trader or would like to gain short-term profits, analyze the candlesticks over a short period of time like a few days or weeks.
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