It is of paramount importance for cryptocurrency traders to understand candlestick chart patterns to help them quickly interpret price information.
Under technical analysis, candlesticks are more visually appealing than other types of simple charts. Candlesticks patterns are also one of the most efficient methods to analyze what a cryptocurrency might do next, based on what it has done in the past.
Candlesticks visually represent price moves with different colors. Just like a conventional bar or line chart, candlesticks show the market’s open, high, low, and close prices during a specific period. And based on regularly occurring chart patterns, crypto traders can use the signals they generate either to forecast the price direction or to make trading decisions.
Let’s discover the most common candlestick patterns and how you can use them to identify the future direction of cryptocurrency markets.
Basic Candlestick Patterns
There are many candlestick patterns, but they are mostly separated into bullish and bearish categories. As the name implies, bullish patterns indicate that a cryptocurrency will likely rise, while bearish patterns indicate that it will likely fall. Here are a few examples:
Engulfing Pattern
A bullish engulfing pattern develops in a downtrend when buyers outnumber sellers. This pattern is formed of two candlesticks, reflected on the chart by a bearish candle with a small real body that is completely engulfed by a longer green candle.
An engulfing pattern on the bearish side of the market takes place when sellers outpace buyers. This is reflected on the candlestick chart by a candle with a small green body that is entirely engulfed by a longer bearish candle.
Evening Star
An evening star is a multiple-candlestick pattern that indicates that the uptrend is ‘topping’ ahead of a bearish reversal. It is identified by three candlesticks that initially reflect the buyers are stalling at a certain point, and then the sellers take control.
The first candle is bullish and reflects the continuation of the prevailing uptrend. The second candle is a Doji or a spinning top to indicate indecision in the market, and it does so in the form of a small real body. The third candle is then bearish and closes well below the second candle’s body and deep into the first candle’s body.
Morning Star
This pattern is the bullish opposite of the evening star and is formed by three candles, but some variations exist. It is often recognized when the price stagnates after a downtrend. The first candle shows the cryptocurrency is still in a downtrend, and it has to be relatively large compared to the subsequent candles.
The second candlestick has a small body to indicate that confidence in the current downtrend has eroded and bulls are taking control. The third candle must be a large bullish candle that reverts more than halfway into the first candle’s red body. It represents the fact that bulls have reversed the trend and seized control.
Harami
There are two variations of harami candles, but both have small real bodies that are engulfed inside the previous candle’s body. In both cases, a harami pattern shows indecision on the part of sellers or buyers.
This tells cryptocurrency traders that the current trend is pausing. Then it’s either followed by a continuation in the same direction or a trend reversal.
Hammer
A hammer candlestick is a common chart pattern comprised of one single candle with a short body alongside a long lower wick. It occurs at the bottom of a downward trend when the market opens near high, then sold off during the session. Ultimately a strong buying pressure drives the price to close well above the low, slightly above or below the open price.
Overall, the smaller the body and the longer the shadow, the more significant the interpretation of the hammer as a reliable trading signal.
Inverse Hammer
The inverted hammer is similar to a hammer candlestick — it looks like an upside-down version — with the only difference being that the upper tail is long and twice as large as the length of the body. The lower wick is short, and the body has to be near or at the bottom of the candle. This means the candle can have a little lower shadow, but it has to be much smaller than the upper wick.
Found at the end of a downward trend, the inverse hammer is usually seen as a trend-reversal signal. When it occurs in an uptrend, it is called a shooting star.
Shooting Star
The shooting star is the bearish equivalent of an inverted hammer. It has the same shape — a small lower body and a long upper wick — but forms in an uptrend.
This single candle pattern indicates that the price has been rising, followed by a significant sell-off. Finally, the price pulls back to the bottom and closes near the opening price. The sharp decline is often seen as an indication that bears are back in control, and the bulls are stepping aside.
The Bottom Line
Candlesticks are created by up and down movements in cryptocurrency prices. While these swings sometimes appear random — especially in volatile crypto markets — at other times, the patterns they form have information packed into it. Therefore, cryptocurrency traders can use this vital part of the market narrative for analysis or trading purposes.
When using any candlestick pattern, it is crucial to remember that getting confirmation from other technical analysis tools is much better. That would be a bonus if additional options were to manage your crypto trades from a professional interface.
In cryptocurrency markets, however, many exchanges did not provide advanced types of charts or trading tools.
Fortunately, though, Zenfuse offers a rich and complete set of easy-to-use analytics, managing portfolio tools, news aggregation, and tax reporting — all in one place.
The best way to learn to trade candlestick patterns is to practice trading the signals they give. You can develop your skills by trading across multiple exchanges to get mutual confirmations and better gauge the emotions surrounding the cryptocurrency you trade. The Zenfuse interface can be used for this purpose, namely to spot candlestick patterns and to execute trades based on its signals on 22 of the top global cryptocurrency exchanges.
About Zenfuse
Zenfuse is a powerful all-in-one platform for cryptocurrency traders and investors.
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