We continue the series of articles about the basics of trading on the cryptocurrency market.
In the first publication of the cycle, two main trading strategies of the financial markets were studied — investing and trading, as well as the basic rules and criteria that novice investors should pay attention to in the cryptocurrency market to choose their trading strategy.
In the previous article, we considered the question of what is a stock chart, its graphical display, types of stock charts, and the main elements of the graphical display of price movement. We also studied the criteria for the applicability of different types of graphics in certain conditions.
In today’s publication, we will study graphical candlestick models, that you can operate to predict the further movement of the asset price and make trading decisions, even without using additional technical analysis tools in the form of indicators, horizontal and vertical trading volume charts, as well as graphical analysis elements. We will consider these types of technical analysis in more detail in the following publications.
What are candlestick patterns?
As we already discussed in the previous article, the most popular type of stock chart used by traders around the world is the Japanese candle chart.
Japanese candles have become especially popular because of a more visual and convenient perception of the movement of price quotes than any other type of stock chart.
Using only candlesticks, models, and patterns of candle analysis, an experienced trader can obtain a sufficient amount of information about the correlation of the forces of buyers and sellers in the market and analysis to predict the further movement of price quotes. In addition, with the help of candle analysis, you can get information to determine the areas of interest of the price levels of buyers and sellers.
Candlestick analysis models and patterns can be used both for intraday trading (day trading), and for medium-term trading on price fluctuations, and even for opening long-term positions.
In addition, candlestick analysis models can indicate a reversal of the market trend, a continuation (consolidation), or a continuation of the current trend.
Candle analysis is a basic method of technical analysis and is suitable for both investment strategies and all types of trading.
There are a huge number of combinations of candle models. According to the analytical portal AlphaCapital, as of 2021, there are more than 100 models of candle patterns.
As a part of our study cycle for beginners, we will consider the main and basic candlestick patterns that will be useful both for those people who have chosen an investment strategy and for those who have decided to engage in trading.
Bullish Reversal Patterns
We discussed bullish and bearish candles in the previous article of the cycle of the cryptocurrency market basics for beginners.
One of the main candle patterns that indicate a possible trend reversal in the market is the Hammer.
The Hammer candle pattern consists of a short candle body and a long tail down. The Hammer candle model is considered correct if the shadow length is at least twice the length of the body.
The long shadow of the hammer candle signals that despite the strong pressure of sellers on the market, the bulls were able to overcome the pressure of the bears and demonstrated their intention and the presence of forces to reverse the trend and move the price up.
As a rule, the Hammer model is formed at the bottom of a downtrend. At the same time, the hammer candle can be both green and red, but a green hammer candle signals a greater probability of a trend change from a descending to an ascending one.
The Inverse hammer is similar to the usual Hammer pattern described above. The difference between the two models is that in an Inverse hammer, the shadow of the candle is above the body, not under it. As with the Hammer, the upper wick of the candle should be at least twice as large as the body.
Just like the Hammer model, an Inverse hammer is formed at the base of a downtrend and indicates a potential market reversal.
A long shadow on top of the body signals the failed attempts of the bears to push the price down. Buyers were able to stop the pressure of sellers near the opening level of the candle. Thus, the Inverse hammer candle model demonstrates the strength of buyers and a possible trend change.
Three white soldiers
The three white soldiers model consists of three consecutive green candles, usually with short wicks. Ideally, these candles should not have lower wicks. By their length, you can analyze the strength of buyers and assess the probability of price consolidation or a possible pullback.
The three white soldiers model is formed at the base of the downtrend. This model will be considered correct if all three green candles will close above the level of the previous candle.
This candlestick pattern is a very strong bullish signal, indicating that the constant pressure of buyers in the market leads to a break and further price growth.
The morning star model is a more complex candle pattern since it consists of three candles: a long red candle, followed by a short candle, and then again a long green one. The color of the candle in the middle does not matter, it can be either green or red.
At the same time, it is a good sign that demonstrates the strength of buyers, where the average candle is open and closed with a gap from two neighboring candles, and it does not cross them. In the terminology of trade, such a case is simply called a gap.
The morning star signals to market participants that the wave of sales is over and a bull market is beginning to form.
In this article, we started getting acquainted with the main models of candle analysis on stock charts, studied several bullish reversal patterns. In future publications, we will continue to consider bullish reversal models, as well as study the main models of a bearish reversal and continuation of the trend in the market.