Technical traders frequently make use of candlestick patterns. Traders can use this information to extrapolate future market trends and judge based on it once they have mastered it. Candlestick patterns can be either bullish or bearish, depending on the circumstances. This post will cover the top 8 candlestick patterns that every trader should know to navigate the markets confidently.
Candlestick patterns—what are they?
Candlesticks are single bars that show how much an asset’s price changed over a given time frame. Open, high, low, and closing prices are all displayed for the specified time frame.
One or more candlestick patterns help technical traders conclude the asset’s potential future price movement and pattern. These are plotted visually on a chart and used in market research.
Important Candlestick Patterns For Traders
There are many possible candlestick patterns, but we’ll go over the most common and effective ones, starting with bullish patterns that appear during a slump and herald the beginning of an uptrend. When these patterns occur, crypto traders frequently initiate long positions.
- Hammer
The hammer candlestick has an elongated lower shadow and a shorter body. The hammer pattern gets its name because the candlestick looks like a hammer when held vertically. The hammer usually appears at the bottom of a downward trend. In this trend, buyers force the price back up after sellers have been unsuccessful. While green and red candles can create hammer patterns, the former indicates a more robust rise.
- Inverted Hammer
The inverted hammer resembles the classic hammer pattern, but its upper shadow is much longer, and its bottom wick is much shorter. This formation indicates that buyers exerted pressure, followed by unsuccessful attempts by bears to push the market lower. As a result, returning purchasers exert more pressure, driving up prices.
- Bullish Engulfing
In contrast to the first two, the bullish engulfing pattern consists of two candlesticks. The initial candle should have a small red body and be swallowed up by a much bigger green candle. The second candle starts lower than the first, but there is more buying pressure, and the trend increases.
- Piercing Line
The piercing line is another two-candlestick pattern that can appear at the support level at the bottom of a downtrend or during a pullback in preparation for a bullish movement. A long green candle follows a long red candle in this motif. A large disparity between the red candle’s closing price and the green candle’s open price is the most important feature of this pattern. The closing price should also represent at least 50% of the previous day’s red candlestick body. The green candle’s higher closing than its open indicates strong purchasing momentum.
- Morning Star
Three candlesticks make up the more complicated morning star pattern: a long red candle, a short-bodied candle, and a long green candle. The morning star pattern indicates that selling pressure from the first period is waning, and a bull market is developing.
- Three White Soldiers
The three white soldiers are yet another trio of candles. Three tall green candles are lined together, and their shadows are typically extremely short. All three successive greens must start and end at higher levels than the last period. After a downward trend, this pattern is seen as a very bullish signal.
- Hanging Man
A green or red candlestick with a short body and a lengthy bottom shadow forms the silhouette of a hanging man. It usually comes at the end of an uptrend and portends a significant sell-off, though bulls may be able to drive prices higher temporarily before losing control.
- Shooting Star
A shooting star is the inverse of a hammer’s inverted shape. It’s a red candle that is shorter at the base and taller at the top. In most cases, the market opens with a gap to the upside, rises to a local high, and then drops to close near its price on the candlestick. The physical form can sometimes be absent.
Conclusion
Day traders in Bitcoin should have candlestick patterns in their toolkits, much like their forex and stock market counterparts. While these patterns can be used alone to generate useful trading signals, they are most effective when combined with indicators derived from technical analysis.