Trading 101: Understanding Different Candlestick Patterns While Trading Cryptos (Part - 1)
Trading cryptocurrencies has become one of the most lucrative and sought-after professions nowadays. With minimal investment, numerous people across the planet are making a consistent income by trading the cryptocurrency market alone. There are many ways to trade the crypto market, such as applying fundamental analysis, technical analysis, copy trading, or using a credible crypto trading bot.
Among the ones mentioned above, crypto traders find technical analysis to be one of the most prominent methods to take full advantage of the market. By mastering technical analysis, you can easily trade the market 24/7 and pick the coin of your choice. You will also be able to identify trends and profit from the minor price movements in any given crypto by applying the principles involved in technical analysis.
Candlestick charts, as you know, are the holy grail for a majority of technical traders. Are you a crypto trader or wanting to be one? Do you trade the market using candlestick charts and want to learn more? Here at KuCoin, we have curated the ‘Trading 101’ series just for people like you. In this particular article, let’s discuss candlestick patterns, what they are all about, and how to accurately identify and trade them.
We know that a single candlestick provides us with a lot of information about the crypto asset's price, such as its opening and closing prices, along with its max and min prices in that particular time period. However, a series of candlesticks can be even more informative.
If these series of candlesticks represent something meaningful, we call it a pattern. Various candlestick patterns are already identified and back-tested by many professional technical traders. If a pattern is formed by just one candle, we call it a ‘Single Candlestick Pattern.’ The same applies to dual, triple, and quadruple candlestick patterns.
Types of Candlestick Patterns
Based on the impact the crypto market undergoes upon the occurrence of these candlestick patterns, they are divided into two different types. They are:
Trend Continuation Patterns
Trend Reversal Patterns
If the occurrence of a pattern indicates the continuation of the prevailing crypto market trend, we call them trend continuation patterns. Contrarily, if they indicate the reversal of a prevailing market trend, we call them trend reversal patterns. In this article, let’s discuss a few prominent trend continuation patterns used by crypto technical traders.
A single candlestick with no wicks can be considered as Marubozu. Marubozu translates to “bald” in the Japanese language, supporting the appearance of this type of candlestick, as you can see below.
Marubozu candlestick can appear in both bullish and bearish crypto markets. In either of the market states, the appearance of this candle indicates the continuation of the existing trend. The absence of wicks in the Bullish Marubozu pattern in an uptrend indicates that the buying strength is still intact in that crypto pair. The same is valid for a bearish Marubozu pattern in a downtrend. The below BTC/USDT chart is an apt example of the formation of a bullish Marubozu pattern. It is evident that after the appearance of this pattern, the existing uptrend got extended.
Bullish Marubozu Candlestick on Bitcoin Price Chart | Source: BTC-USDT
The Harami is a dual candlestick trend continuation pattern. This pattern typically comprises a long candlestick followed by a smaller one. For this pattern to be valid, the small candle should entirely be within the previous (big) candlestick. If a large bearish candle precedes a small bullish candle, we can consider that as a bearish Harami pattern. Contrarily, if we see a small bearish candle right after a large bullish candle, we call it a bullish Harami pattern. The occurrence of a Harami pattern indicates that the temporary trend in an asset is coming to an end, and the crypto asset may resume its original trend.
The below price chart belongs to the Bitcoin (BTC) crypto. The market was a clear uptrend, and we can see the pullback resulting in a temporary downtrend. The formation of the Harami pattern indicates that the momentary trend is coming to an end, and evidently, the market resumed its original trend after the appearance of this pattern.
Harami Candlestick Pattern on the Bitcoin Price Chart | Source: BTC-USDT
Three White Soldiers
It is a triple candlestick pattern that indicates the continuation of the existing trend or the reversal of the temporary downtrend. This implies that the Three White Soldiers pattern is valid only when it occurs in a bull market. The pattern comprises three bullish candlesticks stacked one above the other. Meaning, the closing price of the second candlestick is above the close of its preceding candle. The same applies to the third candle as well. Also, the candles in this pattern should have tiny to no wicks at all.
We can observe an overall bullish trend in the Ethereum price chart. After the appearance of the Three White Soldiers pattern, we can see the market shooting up to the north right with stronger momentum and thereby continuing the existing bullish trend.
Three White Soldiers Pattern on the Ethereum Price Chart | Source: ETH-USDT Trading
Trading candlestick patterns can be highly profitable, but only if taken great care of while identifying and making your trades based on them. Please note that the appearance of any of these patterns doesn't mean that the trend will continue one hundred percent. It is just an indication that the temporary trend caused by pullback might halt soon. Also, it is not recommended to trade these patterns as a stand-alone tool. Consider backing the signals generated by these patterns with any reliable technical indicators such as RSI, MACD, etc. All the best!
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