In this article (Lesson 2 of our Day Trading Crypto Currencies Guide), you will learn what a candlestick chart is and how you can use it to make profitable trades.
If you haven’t read the first part of our guide (Introduction to Cryptocurrency Day Trading), then we recommend to do so before moving forward.
When it comes to day trading crypto currencies, you want to use technical analysis. To do so, charting is the basic technical tool every trader must be familiar with.
In charts, prices are presented in an organized way. That way, it’s much easier to identify patterns and apply technical indicators.
What is a candlestick chart
There are different types of charts. But we will focus on the Japanese candlestick chart, as this is the most useful among them.
Each candle represents a time frame, and provides us with information regarding the opening and closing prices. In addition, it tells us the higher and lower levels that the price reached during the specified time period.
When you look at the image below, you can see that a bull candle is colored in green. It occurs when the closing price is higher than the opening one.
The opposite is the case with a bear candle, which is usually marked in red, and its closing level is lower than when it opened the session.
In both cases, the closing prices indicate whether buyers are currently in control, or sellers.
Above and below each candle you can see their “shadows,” which show us the extreme upper and lower figures which were recorded during that session.
In addition to the bear and bull candles, there is also the Doji candlestick which usually reflects indecision.
Doji can come in different length of shadows, or even without any shadows at all. What defined them is that the opening and closing price are identical, or at least close enough to seem as the same level.
Short term patterns
In addition to the basic information we can get from a Japanese candle’s components, we can learn about market sentiment. The shape and color of each one create some patterns we can recognize and use.
Now, let’s have a look at some of the basic and most important ones.
Marubozu candle might have really small shadows, or not have them at all. Usually the body of the candle is at least 80% of the overall shape. It provides important information about who’s in control.
A bull Marubozu (green) indicates that buyers were winning the last battle and were able to push the price to its highest level toward the end of candle. A bear Marubozu (red) tells us exactly the opposite. This time sellers were in control.
Long shadows candles
A candle in which one of its shadows is much longer than the other one, considered to be a long shadow candle.
Basically what it tells us is that at the beginning of the session one side of market participants were pushing the price toward one direction. Then, by the end of the session, the other side took control and is now dominating.
This type of candle occurs when a small candle is following by a much bigger one. The latest candle range is higher than the first one, both to the upside and to the downside.
It shows that the struggle between buyers and sellers was tougher than on the previous one. Therefore, the victory was more meaningful and the winning side is now in control.
Real Trades Example
In the following section, we provide an explanation of two real trades we took, which were mainly based on reading candlesticks.
In the chart below each candlestick represents a 1 hour time frame.
At Point A we see an upper long shadow which comes after a strong green candle. This candle suggests that the buyers’ power is weakening. At this moment, we know that we are not looking to buy. However, it’s not the time to sell yet either. What we need is to wait for another confirmation for trend reversal.
Point B comes after several hours of indecision. This candlestick looks like a Doji and is another sign that buyers didn’t manage to take over.
Point C is our FIRST ENTRY POINT. This is where the bears decisively took control. The red candle is going down below the middle of the first green candle’s range. Following several hours of buyer weakness, and traded by large volume, this level made a good selling point. The price at this stage was 8,368 USD.
Then, we can see a long low shadow candle at Point D. It came after the price first went down as expected, and then two hours of indecision took place. As we learned, this shadow reflects an inability of sellers to push prices down. This is where we chose to buy back and close our position. The price at this level was 8,210.
The gain from this trade is the difference between those two prices, which is 8,368 – 8,210 = 158 USD.
Point E is where we decided to enter to another trade. We saw a longer upper shadow in the green bull candle, and then an indecisive red candle. Then came the Marabozu bear candle which traded with big volume and indicated that sellers were taking over. It crossed downward half of the previous green candle and provided us with a good SECOND ENTRY POINT.
Note that if we would connect the 3 consecutive red candles we could get a one long bearish engulfing one.
Our prediction was correct, and after a decent decline we decided to buy back at point F. The reason for that is that once again we saw a long lower shadow. Being already in nice profits we decided to close this position at 7,818.
The gain from this trade was even higher: 8,227 – 7,818 = 409 USD.
The total earnings after those two trades was: 158 + 409 = 567 USD.
Using Japanese Candle in Crypto Currencies Trading – Bottom Line
Learning to read candlestick charts is a must for every crypto trader. This is the first technical tool and one of the most important ones. By using the information it gives us, we can identify patterns and trading opportunities.
As we saw, there are different type of candles. Their appearance in different formations create excellent signals to enter and exit the market.
As you could see in the example above, a wise implementation of this tool can lead to easy profits in short period of time.
Having said that, we don’t recommend trading solely on candles. Combining them with additional indications would increase the probabilities for winning trades. And those will be the subject of our next cryptocurrency day trading lesson.
We hope you found this lesson was helpful. Please let us know below if you have any thoughts, comments or questions.