Candlestick Charting in Cryptocurrency Trading –What You Should Know About it
Candlesticks are a commonly used tool that helps day traders and now crypto traders determine future prices as well as market sentiment, in the hopes of making some profit from their trades.
Candlestick charting has been in existence for over 300 years and has been proven to help traders make sound financial and trading decisions that eventually pay off.
While it’s somewhat technical, the truth is adopters think it’s the most effective tool and its object –price action- the ultimate determinant of profits in trading activities. In fact, they think it’s even more relevant and important than fundamental principles such as news items and earnings.
What all this means in essence is that the true state of a market is largely dependent and seen in the price, that’s accurately presented by the candlestick for that timeframe.
Structure Of A Candlestick
Price activity during a specific period is often represented by the candlestick typically contains four components:
- Open –price when trading begins on the asset
- Close –price of asset at trade closure
- High –highest price at which the asset was traded in between the open and close
- Low –lowest price at which asset was traded during same interval
The asset(s) typically go through these phases, depending on a few key factors like demand, supply, news items, and other fundamentals. These components are highlighted on the candlestick, usually in the form of two distinct features.
The first and most obvious part is called the body. This is wide and bold, and contains information about the prices at which thee asset opened and closed during the specific timeframe.
Good candlestick charting looks at it from the bottom up. If the prices were low at the beginning and ended on a high, that indicates profit. If it’s prices are lower at the close than they were at the open, that’s loss or asset price depreciation.
The other two parts of the candlestick are known as the upper shadow and lower shadow. These are the thin lines extending from the body, up and down respectively, and indicate the prices at which the trade was opened and when it was closed.
How Can Crypto Traders Use The Candlestick?
Cryptocurrency traders often depend on the inherently unpredictable nature of the market to profit from their daily trades. And to do this, some of them use the candlestick. Day traders typically look at the candlestick charts on a 1-12 hours basis.
These are usually best for short term trades. Those who are looking at medium term and long term trades, will often look at history of the candlestick charts over the course of a week, a month or more.
It’s not unusual for traders to go through daily and weekly charts looking for patterns that can improve their odds. This gives them a more holistic perspective on the asset’s “temperature” and market sentiment.
Green candlesticks indicate profitability, while reds indicate losses. In the first instance, the price of the asset went up and closed at a higher price than when it opened. In the second, it’s prices opening on a high, and closing on a low.
How Do Crypto Traders Profit From Using Candlestick Charting?
Simple, they take advantage of the price fluctuations, one or more times a day. Because the market is often volatile, candlesticks hardly ever stay constant.
More importantly, smart traders start looking for patterns that show them the beginning of price increases. These patterns usually present themselves in the form of candlestick shapes.
Once traders identify the specific shapes, they know that once they see the spot the beginnings, the asset is due for a price increase or drop. Understanding and learning about these shapes can be very profitable for traders who know how to spot them.
While there are quite a few of these shapes, the ones you should concern yourself with are
Doji –indicative of market sentiment and traders/investors’ feelings about that asset. If the wick extends up and down, with a thin body located in the middle, then you know that market is unsure of the asset’s value.
Hammer –indicates a possible downtrend recovery. This can be profitable for traders because they typically point at a price recovery. This typically happens when the price of the asset drops below its open price, recovers and then closes at a price higher than its open price. You can identify hammers by the short body of the candlestick usually located at the top, while the wick beneath is at least twice as long as the body.
Shooting star –the inverted hammer. Short body at the bottom, while wick at least twice as long on top of the body. Usually indicates high open price, low closing price.
Final Thoughts on Candlestick Charting
Candlestick charting once fully understood, can be profitable for crypto traders. As long as they do their due diligence and understand that the crypto market is wildly volatile and unpredictable, they can consistently profit from the price fluctuations and make a killing in the process.