Cryptocurrency Candlestick Analysis


 Features and main figures

Japanese candles have been known to exchange traders for several centuries, and for this for a long time there was no more convenient and generally accepted way to present prices. Yes, of course, there are bars, lines and many other types of visual display, but it was candles that gained the greatest response and recognition among traders. And there are reasons for this: Japanese candles are clear and informative, they allow you to accurately determine the price limits for the past time interval. However, this is not the most important thing in them. In addition, the candlestick chart is also a technical analysis method called candlestick analysis.

Accordingly, candlestick analysis is that type of forecasting price changes by displaying prices in the form of Japanese candles. The main ideas of candle analysis were developed by the Japanese trader Munehisa Homma in the XVII century. In his view, the ideal price display system should also be an analysis tool, which actually happened thanks to the advantageous distinctive properties of Japanese candles in comparison with other methods of presentation.

In the Western world, candlestick analysis came to light through Steve Nisson’s publications. In his books, he described the basic principles of work and the advantages of candle analysis, as well as using graphic examples he showed a large number of working models that are successfully used by millions of traders around the world today.

Munehesa developed an independent system thanks to which any trader could very likely predict price changes in the market and, accordingly, make the right decisions about when to buy and when to sell an asset. Given that for him personally these forecasts were vital, since he was engaged in the purchase of real goods (in those days of non-deliverable futures). The foundations of the Munehesa method were not so much directly in the “dry” candle analysis, but also in the fact that he noted factors that often have a strong impact on other market players. We can say that he tried to delve into the psychology of the market. To a large extent, he succeeded. For those who study candle analysis, there will also be unbelievable, at first glance, coincidences in price movements, associated mostly with psychology. And this is not surprising, since most traders open deals in the same places.

How to read a candlestick chart

Let’s look at a few examples of candle formations. We present to your attention 7 common models that show the maximum percentage of response, the prerequisites for a trend reversal and price impulse. Each of them works in the context of surrounding price bars in forecasting higher or lower prices. They are also time sensitive in two important ways. Firstly, they work only on higher timeframes (Day, Week, Month). Secondly, their effectiveness quickly decreases by 3-5 bars after the completion of the picture.

The bullish reversal pattern “triple hit” is formed by three bearish candles in a downtrend. Each candle is below the previous level and closes near the intraluminal minimum. The fourth bar opens even lower, but inside the candlestick there is a reversal and growth continues until the candlestick closes above the maximum of the first candlestick in the series. Lack of opening shadow also indicates a low level of the fourth candle. According to Steve Nisson, this reversal pattern predicts the subsequent emergence of a high price with an accuracy factor of 84%, however, it is quite rare.

Three black ravens

The “three black ravens” bearish reversal pattern begins with the maximum of the uptrend or near it, and three bearish candles show short tails close to intra-bar lows. This model predicts that the downtrend will continue to decline, possibly even further updating the local minimum. The most “bearish” option starts with a new high (point A on the chart), since this formation acts as an excellent trap for bulls who increase purchases after seeing such a price impulse up. This model is more common than a “triple hit” and predicts lower prices with an accuracy rate of 78%.

 Candle sandwich

A candle sandwich is a common bullish reversal formation with a reversal pattern that forms within three days of action. This pattern is formed with two red candles surrounding one green candle in the middle, creating a semblance of a sandwich. The closing prices of both red candles should be very close, and this action creates a support base for the accumulation (trading) phase within the day.

Evening Star

A bearish evening star as a reversal signal begins with a high bullish candlestick, which carries an uptrend to a new maximum. The market is gaining momentum on the next candle, but fresh buyers do not appear, which gives a narrow candle. The gap on the third bar completes the pattern, which predicts that the downturn will continue even lower, possibly leading to a wider and longer downtrend. According to Steve Nisson, this model predicts lower prices with an accuracy of 72%.

Abandoned child

A bullish reversal pattern “abandoned child” appears at rather low levels of a protracted downtrend after a series of bearish candles updates the lower lows. A gap appears on the next candle, but new sellers do not appear, which leads doji candles with opening and closing prints at the same price. The bullish gap on the third bar completes the pattern, which predicts that the recovery will continue with even higher highs, possibly triggering a larger upward trend over the period. This model predicts higher prices with an accuracy of 70% and appears quite often. We remind you that these models are relevant only on timeframes from D1 (Day candles)

 Shooting star

The Shooting Star is one of the most reliable bearish reversal patterns. It signals that this trend has reached its local maximum, and the trader should close any long positions or reduce them and prepare for a powerful correction. The market shows a gap higher at opening and then peaks. Then prices go down just above opening. The shape of the candle looks like a star flies toward the earth, leaving behind a “tail”. We remind you that these models are relevant only on timeframes from D1 (Day candles).

Above, we examined some of the most common and relevant candlestick models, most of them have been known for more than a dozen years, but despite this, their relevance to the cryptocurrency market, which has not existed for a dozen years, is amazing. But the secret is quite simple, because for the most part candle formations and reversal patterns that they build are reflected not in price, but in the minds of traders. Most of the patterns are based on the expected reaction and psychology, therefore it is so important to follow the logic of your thinking and not succumb to cognitive distortions. Often, traders, when opening a deal, are too confident in the correctness of their judgments, and it is precisely on these features of human psychology that the market makes predictable fluctuations. We wish you clear thoughts and good profit!

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