How to Read Candlestick Charts for Crypto | Beginner's Guide

The world of cryptocurrency can be a confusing one for new investors. With so many different coins, tokens, and utilities to choose from, knowing which option will be the most lucrative in the long (or short) term can be challenging. Consequently, many potential investors struggle to understand precisely what they should—and shouldn't—invest in when it comes to this burgeoning sector. That is exactly why so many people use candle stick charts to indicate what is likely to happen with a particular coin or token shortly. 

Suppose you're looking to get involved with cryptocurrency trading and investing but are still a little unclear on the specifics and where to start. In that case, this guide will help provide some insight into how candlestick charts can assist your decision-making process and what you should look out for as an investor.

A brief intro to Candlestick Chart?

A candlestick chart is a type of chart that investors and traders primarily use to analyze the price movement and trading patterns of financial assets, including cryptocurrency. Candlestick charts are considered an essential tool used by investors to analyze price patterns, as they provide a more visual and appealing outline of market sentiment and price action than line charts or bar charts. Candlestick charts are made up of a series of vertical bars of different lengths.

Each bar on the graph represents the opening and closing price of that day for a given financial asset. The vertical height of each bar shows the difference between the opening and closing prices of that day.

Understanding Candle Stick Charts for Crypto

A candlestick chart is a straightforward way of visually analyzing the underlying sentiment behind the price movement of a particular coin or token. For investors, understanding whether the emotion surrounding the market is bullish or bearish is crucial, as this will help determine whether that specific asset will rise or fall in price. After all, if you want to make money from trading or investing in cryptocurrency, you need to know when to buy and when to sell. 

Furthermore, the sentiment of the market will affect all other indicators, such as volume and moving averages, so it's essential to understand it. If you want to get your hands on some crypto, understanding how to read a candlestick chart can help you make more informed decisions that will increase your chances of success.

How to Read a Candlestick Chart for Crypto

When you're ready to start reading a candlestick chart, the first thing you should look for is the colour of the candlestick itself. 

Each colour will represent a different sentiment or sign from the market. Red candlesticks indicate that the market is bearish, whereas green candlesticks are a sign that the market is bullish. Green candlesticks are the most common in the crypto market. You're likely to see only white candlesticks on most charts. This is because the market is currently in a bullish cycle, which means that the price is expected to rise. 

Most traders also analyze other indicators besides candlesticks, as they only tell part of the story. For example, a bullish candlestick indicator doesn't necessarily mean that the price will rise in the next few days. It could just be that the price has been in a bearish cycle for some time and is now coming out of it. So, by using candlesticks in conjunction with other indicators, you can get a more accurate picture of the sentiment surrounding the market.

Identifying a bullish pattern

A bullish candle appears as a long green line with a small or no lower shadow. A bullish candle indicates that an asset's demand is increasing, suggesting that the price of the asset will increase. The upper shadow is short and represents the period when the asset's price was declining before it started to rise again. If a bullish candle appears after a series of bearish candles, it's a bullish sign that the price is likely to increase further. For example, let's say the price of specific crypto has been falling for a couple of weeks. Then, one day the price suddenly rises again, and the following day the price stays at that higher level. This bullish candlestick indicates that the price is likely to continue growing and is a positive sign for the investor.

Identifying bearish pattern

A bearish candle appears as a long red line with a long upper shadow. The upper shadow represents the period when the asset's price was rising before it started to fall again. A bearish candle indicates that an asset's demand is decreasing, suggesting that the price of that asset will fall. For example, let's say the price of the same crypto has been falling for a couple of weeks. Then one day, the price rises again, and the following day the price drops again to a lower level. This bearish candlestick indicates that the price is likely to fall even further and is a negative sign for the investor.

Some of the most important candlestick patterns.

Bullish Engulfing Pattern 

A bullish engulfing pattern is formed when a short-term bearish candlestick pattern is followed by a long-term bullish candlestick that completely engulfs the short-term bearish candlestick. This pattern indicates that an asset's bullish sentiment is likely to continue. 

Bearish Engulfing Pattern 

A bearish engulfing pattern is formed when a short-term bullish candlestick pattern is followed by a long-term bearish candlestick that completely engulfs the short-term bullish candlestick. This pattern indicates that an asset's bearish sentiment is likely to continue. 

Bullish Harami Pattern 

A bullish harami pattern is formed when a short-term bearish candlestick pattern is followed by a long-term bullish candlestick whose body is contained within the short-term bearish candlestick's body. This pattern indicates that an asset's bullish sentiment is likely to continue. 

Bearish Harami Pattern  

A bearish harami pattern is formed when a short-term bullish candlestick pattern is followed by a long-term bearish candlestick whose body is contained within the short-term bullish candlestick's body. This pattern indicates that an asset's bearish sentiment is likely to continue.

Three White Soldiers Pattern 

 A three-white soldier pattern is formed when three long white candlesticks are followed by a long black candlestick. This pattern indicates that an asset's bullish sentiment is likely to continue. 

Three-Black Crows Pattern  

A three-black crow pattern is formed when three long black candlesticks are followed by a long white candlestick. This pattern indicates that an asset's bearish sentiment is likely to continue.

Things to Look Out For When Reading a Candlestick Chart

Keep an eye on the market trends. Ensure you're reading a chart reflecting the current market sentiment and trend. For example, if you want to know what will happen to the price of specific crypto over the next week, make sure you're reading the one-week chart. If you want to know what will happen over the next month, then you'll need to look at a one-month chart. So, when reading a candlestick chart for crypto, make sure you're using the chart that reflects the current market sentiment and trend. Don't get too caught up in the details. Although it's important to understand what every candlestick means and how it can affect the price of the coin, don't get too bogged down in the small details. It's also important to look at the bigger picture and consider other indicators, such as volume, to get a more accurate assessment of the market sentiment. Take note of the overall trend. Although it's essential to pay attention to the other indicators, it's also important to take note of the prevailing trend. For example, let's say that you've been monitoring a particular coin for some time, and it has been in a consistent uptrend. However, one day the price suddenly drops, and you see three bearish candlesticks appear on the chart. Although one or two of the candlesticks may be a false break, if three appear, then you can be pretty certain that the trend is changing to a downtrend.

Final Words

Reading a candlestick is a great way of reading the markets, no matter whether it s a novice or a veteran, candlesticks perfectly capture the volatility of cryptocurrencies making it a favorable tool for everyone to use. Apart from the trends and patterns mentioned above, many other patterns are worth exploring and every pattern has a different hit rate, meaning these strategies are not going to work every time, traders and investors are advised to backtest and do their research without leaning on very much into one strategy without any suitable exit strategy.