Absolutely, despite not being able to provide any financial advice, we are happy to help you boost your trading skills.
To get started, let's dive into how trading was introduced to our modern society.
What are Japanese Candlesticks?
In the 17th century, a legendary Japanese rice trader called Munehisa Homma developed the candlestick chart to track and measure the rice market. His method allowed him to apply some concepts that helped him determine what could happen with rice in the future market. This was completed throughout the studies on each candlestick – graphically representing four price dimensions in one period (high, low, open, close).
Some decades later, during the 19th century, Western society adopted chart analysis following similar principles. Charles Dow and Steve Nison became important financial figures who helped implement the candlestick to the modern markets. After their studies and many other traders, they believed that the Japanese candlestick was a vital financial tool. Today, the Japanese candlestick chart is mainstream and well used by various markets like cryptocurrencies and commodities such as gold and silver.
Introduction to Japanese Candlestick Patterns
The candlestick creation is an ongoing battle between buyers (the bulls) against the sellers (the bears) during a pre-selected time frame. The time frame can be 1-day, 4-hour, 1-hour, 15-min, etc.
When the candle is green, it means that the buyers have won out in the timeframe. On the other hand, when a candle is red, it means that the sellers have won out.
Let’s dissect each and every component of the candlestick. Refer to the diagram above for the following description. For now, pay attention to the green candle.
- The bottom of the candle is the “open.” This is the price of the asset at the beginning of the chosen timeframe.T
- The top of the candle is the “close.” This is the price of the asset at the end of the selected timeframe.
- The lower wick indicates how low the price went in that timeframe.
- The upper wick indicates how high the price went in that timeframe.
For the red candlestick, it is the exact opposite.
The space between the bottom and top is known as the body of the candlestick. Depending on the size of the candlestick and the wicks, we have different candlestick patterns.
Examples of Japanese Candlestick Patterns
Below are some famous candlestick types and how the market reads them:
- Marubozu: The Marubozu has no wicks and only has the body. This means that either the buyers or sellers were in complete control of the market. This candlestick helps us understand the market momentum in that time frame. Usually, these candlesticks are rare in longer timeframes.
- Hammer: Up next we have the hammer pattern. This is a bullish candlestick and has a considerably long wick. This candlestick tells us that the bears were initially in control in the timeframe before the buyers took back control.
- Inverted Hammer: Another bullish candlestick wherein the upper wick is considerably longer. In this case, the buyers were in complete control before the sellers launched a fightback. However, the buyers managed to hold out and ended up on top.
- Shooting Star: The shooting star is the bearish version of the hammer. Basically, the buyers were initially in the driver’s seat before the sellers took back control.
- Hanging Man: This will be the opposite of the inverted hammer. The bottom wick is much longer, and it often happens towards the end of an uptrend. In this case, the bears were initially in control and pushed the price down. In the end, the buyers tried a comeback but fell short.
- Spinning Tops: This pattern can be formed at the top of an uptrend, the bottom of a downtrend, or in the middle of a trend. It can be a bearish or bullish candle. In this candle, the price open and close are near each other and have a medium-sized wick on both ends of the body. This pattern forms when there’s indecision from the bulls and bears during the uptrend, downtrend, or sideways trend (accumulation). This candlestick provides signs of a possible change in trend depending on the climax and market sentiment.
- Doji: A Doji Candlestick happens when the price opens and closes near the same point, almost equal. The opening and closing happen in the middle, which means that the buyers and sellers have canceled each other out altogether.
- Gravestone Doji: This pattern is a doji with a longer upper wick. This means that the buyers were initially in control before the sellers roared back and canceled out all the gains. The gravestone doji is a sign of an upcoming bearish movement.
- Dragonfly Doji: This pattern is a doji with a longer lower wick and is the opposite of the gravestone doji. In this case, the sellers were initially in control before the buyers stepped in and canceled out all the losses. This doji is a sign of an upcoming bullish movement.
Identifying these Japanese candlestick patterns can be a lot of fun and may give you some hints as to how the market will behave in the future. However, in this article, we just looked at solo candlestick patterns. In the next article, we will look at the patterns that these candlesticks make in combination.
While we have a basic understanding of the candlesticks and learned about individual candle structures, we still need to know about the different patterns these candles can form together. While it’s not an exact science, studying the patterns can help you understand the overall market mood and sentiment.
So, let’s go through some simple Japanese candlestick patterns today. Don’t worry. We will not be doing anything elaborate. Instead, we will just show you three patterns that you can incorporate into your daily analysis.
Next, let's look into three classic patterns using purely candlestick graph analysis
Three Simple Japanese Candlestick Patterns #1: Engulfing Patterns
The first thing we will be looking into is the engulfing pattern. In this case, there are two candles with opposite sentiments (one bullish and one bearish). The latest candlestick “engulfs” or overwhelms the entire body of the first candle. Based on the nature of the newest candlestick, the pattern could be bullish engulfing or bearish engulfing.
- Bullish engulfing: In this case, the buyers have retaken control of the market to such an extent that they have entirely overwhelmed the bears in the time frame.
- Bearish engulfing: In this situation, the sellers have taken control by completely overwhelming the buyers.
Both of these patterns are incredibly aggressive patterns of bullish or bearish market sentiment and could signal one of the following:
- Trend reversal: The engulfing pattern is a beneficial indicator to know whether the current trend is reversing or not. So, if an asset charts a bullish engulfing pattern during a downtrend, it indicates that the buyers are looking to retake control and reverse the trend. Similarly, vice-versa.
- Trend continuation: Charting a bullish engulfing pattern during an uptrend indicates that a further rise in price is on the cards. On the other hand, a bearish engulfing pattern on the downtrend suggests a further fall.
Let’s check this pattern in action. We are looking at the BTC/USD daily chart.
The Bitcoin price charted a bearish engulfing pattern on July 12, 2021 (the downward pointing arrow). Following this, it dropped from $34,200 Usd to 29,800 USD on July 20. Following that, on July 21, BTC charted the bullish engulfing pattern, triggering a reversal in the bearish trend, and the price jumped up to $42,200 by July 30.
Three Simple Japanese Candlestick Patterns #2: The Morning/Evening Stars
Up next, we have the “star” patterns – the bearish evening star and the bullish morning star. Both of these are trend reversal patterns. This is how they work.
Morning star pattern – Bullish
This pattern happens at the bottom of a downtrend and indicates an imminent reversal in the bearish sentiment. This pattern is characterized by three candlesticks.
- First candle: A strong bearish candle that continues the current downtrend., indicating that the sellers are still in control.
- Second candle: The size of the candle is significantly smaller than the first candle. This could be either bullish or bearish. This candle indicates that the sellers have run out of momentum.
- Third candle: Now, the bulls have taken full control. This is indicated by the strong third candle.T
Evening star pattern – Bearish
This pattern happens at the top of an uptrend and indicates an imminent reversal in the bullish sentiment. This pattern consists of three candlesticks.
- First candle: A strong bullish candle that continues the current uptrend., indicating that the buyers are still in control.
- Second candle: The size of the candle is significantly smaller than the first candle. This could be either bullish or bearish. This candle indicates that the buyers have run out of momentum. This candle is also known as the “star.”
- Third candle: Now, the bears have taken full control. The strong third candle indicates this.
The following chart shows an evening star in action.
BTC/USD formed the pattern and dropped from $40,500 USD to $31,600 – losing ~$9,000.
Three Simple Japanese Candlestick Patterns #3: Soldiers vs Crows
The soldiers/crows signal trend reversals like the star patterns. The three white soldiers are a bullish signal, while the three black crows are a bearish sign.
Three white soldiers – Bullish
The pattern consists of three consecutive long-bodied green candlesticks at the end of a bearish trend. This pattern basically tells us that the buyers are back in complete control of the market. The candle’s wicks are very small, and they open and close progressively higher than the previous day.
Three black crows – Bearish
The pattern consists of three consecutive long-bodied red candlesticks at the top of a bullish trend. The three black crows signal the start of a bearish downtrend, with the sellers retaking complete control from the buyers. Each candle opens at the previous day’s closing price, but the negative pressure keeps pushing the price down.
Again, let’s check the BTC/USD chart for this pattern.
At the end of a long-running downtrend, the buyers took back control and formed the three white soldiers pattern with $30,750 USD to 33,650. Unfortunately, this didn’t kickstart a bullish rally, with the bears immediately taking back control. This example serves as a reminder for you that technical analysis isn’t an exact science. You must be very careful with your readings and observations.
Today we learned how to combine different candlesticks to form patterns to determine bullish or bearish market sentiment. In fact, these three patterns – engulfing, morning/evening star, and three crows/soldiers – are extremely useful in determining bullish/bearish trend reversal. Combine these patterns along with the lessons you have learned in our other articles to make solid and insightful trades.
Taking a deeper approach, let's take the next step in determining more sophisticated patterns that will indicate a bullish or a bearish signal to traders. Some go overboard with these patterns. Case in point, the infamous “stegosaurus,” aka, “I really want to find a pattern here.”
However, there are some that do work wonders. In today’s article, we will be looking at the following:
- Head and Shoulders
#1 Triangle Pattern
Triangles are patterns that indicate a trend continuation and are often formed during mid-trend. The triangle patterns are formed when the upper and lower trend lines meet at the right side’s apex. Thus, the upper trend line connects the highs, while the lower trend line connects the lows. The triangles usually form three kinds of patterns:
- Ascending triangle: This triangle uses an upward trending line, with the price action getting tighter and tighter until the bulls take control and break above the upward horizontal line.
- Descending triangle: This triangle uses a downward trending line with the price action getting tighter and tighter until the bears take control and break below the downward horizontal line.
- Symmetrical triangle: This triangle has price action getting tighter between upward and downward trending lines. This pattern could either break when the bulls push the price above the downward trending line or the bears push it below the upward trending line. This pattern indicates a temporary accumulation.
The following chart shows a triangle in action.
Between March 25 and April 10, the Bitcoin price was trending in an ascending triangle pattern. Before the buyers broke out, BTC reached an all-time high of $64,863.10 on April 14.
#2 Wedge Pattern
The next patterns we will be looking into are the wedges. A wedge is often an indication of a trend reversal. It is a pattern marked by converging trend lines on a price chart. The two trending lines make a wedge shape and formation.
- Falling wedge: The sellers are desperately trying to push the price down but are progressively losing their momentum. As such the buyers take back control and push the asset’s price up.
- Rising wedge: The buyers are desperately trying to push the price up but are losing their momentum. The sellers wrest back control and promptly sink the price.
The following chart shows a falling wedge in action.
Between January 9 and February 1, the Bitcoin price dropped from around $40,500 to $33,500 reaching a low of $28,750 as it trended in a falling wedge before the buyers broke out and BTC corrected significantly.
#3 Flag Pattern
The flag pattern is a convenient pattern that signifies that the asset price is going through a short accumulation period before continuing the previous trend.
The Flag pattern has three elements to it:
- The pole or the initial trend
- The flag, aka a period of accumulation whose trend is opposite to that previously seen in the pole
- The breakout following the flag, which should ideally replicate the initial trend
Regardless of the time frame, the shape of this candlestick pattern should be similar and proportional to a flag where the second pole should have a similar length as the first one.
There are two kinds of flag patterns:
- Bullish flag: The initial trend was bullish, the flag is bearish and the subsequent breakout was positive.
- Bearish flag: The initial trend was bearish, the flag is bullish and the subsequent breakout was negative.
The following chart shows a bullish flag in action.
Looking at the chart above, BTC/USD jumped from $17,000 on December 12, 2020 to $40,000 on January 8, 2021. Following that, the consolidation flag happened until January 28, wherein it dropped to $30,500 After that, the buyers regained control and the price jumped to $57,500 on February 21.
#4 Head And Shoulders Pattern
Finally, we will be looking at one of the most interesting technical analysis patterns out there – the head and shoulders. This is a fascinating pattern that helps in detecting momentum exhaustion and trend reversals. The “shoulders” of the pattern will be around the same level, and the head will be above or below the shoulders.`
There are two variations to this pattern:
- Head and Shoulders: In this pattern, the head is above the two shoulders. After charting this pattern, the asset price drops down.
- Inverted Head and Shoulders: In this pattern, the head is below the two shoulders. After charting this pattern, the asset price goes up.
Let’s look at the head and shoulders in action.
In the BTC/USD daily chart above, the asset formed the head and shoulders between March 8 and May 12. Following this pattern, the Bitcoin price dropped from $56,600 to $34,750 between May 12 and May 28.
So that concludes the fourth chapter in our series on technical analysis. Next, we will look at more price behavior and familiarize ourselves with more tools to help better understand the crazy world of technical analysis.
After we exhaust our options to predict the future price of the digital currencies based on the candlesticks patterns, we can continue with the graph analysis by applying some concepts and indicators to better assist extracting logical information and reading the information on where the prices could be heading to play accordingly.
Who was Fibonacci?
Leonardo Pisa or Leonardo Bonacci was born at the beginning of the 12th century in Italy and was a significant mathematician who changed our lives as we know it. As he studied and became more knowledgeable, he introduced the Hindu-Arabic numeral system and the Fibonacci sequence to the western society. Thanks to Leonard, also known as Fibonacci, we don’t read in Roman Numerals today.
Fibonacci spread the new numeral system after releasing a calculation book, “Liber Abaci,” adapted from an older Indian Method. Leonardo used the theory to solve problems related to the growth of the rabbit’s population, and the solution was a sequence of numbers that eventually became known as the Fibonacci Sequence.
What is the Fibonacci Sequence?
The Fibonacci sequence is an endless numeral pattern, which involves adding the previous two numbers starting from 0 and 1 to continue the pattern. For example, the following is the Fibonacci pattern:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377…
What Is The Golden Ratio?
After more studies and an in-depth look into the sequence, we can find a ratio that consistently appears and continues the progression starting from 3. This ratio is called the Golden Ratio (phi = φ) and is often referenced as “The Most Beautiful Number In The Universe.”
The reason φ is so extraordinary is that it can be visualized almost everywhere, as explained by Leonardo. The number 1.618 would be the ratio of the next number, and 0.618 would be the ratio for previous numbers. The ratio may have a slight deviation in the sequence, but it should always be close to the 1.618:
How can Fibonacci help us trade?
Before we jump into the graphs, let’s look into the other Fibonacci levels. The tool to trade connects any two points that the trader views as relevant, typically a high point (top) and a low point (bottom) of a clear market swing. The levels are 23.6%, 38.2%, and 61.8%. In addition to that, we have 78.6 % and 50% levels that are not officially a Fibonacci ratio. However, it became common among Fibonacci believers to also indicate support and resistance levels. The support and resistance are key levels to watch how the market approaches and behaves there.
The 38.2% ratio comes from dividing a number from the sequence by the number located in two spots to the right. For example, 5 divided by 13 equals approximately 0.381. The 23.6% ratio comes from dividing a number from the sequence by the number that is three places to the right. For example, 8 divided by 34 equals about 0. 24. The golden ratio (phi) tends to be the point where the market turns around forming a bottom or a top.
Those levels are critical as there is more pressure between the buyers and sellers. Traders often use it to place their stop-loss orders accordingly. The price should break through each resistance during a bull run or upward trend and create a new support level instead. It is common to see the price retest the new support after the breakout to ensure the market is ready to continue the movement. Users can apply the opposite idea during a bear trend.
As a resource in candlestick trending, we can apply the Fibonacci extension for upward price projection or Fibonacci retracement for downward projection. Each support may provide strong resilience and, therefore, a potential trend reversal.
How to use the Fibonacci levels
A trader can take advantage of using Fibonacci retracement and extension analysis to trace a robust trading plan. Applying the tool will allow them to “time” the cycles by identifying levels where the market is more likely to reverse and, therefore, enter or exit the market. In addition, the support and resistance will help “time” the market based on price oscillations when hitting each Fibonacci level. Let’s take a closer look:
Fibonacci price extensions will provide projections based on an initial upward movement. The trader would need to identify the three main points to apply the tool and identify the supports, resistances, and higher target levels that the price may reach in the future. The three points are:
- The lower point from a potential bottom.
- The peak on the significant upward movement.
- The point the market reverts to continues with the trend.
Fibonacci price retracement is price movement from a prior low to high swing to identify possible support levels where the market recovers before continuing with the downtrend. The retracement would be between the initial high or peak and the low or bottom points selected. In this case, we would need to identify the downtrend and the significant swing and apply the Fibonacci retracement.
The steps for both cases would be similar and are presented below:
- Identify significant peaks and bottoms (highs and lows) to locate the outstanding price swings.
- Run all possible Fibonacci price relationships on the clear trend.
- Look to spot trade setup based on candlestick patterns and previous levels by zooming out and looking to the left to compare previous price actions (if any).
- If a setup is identified, look for an entry or exit opportunity by placing limit orders close to Fibonacci levels.
- Once the order is triggered, address and manage positions by adjusting stop-loss between levels.
Seeing The Fibonacci Retracement Levels At Work
In the example above, we can see the asset price peaking very close to the 3.618 extension target, entering the purple extension level at the upper right and initiating a trend reversal. As the market breaks through the resistances, the stop-loss orders should move below the new support accordingly to maximize profits. This strategy would have worked well from almost every resistance and support starting from the 0.382 in yellow level until the peak.
We set the support and resistance levels using the top and bottom wicks of the candlesticks selected. Those levels were selected as the price strongly breaks the bearish trend line, indicating a temporary bottom and an opportunity for a potential pullback before a trend reversal again. Depending on the timeframe, you may see the candles with larger bodies and smaller wicks, this may help determine which point would be more relevant on the swing in price. The 0.618-level was the main resistance where the price failed to continue the trend and initiated a trend reversal.
This scenario presented an opportunity to either buy after the downtrend line was broken and manage stop losses to exit the market on green and new peaks at all-time highs. Or a chance to exit the market if the trader was holding the asset. The opportunity to sell would have been after the third attempt of passing the 0.618 level and seeing a bearish rejection to proceed with newer highs. Instead, the price entered the light blue level and didn’t manage to hold above.
We understand it is easier said than done. However, measuring risk and placing stop-loss may vary depending on each trader. Some traders may not accept losing more than 1 or 2% of the trade. Others may prefer to give more room in case of support retest, long wicks, and measuring the risk to the reward as cryptocurrencies may have strong upward movements as each portfolio is different.
Fibonacci Retracement: Conclusion
Fibonacci introduced an amazing theory that impacts everyone indirectly or directly. The theory became relevant for traders and many other aspects of our lives. The price of all assets in the world will present a funny behavior when approaching those levels and if using the correct strategy, it can be very profitable. Fibonacci levels and candlestick combinations allow traders to set their orders and maximize their odds of a successful trade.
Some assets are more volatile than others and it may impact projections on the retracements and extension levels. Therefore, there is no guaranteed or fixed price behavior that an asset should follow. However, the Fibonacci retracement and extension help us determine support and resistance levels with accuracy. From there, set a trading strategy using limit orders to enter or exit the market and protect the capital by setting sell-limit orders. The more familiar traders are with the graphs, the better they will plot the opportunities and use the levels for a better trade.
A combination of factors like trend lines, candlestick patterns, and indicators will help determine the overall price direction. The most significant levels where the market may continue the trend, accumulate or revert.
The cryptocurrency market can be a hard one to gauge, especially if you are a newbie trader. You must have seen all these fancy price charts and crypto trading strategies that barely make any sense. What’s with all the lines! What’s with all the curves? What is RSI?
Whether old-school traders want to admit it or not, technical analysis can be very daunting. So, today what we are going to do is to simplify the process for you. We will show you three cool techniques that you can use to gain a better understanding of the market.
Before we begin, let’s give you a small tour of the interface.
CoinSmart Advanced Trading Interface
When you log into your account, you will see this on the header. Select “Advanced Trade.”
Now, you will see the price chart, order book, and the different technical analysis tools that are available to you.
You can choose the crypto you want to look into on the top right corner and the base fiat currency (CAD, USD, or EUR). In our examples, we will be looking at BTC/CAD.
Alright, let’s get started.
Top 3 Simplest Crypto Trading Strategies #1: Overpriced and Underpriced
The first thing that you need to look at before investing in the market is whether the asset is overpriced or underpriced. Ideally, you should want to enter the market when the asset is underpriced and sell when it is overpriced. There are two ways that you can judge this behavior.
Firstly, we have the relative strength index.
The relative strength index (RSI) is a technical indicator that analyzes the strength or weakness of an asset, based on the closing prices of the recent and historical trading performance.
If RSI > 70: The asset is overpriced and will likely drop soon.
If RSI < 30: The asset is underpriced and will rise again.
Let’s take an example.
As you can see, the relative strength index was hovering above 70, indicating that the market was overpriced. This resulted in a massive sell-off, with BTC crashing from $72,000 Cad to $59,800. So keeping an eye out on the RSI is a very handy tactic.
The second tool that you can check out is the Bollinger Band.
Created by John Bollinger, the Bollinger Band allows you to check market volatility and asset strength. There are two things you need to know about these bands:
- Squeezing bands mean decreasing price volatility, and expanding bands mean increasing volatility.
- When the price candlesticks drop below the Band, it indicates that the asset is underpriced. When the price rises above the Band, the asset is overpriced.
Top 3 Simplest Crypto Trading Strategies #2: Golden & Death Crosses
Now we come to the cross strategy. In technical analysis, a “simple moving average” or SMA is the mean average of an asset over a defined period of time. So, a 20-day SMA is the mean average of an asset over the last 20 days.
You just need to select 2 “Moving Averages” from the list of indicators and choose two time-frames – 50 and 200.
Also, make sure that you have put your time frame as “1-day.”
Alright, now that we have done our homework, let’s look into the indicator itself:
- Golden cross: The 50-day SMA crosses over the 200-day SMA. This is a bullish signal.
- Death cross: The 200-day SMA crosses over the 50-day SMA. This is a bearish signal.
Now, let’s see how this works in an actual chart.
As you can see, the 200-day SMA (blue) has crossed over the 50-day SMA (yellow) to form the death cross. Following this, Bitcoin dropped from $40,730 to $37,600 over the next four days.
Top 3 Simplest Crypto Trading Strategies #3: Dollar Cost Averaging
Finally, we have one of the least complicated and well-tested strategies out there – Dollar Cost Averaging (DCA). The idea is that instead of putting all your money at one go, you:
- Break down that amount into smaller batches.
- Choose a specific time and day, and only buy at those times.
Keep in mind that this is a long-term strategy. By buying smaller portions of an asset at the same time over a long period, you will overcome market volatility.
Let’s take an example.
Alice wants to invest $5,000 Cad in BTC. However, she read upon and decided to break up this investment into five $1,000 Cad batches. She then decides that one first of every month, she will make her investment. By doing this, Alice will mitigate significant fluctuations in one go.
So, there you have it. Investing in crypto is simple and doesn’t require an Einstein-level IQ. It just needs self-discipline, a bit of understanding, and some patience. So, be on the lookout for some patterns and integrate a consistent investment policy. That’s all that you will need to invest in crypto, regardless of the market conditions.
There are many indicators and strategies we can leverage to maximize our trading profits and with patience, strategy and discipline, the sky's the limit.