Crypto Trading: What Candlesticks Can Tell You
To the average trader, candlestick patterns are a bunch of crosses and odd shapes with bizarre names, like the three black crows, or the abandoned baby bottom.
But as odd as they may sound, they can provide powerful insight into direction.
Here are the top three candlesticks to be aware of at top or bottom of trend.
Candle No. 1 – The Doji Cross
Doji crosses are a sign of indecision of bulls and bears. When found at the top or bottom of trend, it can indicate that a reversal in the other direction may be nearing. However, as with any technical indicator, confirmation is key. Typically, when we see a doji at top or bottom of trend, it can be a sign of indecision among the bulls and bears.
They tell us there’s a potential reversal in the stock.
Notice the doji cross at top of trend on BTC, which marked the top at $10,000 in May 2018.
Or even the doji cross at bottom of trend near $6,500 in early May 2018.
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Of course, it’s always best to confirm with other indicators, such as the Bollinger Bands, MACD, RSI and Fast Stochastic, this cross just illustrates where turning points can occur.
Candle No. 2 -- The “Hammer”
There’s also a hammer candlestick, which when found at bottom of trend, can indicate exhaustion of the bears and likely upside.
In simple terms, it’s a signal of capitulation among the sellers and an indication of potential trend change. The signal doesn’t always mean that bullish investors have taken control of a stock, but it does mean that sellers are exhausted and buyers are waking back up. These are most effective when they follow three or more consecutive declining days on trading.
We can clearly see a hammer in mid-May 2018 in Ethereum Classic (ETC).
Candle No. 3 -- Engulfing candlesticks
There’s the bullish engulfing pattern.
This one forms when a large white candlestick appears next to a smaller red or black candlestick, engulfing it. What that suggests is that the bulls have now taken control of the stock price from the bears. The pattern will follow a stock price decline, and indicate potential reversal off a low.
We can see a bullish engulfing pattern in the chart of Bitcoin (BTC) for example in late May 2018. Notice here how at the bottom of a downtrend, there’s a with a small red candlestick followed by a large green candlestick that completely eclipses or "engulfs" the previous day's candlestick. That’s a bullish engulfing pattern.
You’ll also notice that after it formed, the price of the BTC rallied from $7,100 to $7,750.
However, as with any indicator, it’s essential that you confirm with other indicators, such as Bollinger Bands (2,20), MACD, Fast Stochastic, and even Williams’ %R.
The bearish engulfing pattern is the exact opposite.
This one forms when a large red or black candlestick appears next to a smaller white candlestick, engulfing it. What that suggests is that the bears have now taken control of the stock price from the bears. The pattern will show up after a price runs higher, potentially indicating reversal.
However, just because an engulfing pattern appears, be sure to confirm.
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