Japanese Candlesticks in Crypto Trading: A Complete Guide and Examples

For many new crypto traders, one of the biggest challenges is understanding and reading charts. Therefore, some traders rely on their intuition, and they are guided by it during trading or investing. This strategy can work when it is a bull market, but it is not suitable for a long-term investment. 

Therefore, traders often use candlestick charts to analyze price patterns of market behavior. This is a fairly old method of analysis that helps investigate and predict future price movement.

Japanese candlesticks have gained the trust of market participants due to their inherent informativeness and visual presentation of data about the trading process. 

Candlesticks are an advanced tool for predicting the behavior of price charts that help to reveal the market sentiment.

What are candlestick charts?

The Japanese candlestick chart is a type of chart that is used to analyze the price of an asset over a certain period of time. This chart consists of candles that represent the same timeframe. The duration of this period can range from a few seconds to several months, or even several years. Varieties of such charts were created in the 17th century.

These tools are believed to have been created by a Japanese rice merchant named Homa, and it was his ideas that formed the basis of modern candlestick charts.  Since then, candlestick charts have been refined and significantly improved. Despite the fact that with the help of candles, it is possible to carry out analysis to obtain various data, their main purpose is to study the price dynamics of movement in the financial markets. Thus, thanks to this research, traders and investors can accurately assess possible price fluctuations and create their own ideas based on the data obtained from the analysis. 

How do Japanese candlestick patterns work?

Each of the candles includes several points that reflect the fluctuations in the price of an asset over a specific period of time:

• Open. It is the starting price of an asset for a certain period.
• High. It is the highest value of an asset for a certain period.
• Low. It is the lowest value of an asset for a certain period.
• Close. It is the last recorded value of an asset for a certain period.

These meanings are called Open-high-low-close (OHLC) charts.

Each candlestick shows the history of the market by using its color and shape.

For instance, if candles have a green color, their closing price is higher than the opening price. In case the closing cost of the coin is lower than the opening one, the candlestick is colored red.

The shape of the candle is divided into two types: the body and the wick.

How to read Japanese candlesticks?

Most traders consider that candlestick charts are much easier to read than line charts or conventional bars. Despite the fact that all of these graphs provide the same information, candlesticks help get more understandable data about the price movement in the market.

Candlesticks show the bulls’ and bears’ resistance within a specific timeframe. Generally, the longer the body, the stronger the buying or selling pressure was. Short wicks at the candlestick indicate the high (or low) price of a certain period of time that it was near to the closing.

The color and settings may differ depending on the charting tools, but in general, if the body is green, then the asset’s closing price was higher than the opening price. Red means that the price moved down during the timeframe, and the candle closed below the opening price.

Some traders prefer black and white representation. In this case, instead of using green and red charts, they represent upward movements in the form of hollow candles and downward movements in the form of completely black candles.

The essence of candlestick pattern analysis boils down to one goal — finding some similar candlestick combinations that are periodically found on price charts. Such combinations are called Japanese candlestick patterns, which can be represented by 1–3 candles or more.  There are a lot of such patterns, and each of them has an original name: “Evening Star”, “Abandoned Baby”, “Hammer”, “Harami”, and others.

Each pattern has its own special meaning and signals the trader about certain market changes that can be used to open trades.

Japanese candlestick patterns are divided into two types according to the nature of the signals:

• Reversal patterns.
• Continuation patterns.

The names of these types of models speak for themselves. It should be kept in mind that the vast majority of patterns are reversal patterns.

How to use candlestick patterns?

There are a huge number of candlestick patterns in order to determine an area of interest for a certain period in the graph. 

They are intended for opening long-term positions, day trades, trading on fluctuations in the value of a coin. Some patterns allow traders to understand the balance between buyers and sellers, while others are able to figure out a trend reversal in the market, continuation (consolidation), or indecision of market participants. 

Every trader or investor needs to understand that candlestick patterns do not give a direct signal to sell or buy a certain cryptocurrency. Instead, they provide a way to look more deeply at the structure of the market and the potential signals of possibilities in the near future. Anyway, it is desirable to become familiar with such patterns in their respective contexts. This could be the context of the technical pattern on the chart, as well as the broader market environment and many other factors.

Candlestick patterns work well when it is combined with other types of analysis such as the Dow Theory, the Elliott Wave Theory, the Wyckoff Method, and different technical analyses (TA), such as:

• The Relative Strength Index (RSI), 
• Trend Lines, 
• The Stochastic RSI, 
• Moving Averages, 
• Parabolic SAR, 
• Bollinger Bands,
• Ichimoku Clouds,
• MACD. 

Using Japanese candlesticks in the Cryptorobotics trading terminal

The Cryptorobotics trading terminal provides traders with a huge number of tools that significantly improve the cryptocurrency trading process and make it less risky. One of these opportunities for platform users is the use of Japanese candlesticks in cryptocurrency trading. Thus, thanks to this, the trader can analyze the market trend and predict the price of the coin.

Let’s take a closer look at the patterns by using the example of the tools presented in the Cryptorobotics trading terminal.

Bullish reversal patterns

Hammer

The hammer is a candlestick pattern on the Japanese candlestick chart. The features of the hammer are that this candlestick has a long lower shadow and a short body, i.e. graphically resembles a hammer, so it is very easy to spot it on a chart. The hammer is formed on downtrends (otherwise, a candle with the same characteristics will be called the hanging man). The hammer marks local lows and predicts further growth. Therefore, the hammer is a bullish reversal candlestick pattern.

The bullish hammer candle can be red or green, but green hammers give a signal about a stronger bullish reaction.

Inverted hammer

The inverted hammer candle has similar features to the regular hammer but with a long wick above the short body rather than below it. As with the hammer, the upper wick should be at least twice as large as the size of the body.

An inverted hammer appears at the bottom of a downtrend and may show a potential reversal. The upper wick indicates that the price has stopped its ongoing downtrend, and ultimately the decline in price stopped near the opening level of the candlestick.

Thus, the inverted hammer candle indicates that buyers may gain control of the market soon.

Three white soldiers

The three-white soldier pattern includes three consecutive green candlesticks that open inside the body of the previous candlestick and close at a higher level than the previous one.

This pattern indicates that constant buying pressure leads to price growth. Ideally, these candles should not have long bottom wicks, and the size of the candle itself and the length of the wick can be used to gauge the likelihood of a consolidation or a possible pullback.

Bullish harami

A bullish harami is a long red candlestick followed by a smaller green candlestick that is entirely within the body of the previous one.

Bullish harami can continue for two or more days. This pattern indicates that the sales momentum slows down and possibly draws to a close.

Bearish reversal patterns

Hanging man

The hanging man candle is a bearish analog of the hammer. It usually forms at the end of an uptrend with a small body and a long bottom wick.

The bottom wick indicates a lot of selling, but the bulls still managed to regain control and raise the price. Remember that after a long uptrend, this kind of activity can be a warning that bulls may lose control of the market soon.

Shooting star

A shooting star consists of a candlestick with a long upper wick and a small lower wick (or no wick at all), as well as a small body ideally located near the minimum value of the candlestick. A shooting star is shaped like an inverted hammer, but it, in turn, forms at the end of an uptrend.

This indicates that the market reached its maximum, after which sellers have taken control of it and began to reduce the price. Some traders prefer to wait for the next few candles to appear to confirm this pattern.

Three black crows

The three black crows pattern consists of three consecutive red candles that open inside the previous candle’s body and close at a level below the low of the previous candlestick.

This pattern is the equivalent of the bearish three white soldiers. It is worth noting that these candles should not have long and high wicks that show constant selling pressure pulling the price down. The size of the candles and the length of the wicks can be used to estimate the likelihood of consolidation. 

Bearish harami

A bearish harami is a long green candlestick and a small red candlestick with a body that is completely within the body of the previous one.

Bearish harami can reverse for two or more days. They appear at the end of an uptrend and may indicate a decrease in buying.

Dark cloud cover

Dark cloud cover — a figure on a Japanese candlestick chart. It is a bearish reversal pattern that reverses an uptrend and turns the price down. The dark cloud cover pattern consists of two long candles, the shadows of which are usually short.

A dark cloud cover is a bearish Japanese candlestick pattern that consists of long red and green candlesticks. The second red candlestick is located above the previous green one and indicates a bearish mood in the market. But this does not mean that once it is discovered, you should immediately sell the coin. As with most cases, you must wait for confirmation. When the downtrend is confirmed, the dark cloud cover candlestick pattern means that traders should sell a cryptocurrency.

Continuation patterns

Rising three methods

This pattern reverses in an uptrend, where three consecutive red candles with small bodies are good confirmation of the continuation of the current trend. It should be noted that red candles don’t have to go beyond the range of the previous candle.

The continuation is confirmed by a green candlestick with a large body and shows that the bulls are again in control of the trend direction. 

Three Falling Methods

The three falling methods indicate a continuation of the downtrend.

Doji Japanese candle

Doji is formed at the moment of simultaneous coincidence of the opening and closing of a candlestick or when they are very close to each other. The movement of the price can be above and below, but, anyway, it will close at or next to the open. Thus, the Doji pattern indicates indecision of the traders between buying and selling.

However, the interpretation of such candles is more context-dependent.

Depending on where the match is, the Doji can be described as:

Gravestone Doji 

Gravestone Doji 

Dragonfly Doji

In accordance with the original concept of Doji, the candle’s opening and closing should be absolutely identical. But, in case, they are not the same, but they are just located next to each other, this model is called a spinning top. However, due to the high volatility in cryptocurrency markets, accurate Doji is quite rare. Therefore, the spinning top is usually used as a synonym for the Doji.

Candlestick patterns based on price gaps

There exists a huge number of candlestick patterns that use price gaps. A price gap is created when a financial asset opens above or below its previous price that is closed. Due to this, a gap appears between the two candlesticks. As it is allowed to trade in the crypto markets 24/7, patterns grounded on these kinds of price gaps are not available. In this case, price gaps can be in illiquid markets. Although they occur mainly because of low liquidity and high bid-ask spreads, they might not be useful as actionable patterns.

How to start using candlestick patterns on the Cryptorobotics platform?

In order to start using candlestick patterns on the Cryptorobotics trading platform, you need to follow these steps:

1). Go to the Cryptorobotics platform

2). Pass the registration process. 

3). Create an account on the exchange that is integrated into the terminal.

4). Link the account that is created on the exchange to the terminal by using the API key. 

5). Transfer your funds to an exchange wallet (if you don’t have funds there) 

6). Click on the “Trade” button.

7). Select a crypto exchange.

8). Select the crypto pair.

8). Select “Candles”.

9). Start conducting the technical analysis with the help of using a chart in the Cryptorobotics terminal.

Advantages and Disadvantages of Candlestick Pattern Analysis

Like any type of market analysis, candlestick pattern analysis has a number of advantages and a few disadvantages.

Advantages:

• Credibility. Japanese candlesticks, unlike any technical indicators, allow you to analyze the behavior of the price itself, and not the results of mathematical calculations. This is important because it is known that the best market indicator is the price itself.
• Versatility. Candlestick analysis of financial charts is suitable for any market.
• Prevalence. The candlestick pattern chart is provided in every trading terminal; no special software is required.

Disadvantages

• The difficulty of mastering. Candlestick analysis cannot be classified as a simple type of market analysis, and it will take a trader many hours to learn and apply it in practice. However, if you consistently use candlestick charts for your market analysis, you will be able to master the candlestick charts properly over time. 

Conclusion

Candlestick patterns are very important for crypto trading, at least they should be aware of it. Even if you do not include them in your trading strategy.

While these methods can be useful in analyzing markets, it is important to remember that they are not based on any scientific principles or laws. Instead, such patterns provide traders with broad concepts and show the buying and selling opportunities that ultimately move the markets.