Have you ever entered into a forex or crypto trade only to see the trend reverse?
Or, have you ever tried to pick a top or bottom in crypto, only to see the trend continue in the original direction?
If so, then you are not alone. These situations happen all of the time to crypto traders because they are unfamiliar with popular chart patterns.
One of the fastest ways to learn crypto trading is becoming knowledgeable about the powerful and popular Japanese candlestick patterns as they indicate if the trend is about to reverse or continue further.
Top 7 Candlestick Patterns
Japanese candlesticks are a technical analysis tool that traders use to chart and analyze the price movements of crypto.
A Japanese candlestick is a type of price chart that shows the opening, closing, high, and low price points for a given period.
A variety of patterns will form based on the relationship of the opening and closing, as well as high and low prices for the candlestick. Technical chart readers will review those patterns to determine the larger crypto trends.
There are over 60 different candlestick patterns, but don’t worry as you don’t need to know all of them to be successful. In fact, we have distilled the Japanese candlestick patterns down to the top 7 that are easy to spot and offer excellent signals.
1. The Hammer Candlestick Pattern
One of the most popular candlestick patterns is the Hammer. The Hammer indicates a downtrend is turning into an uptrend and that traders will want to buy bitcoin.
This Hammer pattern is extremely popular because it is simple and easy to spot. It consists of one candlestick with a large wick to the downside and a relatively small colored body at the top. The small body indicates that the open and closing prices are fairly close to one another.
This pattern is most effective when it forms towards the end of a downtrend as it suggests prices traded significantly lower, but then reversed to close in the upper half of the candle’s range. That reversal in sentiment can often lead to a larger reversal of the downtrend into an uptrend.
2. Bullish and Bearish Engulfing
The Engulfing pattern is another popular formation traders follow. The Engulfing has a bullish version called the Bullish Engulfing while the mirror opposite is the Bearish Engulfing.
The Engulfing pattern consists of two candlesticks.
The first candle will follow the direction of the previous trend. In the case of the Bullish Engulfing, the first candle will be red. Then, the second candle will punch a new low but close above the opening of the first candle essentially engulfing the first candle.
The opposite is true for a Bearish Engulfing where the first candle is a small green body and the second candle is a large red body that completely engulfs the body of the first candle.
The Engulfing is a reversal pattern that signals a strong trend change within the market.
3. Shooting Star
The Shooting Star is a popular pattern widely followed by traders. The simplicity of this single candle pattern helps make it popular.
The Shooting Star will have a long wick emerging from the top of a small body. This means that prices opened in the lower portion of the candle’s range, traded to new highs, then immediately retraced closing near the open.
The color of the body is insignificant to identifying the pattern. When spotted, the shooting star alerts crypto traders to the end of a bullish trend.
4. The Doji
The Doji is another single candle pattern that is the easiest to spot on a price chart.
The open and close of the Doji are nearly identical coupled with a high and low range that is relatively small. As a result, this price action forms in the shape of a plus “+” sign.
The Doji is not necessarily bullish or bearish. The Doji is considered neutral due to the indecision of the market creating similar opening and closing prices.
When a Doji is spotted, it simply means the market is pausing and that a continuation of the trend prior to the pattern forming will ensue.
5. Inside Bar
The Inside Bar is a two-candlestick pattern that signals market consolidation.
The first candle is a large-bodied candle that can be either red or green. The second candle sits inside the range of the first candle and is generally the opposite color.
This pattern alerts the trader that prices are consolidating the trend from the first candle. As a result, a breakout is looming nearby.
Traders typically look for the breakout to occur in the direction of the old trend. So, if the first candle was red, look for a breakdown below the low of the second candle. If the first candle was green, look for a break higher above the high of the second candle.
6. Key Reversal
The Key Reversal pattern is just as the name implies, a reversal formation.
The Key Reversal involves two candlesticks. The first stick is normal-sized and can be any color. The second candle drives to a new extreme and then reverses into a large-bodied candle.
The second candle is key to indicating whether the pattern is bullish or bearish. If the second candle is green, then it is a bullish Key Reversal, and additional gains are expected. If the second candle is red, then look for the market to correct lower.
If the Key Reversal appears near support or resistance levels, then the signal tends to be stronger.
7. Morning/Evening Star
The final candlestick pattern that every trader ought to know is the Morning/Evening Star.
This pattern consists of three candles. The bullish version is the Morning Star where the first candle is a long red body, followed by a small body that pushes to a new low. Then, the third candle is a large green candle that returns close to the opening price of the first candle.
Together, the three candles in the Morning Star signal that a bullish reversal is beginning.
The Evening Star pattern is the opposite and signals a bearish reversal is starting. The distinct shape and length of the three candles make them easy to spot on the charts and a favorite among traders looking for trend reversals.
Conclusion
Japanese candlesticks are a chart reader’s dream.
There are dozens of patterns created by the candlesticks that alert traders to the trends of the forex and crypto markets.
The top 7 candlestick formations are popular among traders because they generate strong signals and are easy to spot and interpret on the charts.
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.
