As a Bitcoin trader, it is important to capitalize on moves immediately. With the price of Bitcoin being infamous for its volatility, opportunities come and go within a short period of time.
While veteran traders have advanced strategies that they have spent years trying to perfect, you don’t necessarily need them in order to make a profit. In fact, if you are a beginner, you are better off trying to execute something simple than making a mistake when trying something more complex.
Candlestick patterns are relatively easy to spot and can help you make profitable trades if you are vigilant and patient. Here, we have outlined a total of 4 candlestick patterns that every trader should know.
Understanding Candlestick Charts
Before you take a look at the patterns, you should fully understand what a candlestick chart is. Investopedia’s candlestick chart guide is very helpful and can serve as a prelude to this post.
If you need the shortest explanation possible, a candlestick chart comprises of three components. They are:
- The color: Usually, green represents an upward move in price whereas red represents a downward move in price. Remember that the colors may be different in some charts.
- The shadow (lines): This represents the intra-day high and low prices.
- The body: This is the opening and closing price.
4 Easy to Understand Bitcoin Candlestick Patterns
Let’s take a look at the patterns themselves. We will look at two bullish patterns followed by two bearish patterns.
The Hammer
The hammer is very simple to understand and is one of the most basic patterns that may be signaling a potential upward run.
After an asset has been suffering from a bearish run, you may notice a short uptick in its price. The body is quite small, but the shadow is quite large. What this tells you is that there were extremely strong selloffs during the day, but the buying pressure was even greater.
Remember that the hammer can be red or green, as it is possible for the selloffs to outweigh the buying pressure. However, a green hammer is usually stronger than a red one, and the subsequent bull run is almost always larger. When you see the hammer, it is best to go long.
Three White Soldiers
The three white soldiers is another easy pattern to spot. Essentially, after a long bear run, you may notice three consecutive green candles (or white as the name suggests). The body of each candle is bigger or the same size as the previous one.
This means that there has been a constant increase in buying pressure throughout the last three sessions. As such, the investor confidence in the asset is increasing, and there is potential for a considerably higher bull run.
In the example above, we can see that the price moves up considerably after the three white soldiers appear. Prior to that, the price was falling, and it fell by a huge amount right before the indicator appeared.
Dark Cloud Cover
The Dark Cloud Cover is the first bearish pattern that we are looking at. While it is rather rare, it does signal a quite strong downward move.
The pattern can be identified at the end of a bull run. The price of the asset opens higher than the previous day’s closing but closes after cutting through at least half of the previous day’s gains. This shows that bears are now dominating the market, and will probably push the price further downward.
The shadows of the candle also show the strength of the selling pressure. The shorter the shadow, the greater the pressure. In the example above, the selling pressure was not that strong. However, it still culminated in a reasonably strong downward movement.
Lastly, remember that while the first red candle is the beginning of the pattern, the second is the confirmation. You should open a position based on this pattern only after you see two candles without an increase in price.
Bearish Engulfing
This is the second bearish pattern that we are looking at. A bearish engulf has an uptrend that gets weaker and weaker as time goes by. In the end, the trend ends with a very small green candle followed by a much larger red candle (it engulfs the green candle).
This pattern suggests that the upward trend in the price has come to an end, and the bears are about to take over. Remember that the larger the red candle is relative to the green one, the stronger the downward trend will be.
Conclusion
We just took a look at 4 extremely basic but extremely useful candlestick patterns that any beginner as well as advanced trader can use to predict where the market will go next.
Remember that these patterns are reversible. For example, The Hammer can also be used to predict the next bearish trend if it is in the opposite direction and at the end of a bull run. The buying pressure that contributes to an uptick instead becomes selling pressure that forces the downtick. As such, these four patterns can go a long way towards making you money from simple trades that are easy to spot and execute.