Author: Duane M. Tilden, P.Eng. Date: June 23, 2018
To become a successful trader in markets, such as cryptocurrency trading, one has to develop strategies which will give them the greatest probability of success, or for most, a profit.
How much risk and reward is up to every trader, as well as the selection of digital assets held and quantity. There are short, medium and long term goals and various methods of achieving each one of these objectives.
One tool that is very useful for developing short term trading strategies which can return a profit to the trader, is understanding Candlestick charts.
Figure 1: Anatomy of a Candlestick (1)
Anatomy of a candlestick
For reading and developing trading strategies, understanding the mechanics of a candlestick chart can lead to opportunities in trading assets to maximize ROI (return on investment), or to determine when to buy and sell assets.
How to Read a Single Candlestick (2)
Each candlestick represents one day’s worth of price data about a stock through four pieces of information: the opening price, the closing price, the high price, and the low price. The color of the central rectangle (called the real body) tells investors whether the opening price or the closing price was higher. A black or filled candlestick means the closing price for the period was less than the opening price; hence, it is bearish and indicates selling pressure. Meanwhile, a white or hollow candlestick means that the closing price was greater than the opening price. This is bullish and shows buying pressure. The lines at both ends of a candlestick are called shadows, and they show the entire range of price action for the day, from low to high. The upper shadow shows the stock’s highest price for the day and the lower shadow shows the lowest price for the day.
A candlestick represents the price activity of an asset during a specified timeframe through the use of four main components: the open, close, high and low.
The “open” of a candlestick represents the price of an asset when the trading period begins whereas the “close” represents the price when the period has concluded. The “high” and the “low” represent the highest and lowest prices achieved during the same trading session.
There is much more to reading and understanding candlestick charts than is covered here. This brief has informational links to where more information on patterns and indicators, and advice on how to use these patterns to make decisions in trading.
Bottom Line (2):
Investors should use candlestick charts like any other technical analysis tool (i.e., to study the psychology of market participants in the context of stock trading). They provide an extra layer of analysis on top of the fundamental analysis that forms the basis for trading decisions. We looked at five of the more popular candlestick chart patterns that signal buying opportunities. They can help identify a change in trader sentiment where buyer pressure overcomes seller pressure. Such a downtrend reversal can be accompanied by a potential for long gains. That said, the patterns themselves do not guarantee that the trend will reverse. Investors should always confirm reversal by the subsequent price action before initiating a trade. (Read more in Candlestick Charting: Perfecting The Art)