One of the keys to successful crypto trading is good technical analysis. Analyzing candlestick patterns to see the direction of market price movements is an important technical analysis skill. But it is certainly common for beginners to be confused about it. After an introduction to the basics of reading candlesticks in the previous article, this time Tokenomy will discuss various types of candlestick patterns that often occur in the market.
Types of Candlestick Patterns
There are various candlestick patterns that appear in the movement of the crypto market and as a trader, you must understand them to be able to make the right decisions. There are three main types of candlestick patterns: Bearish, Bullish, and Continuation. As explained previously, the green graph depicts an increase in prices over a period. This condition is known as Bullish. Meanwhile, Bearish is a condition where the candle is red and the asset price is falling.
- Bullish Reversal Pattern
A bullish reversal is a condition where there is a price reversal from bearish to bullish. This pattern gives a sign that prices will stop decreasing because they will enter a reversal phase.
There are several types of bullish reversal, such as the hammer pattern. This pattern is generally formed after a price decline and indicates a strong buyer entering the asset market. This pattern usually indicates a condition where sellers take control and lower the price. It is also a buyback momentum and pushes prices higher. This makes the closing price higher than the opening price.
Besides the hammer pattern in the bullish reversal type, we can also find a candlestick pattern called the morning star. This pattern consists of three candlesticks, starting with a long body that appears during a downtrend, followed by a short body candle, and finally a bullish candle with a long body. This morning star pattern appears when the market is experiencing a downtrend which is believed to continue, but the market movement actually moves in the opposite direction and increases.
Next, a bullish engulfing pattern appears when there is a downtrend and the market condition is bearish. The bearish engulfing pattern is followed by a higher closing price movement than before. You can recognize this pattern from the appearance of a bearish candle during a downtrend, followed by a bullish candle that has a longer candle body than before.
Another pattern that usually appears during a downtrend is a bullish tri star which forms a doji with a downward pattern and finally rises again on the last candle. The doji indicates some indecision among market participants. When the market is in a downtrend and the first doji appears, market participants start paying attention to whether the downtrend will end. The second doji indicates the state of the market is starting to lose its way. The last doji signals that the downtrend has ended. This one pattern is rare, but its appearance illustrates a high probability in the market.
- Bearish Reversal Pattern
In a bearish reversal pattern, there is a reversal in the direction of asset prices from an initial increase to a downward trend. This pattern is the opposite of a bullish reversal. A bearish reversal pattern means that an asset price that was initially rising could potentially drop again.
One example of a bearish reversal pattern is the evening star pattern. This pattern is depicted by three candlesticks indicating that sellers are temporarily in control. This pattern is the opposite of the morning star pattern. In this pattern, the first candle closes in a bullish position, with the second candle having a small size and an aggressive bearish closing position in the third candle. Such conditions, can be interpreted as a phase where buyers initially took over the market conditions, but eventually, the sellers took over again with a sign of a bullish decline.
Next, a bearish engulfing pattern indicates a reversal when the price movement in the market is experiencing an uptrend. This pattern is depicted by a bullish candle in an uptrend followed by a bearish candle with a long body that exceeds the previous candle. This indicates a change in sentiment from bullish to bearish.
The next pattern is the opposite of the bullish tri star, which is called the bearish tri star. In this pattern, you will also find three doji, but the pattern starts in an upward direction and then decreases at the last doji. Just like the bullish tri star, this pattern depicts the existence of doubt in the market that occurs during an uptrend. This pattern appears when the uptrend has ended.
Candlestick Patterns for Trading
The above explanation covers only a small part of the many patterns that can appear in the market. Learning how to study candlestick patterns may be a slow process, but it is an essential technical analysis skill to support your trading decisions. These patterns can help you to foresee the direction of market movement and know when to sell or buy assets in order to make a profit.
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