Charting for Newbies 101: The Mighty Candlestick!
Howdy There!
If you are like me when I first got into cryptocurrency you are probably looking at all these graphs with lines shooting all over them and thinking to yourself. “What did I get myself into?”
Whelp, pull up a chair and grab a beer cause I am about to learn ya son!
Over the course of the next few weeks, I will be going over the basics of charts and trading so we can all hopefully make smarter trades in the future.
MOST charts that you will see all over the internet that looks like this...
and at their nucleus is the all mighty candlestick!
Fortunes are made and lost by this simple indicator. There are some traders that can make strong market predictions just based on the way they read candlesticks. So learning this skill even at the basic level can be quite useful.
The Candlestick Analysis has been around for a really long time…I am talking about 16th -17th century. The analysis was invented during a time of constant war in Japan’s history. Much of candlestick terminology and philosophy actually stems from this military-dominated past. Well once things settled down in Japan and the rice trade began to boom we can see the candlestick makes its day-view into the exchanges of futile Japan as a way to keep up with the volume of buying and selling rice. Therefore, you might see them referred to as “Japanese candlesticks” and traditionally they come in black and white.
“That’s all fine and dandy, but what do I do with the darn things?”
I was just about to get to that random internet person.
See candlesticks are comprised of a few different parts.
You have your Shadows at either end. (also known as the wick.) – this represents the highest point and the lowest point of sale in that session
The real body – this is going to represent the buy/sell pressure of the session
The open price at one end and the close price at the other – This just shows the highest buy/sell price of that session.
The color of the candlesticks is also important. As I mentioned previously candlesticks can come in black & white but most commonly you will see them represented by green and red.
- Green being a buy movement. This is also referred to as a bullish movement.
- Red being a sell movement. This is also referred to as a bearish movement.
This is why you may sometimes read or hear people talking about some coins being in a Bear or Bull Market.
A candle itself can represent different time segments, 1 minute to a whole 1 day, people generally look at these on what time frame they are selling at. 1-6 hours is typically used for looking at a weekly analysis anymore and you start looking at month/years. Day traders often look at candlesticks at 1 hour or less, I wouldn’t recommend this for beginners since this can be very stressful and risky.
Now that you understand the structure and what each color represents we can move into the different formations of candlesticks that you might come across in your crypto journey. There are tons of different types but we are going to stick to most common ones.
Many of these may signal a change in trend or what is called a reversal. This is why reading candlesticks can be important when deciding your next move.
Standard Line
- Normal buying and selling pressure (based on color)
- Longer the body represents the intensity of the buy/sell pressure
Spinning Top - This can signal indecision in a market.
- Depending on the color it could represent a change in movement called a reversal.
- After long decline can represent weakness in the bearish movements
The Doji - Little or no body
- Happens when the open and close rates are close to equal
- You can sometimes see where the bias is about to turn to by what candlestick precedes a doji.
- This is like a tug-of-war between both movements.
Hanging man, Hammer
- Hanging man(red)
- Top of an uptrend
- Followed by selling pressure
- Hammer(green)
- Bottom of a downtrend
- Followed by buying pressure
- On both, you need to see what candlesticks are presiding it determine the revival of support.
Inverted Hammer, Shooting Star
- Inverted Hammer (green)
- Bottom of a down trend
- Shooting Star (red)
- Top of an uptrend
- Both candlesticks can be a signal of reversal. It’s always important to look at the preceding candlesticks for confirmation of a changing in the trend. And usually, are followed by heavier volume.
Marabozu - This is going to be the strongest movement.
- When you start seeing a bunch of these together this Is when people start saying “To the moon!” or “This coin is trash! Sell!”
*On a side note there are ways that you can “blend” candlesticks together to form different candlestick patterns. This can be a little more advance and out of the scope of what I am covering here…. just the basics :) *
Here a just a few examples that I found in some of my chart studies.
this an example of a hanging man. “Going down! ”
A few spinning tops. I was trying to take advantage of peoples’ indecision as I finesse my way into my buy range. (more about that in a later post.)
The Main thing I would like you to take away from this lesson is that candlesticks represent battles or arguments between the Bears (sellers) and the Bulls (buyers.) Looking at these we can see who is currently controlling the market and make our buying and selling decisions accordingly. If we have a bunch of support from the bears and the prices dirt cheap we want to jump in a scoop up some coins/stocks at those lower prices. When the bulls are flying a rocket to the moon we want to jump on and sell at those higher prices. Buy low, Sell high….it’s so simple.
Stay tuned for: Charting for Newbies 101: Trendy Trendlines!
illustrations by me