In the previous blog, we told you about three handy crypto investing strategies that you can use to take advantage of the market. Today let’s specifically look into different Japanese candlestick patterns.
What are Japanese Candlesticks?
In the 17th century, a legendary Japanese rice trader called Munehisa Homma developed the candlestick chart to track and measure the rice market. His method allowed him to apply some concepts that helped him determine what could happen with rice in the future market. This was completed throughout the studies on each candlestick – graphically representing four price dimensions in one period (high, low, open, close).
Some decades later, during the 19th century, Western society adopted chart analysis following similar principles. Charles Dow and Steve Nison became important financial figures who helped implement the candlestick to the modern markets. After their studies and many other traders, they believed that the Japanese candlestick was a vital financial tool. Today, the Japanese candlestick chart is mainstream and well used by various markets like cryptocurrencies and commodities such as gold and silver.
Introduction to Japanese Candlestick Patterns
The candlestick creation is an ongoing battle between buyers (the bulls) against the sellers (the bears) during a pre-selected time frame. The time frame can be 1-day, 4-hour, 1-hour, 15-min, etc.
When the candle is green, it means that the buyers have won out in the timeframe. On the other hand, when a candle is red, it means that the sellers have won out.
Let’s dissect each and every component of the candlestick. Refer to the diagram above for the following description. For now, pay attention to the green candle.
- The bottom of the candle is the “open.” This is the price of the asset at the beginning of the chosen timeframe.
- The top of the candle is the “close.” This is the price of the asset at the end of the selected timeframe.
- The lower wick indicates how low the price went in that timeframe.
- The upper wick indicates how high the price went in that timeframe.
For the red candlestick, it is the exact opposite.
The space between the bottom and top is known as the body of the candlestick. Depending on the size of the candlestick and the wicks, we have different candlestick patterns.
Examples of Japanese Candlestick Patterns
Below are some famous candlestick types and how the market reads them:
- Marubozu: The Marubozu has no wicks and only has the body. This means that either the buyers or sellers were in complete control of the market. This candlestick helps us understand the market momentum in that time timeframe. Usually, these candlesticks are rare in longer timeframes.
- Hammer: Up next we have the hammer pattern. This is a bullish candlestick and has a considerably long wick. This candlestick tells us that the bears were initially in control in the timeframe before the buyers took back control.
- Inverted Hammer: Another bullish candlestick wherein the upper wick is considerably longer. In this case, the buyers were in complete control before the sellers launched a fightback. However, the buyers managed to hold out and ended up on top.
- Shooting Star: The shooting star is the bearish version of the hammer. Basically, the buyers were initially in the driver’s seat before the sellers took back control.
- Hanging Man: This will be the opposite of the inverted hammer. The bottom wick is much longer, and it often happens towards the end of an uptrend. In this case, the bears were initially in control and pushed the price down. In the end, the buyers tried a comeback but fell short.
- Spinning Tops: This pattern can be formed at the top of an uptrend, the bottom of a downtrend, or in the middle of a trend. It can be a bearish or bullish candle. In this candle, the price open and close are near each other and have a medium-sized wick on both ends of the body. This pattern forms when there’s indecision from the bulls and bears during the uptrend, downtrend, or sideways trend (accumulation). This candlestick provides signs of a possible change in trend depending on the climax and market sentiment.
- Doji: A Doji Candlestick happens when the price opens and closes near the same point, almost equal. The opening and closing happen in the middle, which means that the buyers and sellers have canceled each other out altogether.
- Gravestone Doji: This pattern is a doji with a longer upper wick. This means that the buyers were initially in control before the sellers roared back and canceled out all the gains. The gravestone doji is a sign of an upcoming bearish movement.
- Dragonfly Doji: This pattern is a doji with a longer lower wick and is the opposite of the gravestone doji. In this case, the sellers were initially in control before the buyers stepped in and canceled out all the losses. This doji is a sign of an upcoming bullish movement.
Conclusion
Identifying these Japanese candlestick patterns can be a lot of fun and may give you some hints as to how the market will behave in the future. However, in this article, we just looked at solo candlestick patterns. In the next article, we will look at the patterns that these candlesticks make in combination.
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