Candlestick charts, also known as K-line charts, graphically represent the price trend, highest price, lowest price, and price fluctuations. The history of candlestick charts dates back to the 18th century in Japan, originating from the book "Sakata Senho" written by Munehisa Homma. "Sakata Senho" detailed the trading strategies used by Munehisa Homma in the rice market, which gradually evolved into candlestick charts. In 1990, Steve Nison introduced "Japanese Candlestick Charting Techniques" to the Western world, formally introducing candlestick charts to the global financial stage.
Today, candlestick charts are used to reflect the prices of various markets, including foreign exchange (AKA Forex or FX), stock indices, commodities, stocks, government bonds, and cryptocurrencies. The trading prices of these investment products are recorded and then presented by candlestick charts. For anyone studying technical analysis in trading, candlestick chart analysis is an essential skill. Candlestick charts form the foundation of all trading theories, highlighting their significance.
Candlestick charts consist of 4 components: ① Open Price ② Close Price ③ High Price ④ Low Price.
① Open Price
Open price refers to the first trading price at which a certain cryptocurrency is bought or sold within a specific time range in the market.
② Close Price
Close price refers to the last trading price at which a certain cryptocurrency is bought or sold within a specific time range in the market.
③ High Price
High price refers to the highest trading price at which a certain cryptocurrency is bought or sold within a specific time range in the market.
④ Low Price
Low price refers to the lowest trading price at which a certain cryptocurrency is bought or sold within a specific time range in the market.
① Bullish Candlestick
A bullish candlestick refers to a K-line where the closing price is higher than the opening price. In cryptocurrency trading, a solid green candlestick represents a bullish candlestick.
A bullish candlestick indicates a strong buying force, with buying volume exceeding selling volume.
② Bearish Candlestick
A bearish candlestick refers to a K-line where the opening price is higher than the closing price. In cryptocurrency trading, a solid red candlestick represents a bearish candlestick.
A bearish candlestick indicates a strong selling force, with selling volume exceeding buying volume.
③ Bullish Candlestick with Upper and Lower Shadows
The upper shadow represents the difference between the highest price and the closing price, while the lower shadow represents the difference between the lowest price and the opening price.
A bullish candlestick with upper and lower shadows indicates comprehensive interaction between buyers and sellers. Buyers pushed the price higher, creating the high price, while sellers pushed the price lower, creating the low price. However, the buyers triumphed over the sellers, as the closing price ended up higher than the opening price, resulting in a bullish candlestick.
④ Bearish Candlestick with Upper and Lower Shadows
In this case, the upper shadow represents the difference between the highest price and the opening price, while the lower shadow represents the difference between the lowest price and the closing price.
A bearish candlestick with upper and lower shadows indicates comprehensive interaction between buyers and sellers. Buyers attempted to push the price higher, creating the high price, while sellers pushed the price lower, creating the low price. However, the sellers prevailed over the buyers, as the opening price ended up higher than the closing price, resulting in a bearish candlestick.
⑤ Hammer Candlestick
The hammer candlestick refers to a small-bodied candlestick (can be either bullish or bearish) with a lower shadow that is greater than or equal to twice the size of the body, and generally, there is no upper shadow. In cryptocurrency trading, a red candlestick represents a bearish hammer, while a green candlestick represents a bullish hammer.
The larger the disparity between the size of the hammer's body and its lower shadow, the more significant its reference value. Hammer candlesticks can appear as either bullish or bearish. The presence of a hammer candlestick often indicates a potential price reversal or bounce.
⑥ Inverted Hammer Candlestick
The inverted hammer candlestick refers to a candlestick with a long upper shadow and a small body (can be either bullish or bearish), and generally, there is no lower shadow. In cryptocurrency trading, a red candlestick represents a bearish inverse hammer, while a green candlestick represents a bullish inverse hammer.
The inverse hammer candlestick implies a potential trend reversal from a downtrend to an uptrend. It can appear either bullish or bearish, with the bullish version indicating a more pronounced upward potential.
⑦ Doji Candlestick
Doji candlestick refers to a candlestick where the closing price is equal to or very close to the opening price, and there is little or no block on the line.
Doji candlesticks indicate a pause or indecision in the market. It suggests that there is significant disagreement between buyers and sellers, and the subsequent price trend is uncertain.
There are dozens of common candlestick patterns, but here, we will introduce the four most common ones: ① Morning Star ② Evening Star ③ Three Black Crows ④ Three White Soldiers.
① Morning Star
The Morning Star pattern consists of three candlesticks. The first one is a bearish candlestick, and the difference lies in the second candlestick, which can be either a small bearish or bullish candlestick, followed by a bullish candlestick. The Morning Star pattern is a bullish reversal pattern. If this pattern appears in a downtrend, it should be noted because it indicates a clear trend reversal signal and is a very good buying opportunity.
② Evening Star
The Evening Star pattern generally appears at the end of an uptrend. It consists of three candlesticks. The first candlestick is a large or medium-sized bullish candlestick, followed by a small bullish or bearish candlestick, and the third candlestick is a large or medium-sized bearish candlestick. The closing price of the third candlestick must be below the middle of the first bullish candlestick. The Evening Star pattern symbolizes that the price has reached its peak, and the market is likely to enter a bearish downtrend.
③ Three Black Crows
In traditional financial markets, three red candlesticks are considered a bullish pattern. However, in the cryptocurrency field, red candlesticks represent bearish candlesticks. Therefore, Three Black Crows are considered a bearish pattern in a cryptocurrency context. Three Black Crows consist of three consecutive falling red candlesticks, and the closing or low price of each candlestick is lower than the previous one. When Three Black Crows appear, there is a high probability of a continued downtrend.
④ Three White Soldiers
In traditional financial markets, three green candlesticks are considered a bearish pattern. However, in the cryptocurrency field, green candlesticks represent bullish candlesticks. Therefore, Three White Soldiers are considered a bullish pattern in a cryptocurrency context. Three White Soldiers consist of three consecutive rising green candlesticks. This is a very common candlestick pattern, and when it appears, there is a higher likelihood of a bullish trend ahead.