This is one of the first thing I learned when I started trading in Crypto. And I would recommend anyone who is interested in doing trading to at least learn the basics of the Japanese Candlestick chart. They are used extensively in many trading platforms and can provide traders the most important tool to “analyze” price movement in a market. If you would like to read more about the history of Japanese Candlesticks (and it is pretty interesting), check out the Wiki Page.
Let’s start with the basics.
Above you can see a green candlestick. This simply means that for that particular period, the end price is HIGHER than the starting price. Hence the green bar. The top bar position is where the price ended (which is higher) and the bottom bar position is where the price started. The top wick shows the highest price for the period and the bottom wick shows the lowest price for the period. Easy?
Now we have a red candlestick. This means that for that particular period, the end price is LOWER than the starting price. Hence the red bar. The bottom bar position is where the price ended (which is lower) and the top bar position is where the price started. The top wick shows the highest price for the period and the bottom wick shows the lowest price for the period. Not that difficult right?
So until now it is pretty straightforward? The candlestick charts are actually pretty easy to understand. There is really nothing much to it than that. Now lets look at some more complex examples to understand price movement/action. We will take a few bars to explain what is going on. These will give you a better understanding of the price action that is happening for that period. Basically just spotting patterns.
So what do we see here? We know that in the first bar, there was a dip because of the red candlestick. However the swing in that period is quite wide. This could explain the reversal from red to green in the next bar. You can see the next two bars are green and the price ended higher. Next we see another green bar but the top wick and the bottom wick are pretty far apart. Again, this could explain the reversal from green bar to red bar. If you spot very wide wicks, it could suggest a reversal to either bullish or bearish. Look at historical prices and levels of resistance and support. Of course nothing is absolute but it does give some indication that the traders are indecisive and some of them might be thinking of selling instead of buying. So yes wicks themselves do tell you quite a lot on the market sentiments. Although it can be kind of difficult to spot at times.
How about the above candlestick chart? What does this tell you? We can see that the first few bars the overall trading price is pretty limited even with the very narrow bars and relatively long wicks. However on the fifth bar, we do see a even longer wick all the way to the bottom. Note that this meant even though at one point the price did dip quite significantly, it wasn’t sustainable and bounced right up. This is called a hammer. Shows that the support level is very much at this level and should not be any lower, especially if it is in a short period like 15min or 30 min time. This can be seen by big price increase in the next bar. Note that hammer or the inverse hammer is usually a good indication that there might be a price reversal is coming, especially if it is hitting the resistance level or support level. You can make use of these candlestick indicators with other tools (especially historical levels of resistance and support) to make your trades more successful and predictable. Nothing is fool-proof though so you will need to have more confirmation.
The above is quite an obvious one. What does this tell you about the market at this time? Momentum lost. The red candlestick is completely inside the green candlestick margin on its right. This means that we are expecting a downward trend as the buyers lose steam and the sellers start to come into play. The reverse is true as well. I always make try to spot the momentum candlestick when trying to buy the dip or sell the high. Again if you see that the price levels are reaching the resistance or support levels, you should consider your position.
Of course you should never use only one trading indicator as there are usually multiple factors affecting the market. Especially one as volatile as the crypto market. However learning some basics of the Japanese candlestick can help improve your trading significantly. Again there is no absolutes, even experts with all the trading tools in the world and whatever, things will not always go their way. But it sure help a lot. The above are just some basics. Candlestick patterns can be very complex too.
If you are starting your first foray into trading, you can follow my guide at trading cryptos in Binance.