If you are starting to trade cryptocurrencies, you have probably heard about Japanese candles. They are an incredible visual tool for analyzing how the price of an asset moves over a specific period of time. Although they may seem complicated at first, once you understand them, they will become one of your greatest allies in trading. In this guide, I will explain how they work, how to interpret them, and what patterns to look for to make better decisions.
What is a Japanese candle?
Basically, a Japanese candle summarizes the price behavior over a period of time (it can be one minute, one hour, one day, etc.). Each candle gives you four key data points:
1. Opening: The price at the beginning of the period.
2. Closing: The price at the end of the period.
3. Maximum: The highest price reached.
4. Minimum: The lowest price reached.
A candle is formed by:
The body: The difference between the opening and closing price.
The shadows (or wicks): These thin lines above and below the body that show how far the price went (highs and lows) during that time.
Types of candles according to price movement
Bullish candle: When the closing price is higher than the opening price. They are usually green or white and reflect that buyers dominated that period.
Bearish candle: If the closing price is lower than the opening price, we have a red or black candle. This indicates that sellers had more control.
How to interpret a candle
1. The size of the body:
A large body shows a strong movement, either up or down.
A small body reflects indecision or low activity.
2. The size of the shadows:
Long shadows indicate that there was quite a bit of volatility. If the upper shadow is long, it means that sellers pushed the price down after a high. If it is the lower one, buyers defended the price from a low.
Short shadows usually reflect stability.
Common patterns in candles
If you look at how several candles form in succession, you can identify patterns that will give you clues about what might happen.
Bullish reversal patterns:
Hammer: It is a candle with a small body and a long lower shadow, indicating that buyers are regaining strength after a drop.
Bullish engulfing: A large bullish candle that completely 'wraps' a previous bearish candle. A clear signal that the trend may change upwards.
Bullish harami: Here you have a large bearish candle followed by a smaller bullish candle within its body. It is another sign that the market could rise.
Bearish reversal patterns:
Shooting star: A candle with a small body and a long upper shadow, typical of a market that could turn downwards.
Bearish engulfing: Unlike the bullish pattern, here a large bearish candle wraps a bullish one. It shows that sellers are taking control.
Bearish harami: Similar to the bullish one, but in the opposite direction: a large bullish candle followed by a smaller bearish one, which could signal a drop.
Continuation patterns:
Doji: When the opening and closing prices are very close, showing indecision. (There are many types of doji candles, this is just one variant)
Three white soldiers or three black crows: Three consecutive bullish or bearish candles with solid bodies, confirming an upward or downward trend.
Practical tips for using candles in trading:
1. Use them with indicators: By themselves, candles are useful, but when you combine them with tools like RSI or moving averages, their power multiplies.
2. Analyze in different time frames: Don't just stick to one-hour charts. Look at daily or 4-hour charts for a more complete view.
3. Confirm the patterns: Don't make decisions just because you identified a pattern. Always verify with volume and the general market situation.
4. Understand the psychology behind the price: Candles reflect emotions such as fear and greed. If you learn to recognize them, you can anticipate important movements.
Conclusion
Learning to read Japanese candles is not just a technical skill, it is a key ability for any trader. With time and practice, you will better understand how to react to market movements and better seize opportunities. Remember: the key is to practice, stay informed, and not make hasty decisions.
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