This week we have a brief introduction to Candlestick patterns.
Candlesticks, or Japanese candlesticks, were created by our friends from the East to help identify a full period of trading activity for rice. Today, we can use it for any commodity, stock, currency or crypto. Their basis is to show, with all its possible variations, the Open, High, Low and Close for the period whether it’s a 15 minute, 4 hour or daily chart. Candlesticks are a technical trading tool that believes what we need to know about sentiment, emotion and trends are visible in the price patterns. Bullish or bearish activity are easier to spot when we document through candlesticks.
Here’s how they work.
The Candle Formation
We form a candle with the 4 pieces of data: Open, High, Low and Close. The open and the close form the ‘body’ of the candle while the high and low, if not the open or the close form the wick (the shadow) of the candle. This is what that looks like, courtesy of StockCharts.com:
As StockCharts.com says in their explanation of candlesticks, ‘the hollow candlestick means the close is greater than the open, indicating buying pressure’ while the filled candlestick ‘means the close is lesser than the open, indicating selling pressure’. This helps us create and view a chart that has some visual appeal to it and helps us see some of the action going on in the market, not unlike the width of the Bollinger Bands indicating volatility that we talked about last week.
Candlesticks in your Magnr Account
Candlesticks are a default setting in your Magnr Trading Account. Unlike the above description where hollow is bullish and filled is bearish, in your Magnr Account green is bullish and red and bearish. This is what it looks like in your Magnr Account
This is the daily chart for Bitcoin on Bitfinex at Magnr. Here you see the candlestick formations making the price chart on Bitcoin AND volume measurements at the bottom. These are your default settings and they are there for a reason. Many traders that trade candlestick patterns like to use volume for the confirmation of a trend, the ending of a trend or a potential trend reversal, all of which are important to the trader to enter and exit trades profitably.
On this chart, the heaviest volume in early September is associated with hitting the recent low at $2980. Some questions this chart asks us are:
- Since volume is MUCH lighter after bouncing off of $2980, does that mean there is no longer selling pressure on Bitcoin? Did the bears run out of gas?
- Is there any trend at all in Bitcoin at the moment?
- Is this information enough to trade from for you?
It looks like Bitcoin might be in a non-trending pattern at the moment so how do you trade non-trending markets?
Add Another Indicator
The bands are getting wider after a contraction earlier in the month and the downward price action that took us to the recent low went below the lower band on 2 successive trading days or outside of 95% of likely prices.
Based on the questions the candlesticks ask us and what the Bollinger Bands show us, a couple trading techniques off the daily chart could include (these are NOT recommendations, you trade and risk your own capital):
- Trading between the band and the moving average OR
- Trading between the bands
We intend to get into candlestick patterns like morning stars, dojis or haramis in more detail in future posts. This is only an introduction to help you understand what you see on the charts in your Magnr Trading Account, as well as show you how indicators can work together in a non-trending market. Like Bollinger Bands, candlesticks give us both good information and a good visual of what’s going on in a market.
How do you trade candlesticks and do you use the daily chart or hourly or?