Techniques for reading popular candlestick charts in trading

2025-12-21 05:23:13

Key Aspects

Japanese candlesticks are an indispensable tool for technical analysis, allowing traders to identify entry and exit points in the cryptocurrency markets.
The main figures ( hammer, bullish harami, hanging man, shooting star, doji ) give traders the opportunity to recognize trend reversals or confirm the current movement.
All trading decisions should be made considering trading volume, market psychology, and liquidity depth.

What Japanese Candles Represent

Japanese candlesticks are a graphical way of displaying the price dynamics of an asset. This methodology originated in the 18th century in Japanese markets and was used to identify patterns in price movements. Today, crypto traders use candlestick charts to analyze past price data and forecast future movements. The combination of several candles forms patterns that signal possible price increases, decreases, or consolidations. Analyzing these figures helps to understand market sentiment and find promising trading signals.

The Principle of Candlestick Chart Construction

Imagine that we are tracking the quotes of a crypto asset over a certain time interval of ( hours, days, or weeks). The candlestick chart visually conveys price information. Each Japanese candlestick consists of a body and two lines called wicks or shadows. The body reflects the boundaries between the opening and closing prices of the period, while the wicks demonstrate the extreme values of ( maximum and minimum) during this time. A green body symbolizes price growth, while a red one signifies a decrease.

Candle Chart Interpretation Methodology

Candlestick patterns are formed from a sequence of several candles. Different combinations carry various information: some illustrate the balance between buyers and sellers, others signal a reversal, and others indicate market uncertainty.

It is important to remember: a candlestick pattern is not a direct signal to act. Rather, it is a tool for analyzing the current state in order to identify potential opportunities. It is recommended to always analyze patterns in context and not isolate them from other factors.

To minimize risks, experienced traders combine Japanese candlesticks with alternative analysis methods: the Wyckoff method, Elliott wave theory, and Dow theory. They also use technical indicators: trend lines, RSI, stochastic RSI, Ichimoku clouds, and the parabolic SAR system. Candlestick patterns synergize with support and resistance levels, where support is the price at which buying interest increases, and resistance is the level with active selling.

Bullish Candlestick Chart Patterns

Hammer

The Hammer is a candlestick with a long lower shadow at the moment of reaching the minimum of a downtrend. The shadow must exceed the size of the body by at least twice. The figure demonstrates that despite the pressure from sellers, buyers were able to push the price back to the opening. The Hammer can be red or green, but a green Hammer indicates a more convincing bullish reaction.

Reverse Hammer

This figure resembles a classic hammer, but has an elongated shadow on top instead of at the bottom. The upper shadow should also be at least twice as long as the body. It appears at the end of a downtrend and may signal a reversal. The upper shadow indicates a waning of the decline, although sellers managed to push the price back closer to the opening. This pattern hints at a weakening of bearish pressure and a possible imminent recovery of bullish positions.

Three ascending candles

The configuration consists of three consecutive green candles that open within the body of the preceding one and close above its maximum. Such candles are characterized by minimal or completely absent lower wicks, demonstrating the dominance of buyers. Some traders analyze the sizes of the bodies and the length of the shadows, noting that the pattern is most reliable with large bodies (strong buying pressure).

Bullish Harami

A long red candle followed by a smaller green candle that is completely contained within the body of the previous one. It can develop over several days. Signals a slowing down or completion of the selling momentum.

Bearish Candlestick Chart Patterns

The Hanged Man

A bearish analog of the hammer that forms at the end of an uptrend. Characterized by a small body and a long lower shadow. The wick indicates significant selling volume after the rise, but the bulls temporarily regained control and pushed the price up. A moment of uncertainty arises: buyers support the ascent, but sellers are increasing in number. After a prolonged rise, the hanging man serves as a warning of a possible imminent takeover by the bears.

Falling Star

Consists of a candle with an elongated upper shadow and a minimal lower one ( or its absence ). The small body is located close to the minimum. Externally resembles an inverted hammer but forms at the end of an uptrend. Indicates that the market has reached a local maximum, after which sellers have regained initiative. When such a figure appears, traders either immediately open a short position or wait for confirmation on the following candles.

Three descending candles

It includes three consecutive red candles that open within the body of the previous one and close below its minimum. The bearish equivalent of three ascending candles. Usually devoid of elongated upper shadows, which demonstrates constant selling pressure. Size and shadows help assess the likelihood of a consolidation of the decline.

Bear Harami

A long green candle followed by a small red candle that is completely contained within the body of the previous one. It can develop over several periods. Typically appears at the end of an uptrend and indicates a loss of momentum by buyers with a possible reversal.

A curtain of clouds

Consists of a red candle that opens above the close of the previous green one and closes below its midpoint. Especially significant during high trading volume, foreshadowing the transition from bullish momentum to bearish. Some analysts are expecting a third red candle for confirmation.

Trend Consolidation Patterns

Method of Ascending Pauses

Occurs in an uptrend where three red candles with small bodies confirm the continuation of the current upward movement. The red candles should ideally not exceed the boundaries of the preceding ones. Confirmation comes with a large green candle, demonstrating the regained control of the bulls.

Descending Pause Method

Opposite configuration indicating a continuation of the downward trend.

Doge and its varieties

A Doji is formed when the opening and closing prices are the same or very close. The price may fluctuate above and below the opening level, but the result is a close at the opening. A Doji symbolizes indecision between buyers and sellers. The interpretation depends on the context and position on the chart.

Dogecoin Gravestone: a bearish candle with a long upper shadow and an opening/closing near the minimum.

Long-legged Doji: a candle of indecision with both elongated shadows and a central opening-closing position.

Doge Dragonfly: can be bullish or bearish ( depending on the environment ) with a long lower shadow and an open/close near the maximum.

When there are opening-closing matches, but not perfect ones, they are referred to as spinning tops. In volatile cryptocurrency markets, accurate dojis are rare, so spinning tops and dojis are often used as synonyms.

Price Gap Patterns

A gap occurs when an asset opens above or below the previous closing, creating space between candles. Although many patterns include gaps, they are rare in the cryptocurrency market due to 24/7 trading. Gaps can appear in illiquid markets, but they do not serve as reliable patterns, signaling low liquidity and high spreads.

The Use of Candlestick Patterns in Crypto Trading

Step one: studying the basics

Familiarize yourself thoroughly with the basic principles of candlestick charts. Learn to read charts accurately and recognize patterns. Avoid real trades until you have confidently mastered the material.

Step two: combining with indicators

Although patterns provide valuable analysis, their effectiveness increases when combined with other technical tools. It is recommended to use moving averages, RSI, MACD, and other indicators to enhance the reliability of predictions.

Step three: multi-timeframe analysis

Crypto traders must analyze patterns on various time scales for a comprehensive understanding. If the daily chart is being analyzed, it is also necessary to check the hourly and 15-minute scales to see the consistency of the patterns.

Step four: risk management

All trading approaches carry risks. Use stop orders, avoid overtrading, and look for a favorable risk/reward ratio.

Conclusion

Mastering the skill of reading candlestick charts is beneficial for anyone engaged in cryptocurrency trading, even if it is not a core element of their strategy. Japanese candlesticks help capture the balance of power between sellers and buyers. However, they are not infallible and should be used in conjunction with other tools and strict risk management to protect against potential losses. The right approach is to consider candlestick patterns as one of many elements of comprehensive analysis, rather than as an automatic trading signal.