https://twitter.com/Trader_Melon Candlesticks in Cryptocurrency Markets A short guide by Melon. Follow me on Twitter @Trader_Melon https://twitter.com/Trader_Melon Candlesticks in Crypto Price is the only thing that matters when trading. If you are entering a position based solely on an indicator or placing blind bids at support and resistance levels, you will get bfto eventually. I know this because I used to do it. With that in mind, why would you not pay attention the indicators that reflect price action? Candlesticks. Candlesticks are based on the price movements of the market. The buyers are sellers paint a picture with bodies and wicks of the candles, and these pictures can be interpreted to give you an idea of where an asset might be headed. If you don’t believe in technical analysis or want to invest for the long term based on a project’s “solid” fundamentals, this isn’t for you. Here are some candlestick patterns that I have found work exceptionally well in the crypto markets, as well as traditional, but as I have a main focus on cryptocurrencies, the charts and examples will be from assets in those markets specifically. This brief guide will be split up into two parts: Reversals and Continuation. Reversal Patterns: Hammer Morning Star/ Evening Star Harami/Inside Candles Engulfing Structures/Candes Continuation Patterns: Consolidating Box J Hook/Wave Vertical Hammer Three Methods https://twitter.com/Trader_Melon Before we take a look at each of these candlestick patterns a little more in-depth, it’s important to understand that without the proper context, candlesticks patterns on their own mean very little. This is not a guide for understanding candlesticks. If you don’t understand how to identify where the open, close, high, and low of the candlesticks are, I suggest you go and learn the basics, and then return here once you have a grasp on that. Further, for the purpose of illustrating these patterns, the examples used in this guide are cherry picked. It makes sense to use clear examples where the pattern played out rather than where it didn’t because that would just confuse everyone. In later updates of this guide, I’ll probably add some more examples where patterns failed, so you have a better understanding of the hit rate of these candlestick patterns. Which may be a shock to you, but is not 100%. So with the introduction out of the way, let’s begin with: Reversals. Reversal patterns occur at significant price and resistance levels. Often, the best way to capitalize on a level will be to mark your chart up on the daily and weekly time frames with larger zones that you can then work with on the lower time frames. https://twitter.com/Trader_Melon This is a 3 Day ETH/USD chart from Coinbase. We can see that after a long period of downwards consolidation, we are now testing a long-term support/resistance level once more. On a 3 day chart, this zone is quite large, it’s about a $50 range on an asset worth $400 currently, which is about a 17% range. However, we can now narrow down the time frame to the daily, and that will give us a clearer indication of the candlesticks that are forming. Remember, these zones are not intended to be acted on with blind limit orders. We are looking for reversal patterns within them to be confirmed to give us a better sense of direction. Here is the daily chart. We can see that we now have a clearer understanding of the price action occurring in the zone, and that will give us more information to work with to predict large macro moves of reversal or continuation. Whether you swing trade or scalp, the overall direction of the trend is important to be able to identify, and these candlestick patterns can help you regardless of whatever timeframe you trade on. https://twitter.com/Trader_Melon So now that we’ve identified a zone where a reversal might occur, let’s begin looking at some patterns that are indicative of a possible reversal, and provide decent entries and stops. Also, please keep in mind the trend in which whatever coin you’re trading is heading in. Like divergences, you’re better off trying to find reversal patterns after pullbacks to get in with the trend of which the asset is heading. While these can help you identify potential tops and bottoms, there no real way to tell if you’ve nailed the exact top or bottom, and the trend apes can easily come in and ruin your perfect entry. But I know you’re not retarded, right? You wouldn’t do that… So, let us first begin with the hammer, the most obvious and widely recognized of the reversal candles. Hammer/ Hanging Man This is a hammer that occurred at the bottom of a pullback into support. They are characterized by a longer bottom wick, and a small body. The hammers can be either color, red or green. Traditional candlestick analysis says that the wick has to be at least double the size of the body, but you and I aren’t going to measure this, because nobody actually does. Is the wick long and is the body short? Does it look like a hammer? It’s probably a hammer. https://twitter.com/Trader_Melon Additionally, there may also be a small upper wick which occurs when sellers attempt to bring the asset back down after buyers have scooped it up. This is not important in the grand scheme of things. All we are looking for is price to form a hammer at significant level of support, and for buyers to then follow through on the next candle. Did you read that part? It’s important. DO NOT BLINDLY ENTER WHEN YOU SEE A HAMMER. THE NEXT CANDLE MUST SHOW FOLLOWTHROUGH. There are plenty of times where a hammer will form, only to be taken out at the next candle by the stronger trend in the market. Here is where you would enter on this particular chart. Place your entry at the top of the hammer and wait for buyers to push the price up to your entry, and place your stop loss below the low of the hammer or previous candles if you wish to have a wider, safer stop. It’s that easy. Target the upper parts of the zones, and wait for a reversal trigger or your target to be hit. This will allow you to capture the bulk of the move with as little drawdown as possible. By waiting for buyers to come into the market at the end of an exhausted sell off, which is indicated by the long lower wick on the hammer, you are allowing yourself to pay for confirmation that the reversal is likely to play out, and thus https://twitter.com/Trader_Melon you will have little drawdown on the play, instead of placing limit orders at support and resistance levels and praying that they will hold. Hammers that occur at resistance levels are called hanging man candles. They can also be either color. Here is a hanging man candlestick pattern that is confirmed at the top for a nice reversal on the Daily chart on ETH/USD. This also happened to be the exact top of the rally, in ETH’s case, but obviously that won’t happen every time. It might only be a minor pullback before the trend takes over again, however, you can see how useful it might be to be able to identify where a leg in a trend might be ending. If you see one of these patterns develop, it might be a good idea to take profits. Or hold. Up to you, really. Hammers can also occur as inverse hammers. The context of the candles are the same as regular hammers, meaning they simply imply a reversal in trend, they just look like the opposite of a hammer, but the wick being at the top instead of the bottom, and the body of the candle being at the bottom instead of the top. Pretty easy. At tops they are called shooting stars and at bottoms inverse hammers. Here’s a quick example of a shooting star on the 1 hour chart of ETH/USD. https://twitter.com/Trader_Melon I actually traded this too, and I should have taken this as sign to exit my long and instead wait for a break above the zone to reenter my long position, but I held out and got stopped on the trade. (The R/R tool shows my current position, not my position that was stopped). That’s it for hammers, pretty easy, right? Next up, the star patterns. These are extremely useful and have a very high hit rate. Morning Star/ Evening Star As with all candlestick patterns, these must occur at either price resistance or support levels. If you see these in a range or during a period of consolidation, do not trade them they are invalid. Because I’m a bula at heart, let’s first look at the Morning Star. Here’s an example I traded, and yes, it’s ETH/USD again. https://twitter.com/Trader_Melon The morning star is a three-candle reversal pattern. It is characterized by a long candle in the direction of the current trend, followed by either a doji or small bodied candle, and then typically, a large marubozu candle in the opposite direction, completing the pattern and signaling a possible reversal. Note that the marubozu is not essential for the pattern to be valid, this it is just typical of the pattern. Similarly to the hammer, place your entry at the top of the marubozu, and wait for the buyers to continue to push the price upwards. Your stop goes below the lowest wick of the pattern. And then you let it ride. https://twitter.com/Trader_Melon The evening star is the same as the morning star, but it occurs at resistance levels. As you can see in the example above, it occurred at a local top before a pullback into the overall bigger move. Seeing these patterns can help you better understand what price will be doing, and allow to you to add to your positions, or take profits before a bigger pullback. However you manage your trades, really. These candlesticks are meant to be triggers that assist in your trading system. Do with them what you will. Harami and Inside Candles There are two types of inside candles, large bodied ones and small bodied ones. The type is not really important, more so the fact that they occur and more importantly, where they occur on the chart. Harami are small bodied candles that open and close completely within the larger candle that occurred before it. It does matter the color of the candle. In traditional markets, there is usually a gap up from the previous day’s close, and then a small green or red day. In crypto however, there are no gaps unless the asset you’re trading is extremely illiquid or the market happens to shift rapidly just as a new candle is opening. So, in the case of cryptocurrencies, harami are simply small bodied candles that open at the low of the previous candle, and close somewhere above the previous https://twitter.com/Trader_Melon candle’s close. They are a weaker candlestick pattern on the lower time frames, but on the daily and 3 day charts, they are useful for showing a slowing of momentum, and possible reversal. They are best paired with engulfing structures, which will be discussed later in this guide. Personally, I wouldn’t suggest trading a harami candle, but they are useful for showing the early signs of reversal, and that a bottom or top might be coming in the next few days. Use these in conjunction with your other analysis tools to give you a better edge in the markets. Notice how the harami occurs right at support, showing that sellers are slowing down and buyers are beginning to enter the market again. It is not a trigger to enter a trade like some of the other reversal patterns, but it is significant for allowing you to change your bias and tell you that the market may be ready to head in the opposite direction. Next, let’s discuss what I see a lot of people on Crypto Twitter call Inside Candles. Technically, these patterns have names as well. A bullish inside candle is called a piercing pattern and a bearish one is called a dark cloud cover. (Look, I didn’t come up with the names, ok?) Piercing Pattern The piercing pattern is a bullish reversal signal and is considered very strong. They occur at key support levels and show very strong conviction on the part of the buyers. Combine a piercing pattern with marubozu, and you have a very setup to get long and strong. The piercing pattern requires that the bullish candle reclaims at least https://twitter.com/Trader_Melon 50% of the bearish one that precedes it. Once again, no, you don’t have to measure it, just eyeball it like you do everything else in your life. Let’s have a look at the corn and see what we can find. After the brutal dump from 20k, the corn managed to find a bottom at 6k. Look at what candle pattern caught that bottom? Keep in mind this is a daily chart. The long lower wick also indicates sellers being trapped, and the strong close shows the conviction of the buyers to push the price higher. I would consider this pattern to be a trigger, but you’re welcome to wait for something else you like to long, be it a pullback or another candlestick pattern elsewhere after some consolidation. A lot of traders on Crypto Twitter seem to think that these patterns don’t work, even on daily charts. But as with the harami, it shows a complete exhaustion of sellers. If you have a wide stop, it should account for any swings lower that might occur. Of course, no pattern has a 100% hit rate, and that should be taken into account along with your trading system and as with all candlestick patterns and analysis, you should wait to see how the next candlestick opens to give you a better sense of direction. https://twitter.com/Trader_Melon Dark Cloud Cover The dark cloud cover is the opposite of the piercing pattern. That’s it. Let’s look at a quick example to give you basic gist of things. This is a daily chart of Litecoin before the big run in 2017 at the end of the year. Here we can see that there is a nice dark cloud cover pattern that is confirmed by the next two candles. With regards to dojis, they can essentially be treated as a “resting day” unless they are part of the pattern, like in the case of a morning and evening star. Enter on the cross to the downside and select your targets to the nearest support level that you expect a reaction at, or until you get a reversal pattern in the opposite direction. Here we can see a pullback to a nice level of support that held, where you could have safely exited your trade. I hope you’re beginning to understand the idea behind candlestick patterns a little bit more at this point. Let’s take a look at something a LOT of traders misinterpret next: https://twitter.com/Trader_Melon Engulfing Patterns Engulfing patterns are fairly simple. At a swing low or high in the chart, like everything else in this guide, a large bodied candle of the opposite direction of the current trend will close, signaling a possible reversal. The problem with engulfing patterns for most traders, is that they think that an engulfing pattern alone is what signals the reversal, and often times, a complete reclaim will occur on the next day, and these traders will claim that the engulfing patterns do not work, failing to take into account the context of the chart, or what an engulfing pattern actually is and isn’t. For this part of the guide, because these tend to be slightly more subjective than the other patterns, let us look a good, an okay, and bad example of an engulfing pattern. In traditional markets, the best engulfing patterns are those that gap down and then have a large engulfing candle the next day. In crypto, we don’t have these, so instead we have what I like to call engulfing structures. The best and most reliable engulfing patterns that I have found are those engulf entire structures in price action, meaning many small bodied candles are engulfed by large candles in the opposite direction. You can see that the hammers in this example are rather weak, and while technically valid, do not exactly inspire any kind of confidence in the trade. However, then this large bodied engulfing candle appears, giving a clearer sense of direction, completely engulfing the small bodied candles next to it, showing that buyers are https://twitter.com/Trader_Melon confident in this area and are willing to push price higher from here. Additionally, the candle is a marubozu, meaning sellers weren’t able to push price back much at all before the candle close. You can see that the engulfing candle engulfs the entire structure, something that I prefer to see over a single candle engulfment. Here is a valid engulfing pattern right at a support level. This is a “textbook” engulfing pattern, however it is a single candle engulfing pattern, and not only that, look at how large the engulfing candle is. If you are comfortable having a wide stop swing trading, then this could be a possible setup you could take, but the R:R here just isn’t something I’d want to take personally. That being said, it is a valid engulfing pattern. So, up to you, really. Next is a bad engulfing pattern. https://twitter.com/Trader_Melon Englufing patterns are likely to occur during periods of consolidation. These are bad examples of the pattern, as they have no real merit and are considered invalid. In sideways movement, an engulfing pattern means very little, and should not be taken as a trigger to go short in this case, even though it would have worked. Reversals Conclusion I hope this helps you be able to identify some better places for entry into positions. I don’t have anything against you degens who place limits at areas with no confirmation, and to be honest, more power to you. I’ll never catch the exact bottom with this method, but this is intended for my boys with a little less ball, and a little more patience. So, just to recap, when you see these patterns, the most important thing is to wait for a candle close for the pattern to complete. Once you have a pattern that you recognize, the next candle is where you act. Wait for the direction to be confirmed, and then enter the trade. Part 2 will contain continuation patterns, but I’m tired of typing now. Best of luck, lads. I hope this helps you at least a little bit.