https:// twitter.com/Trader_Melon Candle sticks in Cryptocurrenc y Markets A short guide by Melon. Fol low me on Twitter @Trader_Me lon https:// twitter.com/Trader_Melon Candlesticks in Cry pto 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 cand les, 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 Engulfi ng Structures/Cand es Continuation Patterns: Consolidating Box J Hook/Wave Vertical Hammer Three Methods https:// twitter.com/Trader_Melon Before we t ake 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. T his is not a guide for understanding candlesticks. If you do n’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, th e examples used in this guide are ch erry picked. It makes sense to u se clear examples where the pattern p layed 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 o f the hit rate of these candlestick patterns. Wh ich may be a shock to you, but is not 100 %. So with the introduction out of th e 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 T his is a 3 Day ETH/USD chart from Coinbase. We can see that after a long period of downwards consolidation, we are now testin g 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, t he 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 som e patterns that are indicative of a possible reversal, and provide decent entries and stops A lso, please keep in mind the trend in which wh atever coin you ’ re trading is heading in. Like divergences, you ’ re b etter off trying to find reversal patterns after pullbacks to get in with the trend of whic h the asset is heading. While these can hel p you identify po tenti al tops and bottoms, there no real way to tell if you ’ ve nailed the exact top or bottom, and the tr end apes c an easily come in and ruin your perfect entry. But I know you ’ re not retarded, right? You wou ldn ’ t do that ... S o , 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, a nd 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 f ollow 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 b y 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 min or 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 bott om, 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 o f a s hooting sta r 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 the n typically , a large marubozu candle in the opposite direction, completin g the pattern and signaling a possible reversal. Not e that the maru bozu is not essential for the pattern t o be valid, this it is just typic al 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. A nd then you let it ride. https:// twitter.com/Trader_Melon The evening star is the same as the morning star, but it occurs at resist ance levels. As you can see in th e exa mple above , it oc curred at a local top before a pullback into the overall bigger move. Seeing thes e patterns can help you better unders tand what price will be doing, and allow to you to add to your positions, or take profits before a bigger pullback. However you ma nage your trades, really. The se 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 importa n tly, where they occur on the chart. Harami are small bodied candle s that open and close comp letely within the larger candle that occurred before it. It d oes matter the color of the candle In traditional markets , th ere is usually a gap up fro m the previ ous day ’ s close, and then a small green or red day . In crypto however, the re are no gaps unless the asset you ’ re tr ading is extremely illiquid or the market happens t o shift rapidly just as a new candle is open ing. So, in the case of cryptocurrencies, harami are simply small bodi ed candles tha t open at the low of the previo us candle, and close somewhere above the pre vious https:// twitter.com/Trader_Melon candle ’ s close. They are a weaker candl estick pattern on the lower time frames, but on the daily and 3 day charts, they are useful for showing a slowing of momentum, and p ossible reversa l. T h ey are best pa ired with engul fing structures , wh ich will be discu ssed later in this guide. Personally, I wouldn ’ t suggest trading a harami candl e , but they are useful for showing the early signs of reversal , and that a bottom or top might be com ing in the next few days. Use these in conju nction with your other analysis tools to give you a bette r edge in the mar kets. Notice how the harami occurs ri ght at support, showing that sell ers are slowing down and buyers are beginning to ente r the ma rket again It is not a trigger to enter a trade like some of the other reversal patterns, but it is significan t for allowing you to change your bias and tell yo u that the market may be rea dy to head in t he opposite direction. Next, let ’ s discuss what I see a lot of people on Crypto Twitter call Inside Candles. Te chnically, these patterns have names a s well. A bullish inside candle is called a piercing pattern and a beari s h one is called a dark c loud cover. ( Look, I didn ’ t come up with the n ames, ok? ) Pi ercing Patt ern The piercing pattern is a bullish reversal signal and is considere d very st rong. 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 p iercing pattern requires that the bullish can dle reclaims at least https:// twitter.com/Trader_Melon 50% of the bearish one that prece des it Once again, no , you don ’ t have to measure it, just eye ball 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 b rutal dump from 20k , the corn managed to find a bottom at 6k Look at what candle patte rn caught that bottom? Keep in mind this is a dai ly chart. The long lower wick al so indicate s sellers being trapped , and the strong close shows t he 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 consolidati on. A lot of trade rs on C rypto Twitter seem to t hink t hat these patterns don ’ t wor k, even on daily charts. But as with the harami , it shows a c omplete exhaust i on of sellers If you have a wide sto p, it should acc ount for any s wing s lower th at 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 wi th all candlestick patterns and analysis, you sho uld wait to see h ow 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 oppos ite of the piercing pattern. That ’ s it. Let ’ s lo ok at a quick example to give you bas ic gis t of things. Thi s is a daily chart of Lit e coin before the big run in 2017 at the end of the year. Here we can see that there is a nice dark c loud cover pattern that is confirmed by the next two candles. W ith 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 c ross to the downside and select your targets to the nea rest support level that you expect a reaction at, or until you get a reversal pattern in the opposite direction. H ere we can see a pullback to a nice lev el of support that held, where you could have safely exited your trade. I hope you ’ re beginning to under stand the idea behind candlestick patterns a little bit more a t this point. Let ’ s take a look at something a LOT of traders misin terp ret next: https:// twitter.com/Trader_Melon Engulfin g Patt erns Engulfing patterns are fairly s imple. At a swing low or high in the chart, like everything e lse in this guide, a larg e bodied candle of the opposite direction of the current trend will close, signaling a possible reversal. The problem with engulfing patterns for most trad ers, is that they think that an engulfing pattern alone is what signals the re versal, and often times, a complete reclaim will occur on the next day, an d these traders will claim that the engulfing patterns do not work , failing to tak e into account the context of the chart, or what an engulfing pattern actually is a nd 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 in stead 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 engulf ed 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 exac tly inspir e any kind of confidence in the trade. However, then this large bodied engul fing candle appears, giving a clearer sense of direction, completely engulfing the small bodied candles next to it, showing that buyers a re https:// twitter.com/Trader_Melon confident in this area and are willing to push price higher fro m here. Additionally, t he candle is a marubozu , meaning sellers weren ’ t able to push p rice back much at all before the candle close. You can see that the engulfing candle engu lfs the entire structure, something that I prefer to see over a single c andle engulf ment Here is a valid engulfing pattern right at a support level. This is a “ textbook ” engulfing pattern, however it is a single can dle engul fing pattern, and not only that, look at how large the engul fing c andle i s If you are comfortable having a wide stop swing t rading, then this could be a p ossible setup you could take, but the R :R here just isn ’ t something I ’ d want to tak e personally. That be ing 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 du ring periods of consolid ation. These are ba d examples of the pattern, as they have no real me rit and are considered inval id. In sideways movement, an engulfing pattern means very little, and should not be taken as a trigger to go s hort in this case, even though it would have worked. Reversals Conclusion I hope this help s you be able to identify some better places for entry into positions. I don ’ t have anything against you degens who place limits a t areas with no confirmation, and to be honest, more power to you. I ’ ll never catch the exact bottom with this m ethod, but this is in te nded for my b oys 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 directi on to be confirmed, and then enter the trade. Part 2 will conta in continuation patterns, but I ’ m tired of ty ping now. Best of luck, lads. I hope this help s you at leas t a little bit.