Trading cryptocurrencies while observing candlestick charts is essential knowledge for every trader and is something that needs to be learned from the start. Facing the various combinations of candlesticks, beginners may feel somewhat overwhelmed; in fact, complex candlestick patterns can be simplified into three simple categories: first, observe the bullish or bearish nature; second, observe the size of the body; third, observe the length of the shadows.
First, observe the bullish or bearish nature; bullish candlesticks indicate a continued rise, while bearish candlesticks indicate a continued fall. Taking bullish candlesticks as an example, after a period of struggle between bulls and bears, a closing price above the opening price indicates that bulls hold the upper hand, signaling that the next phase will likely continue to rise, at least ensuring some initial upward momentum in the next phase. Conversely, the same applies to bearish candlesticks.
Second, look at the size of the body; the size of the body represents intrinsic motivation. The larger the body, the more apparent the upward or downward momentum; conversely, the momentum is less apparent. Taking bullish candlesticks as an example, the body is the portion where the closing price is higher than the opening price. A larger bullish candlestick body indicates stronger upward momentum, while a larger bearish candlestick body indicates stronger downward momentum.
Third, observe the length of the shadows; the shadows represent turning signals. The longer the shadow in one direction, the less favorable it is for the price to move in that direction — that is, the longer the upper shadow, the less favorable it is for the price to rise, and the longer the lower shadow, the less favorable it is for the price to fall. Taking the upper shadow as an example, after a period of struggle between bulls and bears, the bulls have lost, regardless of whether the candlestick is bullish or bearish, the upper shadow section has formed the next phase of overhead resistance, making the probability of price adjusting downward greater.
First, observing candlesticks is essential knowledge that every trader must learn. Below, the instructor will briefly explain the basic knowledge of candlesticks.
The candlestick chart was first introduced in Japan, primarily used by Japanese merchants to record rice market trends and price fluctuations. It was later adopted in stock, futures, and cryptocurrency markets due to its detailed and unique representation.
Friends with stock trading experience know that the colors of stock market candlesticks are red for up and green for down, but in the cryptocurrency market, the colors are exactly the opposite: red for down and green for up.
This is not a special treatment by cryptocurrency market software; it is consistent with the mainstream representation methods internationally.
A single candlestick is generally composed of three parts: the upper shadow, the body, and the lower shadow.
1. If the closing price for the day is higher than the opening price, it is called a bullish candlestick; if the closing price is lower than the opening price, it is called a bearish candlestick. Bullish candlesticks represent upward movement, while bearish candlesticks represent downward movement.
2. Large Bullish Candlestick. When this shape appears, it indicates a strong upward trend and an optimistic short-term outlook.
3. Long lower shadow. This formation indicates that the price struggles to fall, and buyers are strong. However, we cannot easily buy based on this single signal.
4. Long Upper Shadow. When this formation appears, it indicates that there are relatively more sellers, and the price is likely to show signs of decline in the short term.
Cross Star, market reaction is relatively mild, trading volume is not active, wait and see for now.
Second, detailed explanation of various forms and meanings of a single candlestick.
A single candlestick has various deformations, and investors can measure the strength of bulls and bears based on the length of the body and the length of the shadows. Generally speaking, a long upper shadow and a short lower shadow, or a short bullish body or a long bearish body, indicate strong bearish forces; a short upper shadow and a long lower shadow, or a long bullish body or a short bearish body, indicate that bulls hold the initiative and advantage.
There are mainly 14 basic shapes of individual candlesticks:
(1) Large Bullish Candlestick with No Shadows
The opening price is the lowest price, and the closing price is the highest price, indicating strong bullish momentum with no resistance from bears. This often appears at the initial stage of a price moving away from the bottom, after a pullback ends, or during a strong rebound after severe over-selling.
(2) Large Bearish Candlestick with No Shadows
The opening price is the highest price, and the closing price is the lowest price, indicating absolute dominance by sellers, with no resistance from buyers. This often appears at the initial stage of a downtrend after a top has formed, after a rebound ends, or during the final suppression process.
(3) Small Bullish Candlestick with No Shadows
With no upper or lower shadows, the price of the currency fluctuates within a narrow range, indicating that buyer strength is gradually increasing, and bulls temporarily hold the advantage. This formation often appears during the early stages of an upward trend, after a pullback, or during consolidation.
(4) Small Bearish Candlestick with No Shadows
Without upper or lower shadows, the price fluctuation is limited, indicating that selling power has increased, and bearish forces slightly dominate. This formation often appears at the beginning of a downturn, after a rebound ends, or during consolidation.
(5) Bullish Candlestick with Upper Shadow
This is a resistance-type rise, indicating that bulls encounter resistance during an upward movement. This formation often appears during a rise, before an expected rise, or when the price encounters a dense trading area after starting from the bottom. The longer the upper shadow, the greater the overhead pressure; the longer the bullish body, the stronger the bullish momentum.
(6) Bearish Candlestick with Upper Shadow
Indicates that the price of the currency first rises and then falls. The longer the bullish body, the stronger the bearish force. This often appears at stage tops, when the operator raises prices to sell or during a shakeout.
(7) Bullish Candlestick with Lower Shadow
Indicates that the price of the currency first falls and then rises, with buyers supporting the price at a low level and sellers being blocked. This often appears at market bottoms or at the end of market adjustments.
(8) Bearish Candlestick with Lower Shadow
This is a resistance-type downturn, where the price rises and then falls, indicating strong bearish power, but is met with resistance from buyers during the decline. This often appears during a downturn or near market tops.
(9) Bullish Candlestick with Upper and Lower Shadows
Indicates pressure above and support below, but buyers are dominant. This often appears at market bottoms or during price rises. A long upper shadow indicates strong resistance above; a long lower shadow indicates strong support below.
(10) Bearish Candlestick with Upper and Lower Shadows
Indicates that there is selling pressure above and buying below, but bears dominate. This often appears at market tops or during price declines. The longer the bearish body, the greater the force of the bears.
(11) Cross Star Shape
The opening price equals the closing price and is in the middle of the trading range. This indicates intense struggle between bulls and bears, with the outcome about to be determined. It often appears at market bottoms or tops and is a typical form indicating that a market turning point is about to occur.
(12) T Shape
Also known as the Dragonfly Doji. The opening and closing prices are the highest of the day, and the lower shadow indicates that there is some support below. This shape often appears at market bottoms and sometimes at market tops, serving as a market reversal signal.
(13) ⊥ Shape
Also known as the Gravestone Doji. The opening price and closing price are the lowest for the day, and the upper shadow indicates that there is some pressure above. If the upper shadow is long, it implies a strong downward implication. This often appears at market tops, and occasionally at market bottoms.
(14) One Line Shape
When the opening price, closing price, lowest price, and highest price are all the same, this shape appears, usually when the price reaches the limit up or limit down directly after opening, indicating absolute dominance by the bulls or bears, with the limit price remaining unbroken throughout the day.
Third, the Combination of Candlestick Patterns in V-shaped Reversal Patterns
1. What is a V-shaped Reversal Pattern?
The V-shaped reversal is a common and powerful reversal pattern in practice, often used in technical analysis, usually appearing during periods of market volatility, where a price level only shows one low point or high point at the bottom or top area, then reverses the original trend, resulting in a sharp movement of the currency price in the opposite direction.
A V-shaped reversal is a strong upward signal. Its occurrence generally follows a prolonged downtrend (downward at a certain angle), usually after negative news, extreme selling pressure, and then sudden positive news (currency), causing the candlestick to turn upward with considerable continuity. Hence, a 'V' shape is formed on the candlestick chart.
2. What does the V-shaped reversal pattern signify?
When the price has a period of horizontal extension, analysts can take this opportunity to study market behavior closely and seek clues about its direction. This phase is called the transition phase. This is a characteristic of most reversal patterns. However, a V-shaped pattern represents a sharp market reversal, which is vastly different from the usual gradual change in market direction. When it occurs, the trend unexpectedly shifts suddenly with little to no warning, followed by a sharp movement in the opposite direction.
3. Detailed Explanation of V-shaped Reversal Patterns
First, there must be a trend present beforehand. Before the V-shaped reversal phenomenon occurs, there should be little change or only slight adjustments. Initially, it always moves too far in one direction and then often suddenly rebounds back in the opposite direction, like a rubber band being pulled too long and then snapping back. This sudden rebound characteristic usually has no prior indication, and afterward, the market's sharp movement in the opposite direction often triggers a series of price limit increases (or drops).
The primary condition for forming a V-shaped reversal is a steep or gradually loosening trend. Sometimes, the only effective signal of this reversal is a breakout from the market's very steep trendline. Moving averages provide little help in this case, as their nature causes them to lag behind uncontrolled price changes. After the event, those trapped in the market rush to transfer or stop losses to escape losing positions, which in turn further exacerbates the speed of the reversal.
Fourth, Common 3 Types of Warning Candlestick Signals
What are warning candlestick signals? First, Shenghui will discuss warning candlestick signals, which are an important component of signature candlesticks. Typically, the signals they emit can bring unexpected effects to our judgments and operations in practical situations. However, warning signals merely serve as reminders, and the subsequent price trend can vary greatly; they should not be used as confirmation signals.
Of course, if you can combine trading volume, relative positioning theory, and specific market conditions, you can certainly get ahead in bottom-fishing and top-escaping.
Typically, warning candlestick signals are mainly divided into three groups: the first group includes warning reversal hammer and hanging man patterns, the second group includes doji stars and consecutive doji stars, and the third group includes engulfing patterns. The appearance of these three groups of candlesticks usually indicates that a change in trend is about to occur, serving as a leading signal ahead of confirming candlestick signals.
1. Inverted Hammer — a warning signal for a potential bottom.
This candlestick's characteristic is a long upper shadow and a small body. Both bullish and bearish candlesticks can appear, but the bullish signal is stronger, while the bearish signal is relatively concealed. Its prerequisite must be that the price is at a relatively low level after a period of adjustment.
Therefore, during trading, candlesticks often leave a certain upper shadow, and if the body is not large, once the main funds believe the time is right, they will further increase their position, leading to the emergence of a large bullish candlestick, thus confirming the bottom! Therefore, the signal emitted by this candlestick can only be considered a warning signal, but once a confirming signal appears, bottom fishing can proceed with confidence.
2. Hanging Man — a warning signal for a potential peak.
The so-called Hanging Man refers to a small-bodied candlestick with a lower shadow that forms at a relatively high position, especially after a significant rise. It can be either bullish or bearish, but the bullish one is more frightening. This candlestick is formed by institutional forces inducing buying, with one side leaving a lower shadow indicating that bears are left with an opportunity, while the small body indicates that the upward momentum is waning. Therefore, the appearance of this hanging candlestick warns of the risk of a peak.
3. Doji Star
The meaning of the Doji candlestick is that the forces of bulls and bears have reached a balance. If this candlestick appears during a decline or rise, it is merely a brief pause and adjustment, and it does not signal a warning for a peak or bottom. However, if it appears at a relative high or low, it often indicates an imminent change in the market, so when you see it, you must be highly vigilant. Once followed by a large bearish or bullish candlestick, the top or bottom is confirmed.
Looking at candlesticks as a foundational skill is essential for a qualified investor, and there are now many comprehensive theories surrounding it.
Position Management
Position management has always been a very popular topic in trading systems. What everyone is interested in is how to adjust position size and add positions to increase profits. Due to the many uncertainties in the market, exploratory building of positions may be a safer way. If you want to trade in the market and survive long-term, you must diversify risks and increase profits through position configuration.
First, Olive-Shaped Position Increase Method
Assuming the price is about to rise, you buy a small amount first. Once you are profitable, you do not close the position but trade with multiples of the first transaction amount. With sufficient funds, you can buy a large quantity; if the price continues to rise, you can invest all remaining funds, lightly adding funds on both ends and heavily adding funds in the middle.
Second, Pyramid Position Increase Method
The most commonly used trading method in the futures market. That is, buy a fixed position at a certain price; when the price rises to a certain extent, buy in with less capital than the first position. If the stock price continues to rise, then buy in with a smaller position than the last time. Continue this way, gradually decreasing the amount of added funds.
Third, Inverted Pyramid Method for Position Increasing
This is the first time testing a purchase with a smaller position. If the market rises and the investor feels good, the next purchase will be larger than the first. The more chips you have, the more the additional funds will gradually increase.
Fourth, Equal Division Position Increase Method
Divide the invested funds equally before trading. When the market gradually rises as expected, add equal amounts of funds each time.
Fifth, Probability Trading Method
This method uses success rate as the standard for profitability. There is no systematic capital management method for batch increasing or decreasing positions for a specific currency. The result is either a stop loss or a take profit, both completing a round of trading. For example, if an investor is optimistic about a certain currency, they will buy a fixed position of that currency, clear positions when reaching the stop loss level, and take profits when reaching the target level. This is especially true for diversified participation in multiple currencies.
Sixth, Chase Method - also known as the Martingale system, it was originally used in casinos (roulette).
Its basic principle is: if you lose money, you need to double your bet. If you win, you need to restore your bet to the original amount. This will ultimately lead you to profit. This investment method is more suitable for large upward and downward channels.
Seventh, Inverse Martingale Method
Indicates starting with a unit ratio of 1, where the position increases by doubling after each win, but after each loss, it returns to the position of one unit. The advantage of this strategy is lower risk, as position increases are based on profits, ensuring the safety of account funds. The disadvantage of this method is that placing the largest position on top inevitably incurs losses! This investment method is relatively conservative and can be used at both relative tops and bottoms.
Eighth, how to increase positions after making a profit.
You start from several proportional units. After each stop loss, you reduce your position by 1 unit; after each win, you increase your position by 1 unit. Gradually increase your position! Ninth, Fixed Risk Level Increase Method.
The increased number of positions and the amount of funds used are uncertain, but the potential risk undertaken is fixed.
Position Management, Detailed Explanation of Various Position Adding Methods
First, batch input — this is the concept of adding positions at different points.
This method is often referred to as overweighting. There are various overlay methods. The main method is to enter and add positions after meeting certain conditions. Simple and common methods include fixed-point or proportional overweighting. That is to say, when your first entry's profit exceeds the set points or ratio, you add a certain amount, and continue this way. However, the quantity of position adding has its own efficiency. The more overweight, the better! Retracement adding — when entering, add more when the price moves in the opposite direction. For example: when going long, if the index retraces to 50 points, then enter to add a long position, etc. In fact, there is often a subtle boundary between the method of withdrawing the cost averaging method and abandoning orders. If the exit method is not controlled well, it can lead to terrible losses.
Profit and Loss Curve Position Increase Method — Simply put, when your profit reaches the set target, you increase your position, or when your loss reaches the set target, you increase your position.
Set indicator-based position adding methods — you may use some technical indicators or custom indicators for assessment, equivalent to measuring the market's popularity. For example, if you use ADX as an overweighting indicator, then ADX can serve as a weighting indicator. For every increase of 10, you can add another order, and so on. Of course, there are other methods for increasing amounts; this is just an introduction to some common ones.
Second, the concept of dynamically adjusting the number of points for each entry is a method of adding weight to the same points.
This method adjusts based on certain conditions or situations. The entry quantity is a dynamic position adjustment method. A common dynamic position adjustment method is to adjust the entry position based on the size of volatility — the simplest method is position quantity = W/risk value, where W is usually a fixed value or an acceptable loss amount, and the risk value is a variable value, usually measuring recent volatility, such as volatility. Alternatively, W may be fixed capital, and the risk value is the maximum consecutive loss of your strategy, which is another approach.
Martingale (Flat Betting) Method — In fact, this is a gambling method. In a betting game where you can only bet high or low, you keep betting on one side (either high or low). Every time you lose, you double your next bet until you win once, at which point you can recover all the previous losses, with the winnings exceeding the initial amount bet. When applied to trading, you only have two choices for each trade: long or short. As long as you lose money, your position will double on the next entry. This method is basically not suitable for the average person, as you must have substantial capital to endure significant losses to have a chance at ultimate victory.
Of course, there is also the reverse Martingale position increase method, which is exactly the opposite of the above: you double your position when you win. However, if you lose just once, you will lose all the money you previously won. This is merely a loss of principal. The main difference in timing between the two is that the Martingale method is suitable for use in a consolidating market, as typical trading strategies in a consolidating market have a higher chance of loss. If the trading strategy has a higher chance of winning in a trending market, then using the inverse Martingale strategy may be better. Each of these coding methods has its limitations and is not suitable for ordinary people. However, you can still study them and see. They are quite interesting.
Special Situation Overlay Method — When you notice a certain situation occurring and your trading strategy has a particularly high win rate, you can choose to increase your position at that time.
For example, if the recent price is below the 20-day moving average, but today it opens above the 20-day moving average, and you find that there is a high probability of this situation occurring previously, then you can take action now. When entering the market, increase your position, etc. Of course, there are many other methods to increase weight or adjust positions. However, converting some methods into programming languages and testing them back and forth is not so easy. There will also be some limitations. In the future, there will be some limitations, and when I have the opportunity to show you the differences, I will conduct backtesting.
Third, the number of lots can also change.
Sometimes the way the number of lots changes involves capital control issues, so there are many methods, such as pyramid adding, inverted pyramid adding, or even the same method applicable to the above-mentioned Martingale overweight method. You do not have to adjust your position based on 1, 2, 4, or 8 lots. You can also use Fibonacci ratios to adjust your position or any other method, so adjusting the number of lots is another step.
However, no matter how you adjust, it must be related to the scale of capital you have. You must determine the total position size based on your capital scale, otherwise, you risk being liquidated.
Any method of increasing funds will be greatly related to the method of exiting the market. Once you increase your position, the risk naturally increases significantly. Position control at this time determines when to exit the market. If sold well, you can retain profits. If profits are poor, your losses may increase, and it could be a losing battle. Therefore, various coding methods will have their corresponding ways to appear. When writing programs, you must be particularly careful because the more complex the program, the more likely it is to have bugs. Instead, it creates a series of problems.
Therefore, when capital is not very large, do not put all your money into the same position-adding strategy, as this will not achieve a high level of risk diversification. Most position-adding strategies are based on trends, and if the market trend is always consolidating, the adding method may cause you significant pain.
Fourth, you don't have to rely on overweighting to diversify risks.
A good investment portfolio should be diversified across multiple markets and strategies, utilizing multiple markets to mitigate risks in a single market. Using various strategies can also achieve the effect of diversifying entry points, which is akin to the effect of adding positions. Moreover, using different strategies to enter the market is based on rationale, and it will give you more confidence when trading. It is acceptable to use position-adding methods to test whether the market has turned, but the author recommends employing multiple strategies with diversified entry points.
Finally, the instructor shares the following ten trading insights accumulated over more than a decade in trading cryptocurrencies (must-read, must-collect).
1. If your capital is not very large, such as within 200,000, catching a major upward trend once a year is enough; do not keep full positions all the time.
A person can never earn wealth beyond their understanding. First, practice on a simulated account to develop your true mindset and courage; you can fail an unlimited number of times in a simulated account, but a single failure in real trading could be everything, possibly leading you to flee the market altogether.
3. When encountering significant positive news, if you don't sell that day, remember to sell at a high open the next day; the realization of positive news often turns into negative news.
4. Encounter major holidays, reduce positions or even go to cash a week in advance; based on past experiences, markets usually decline during holidays.
5. The strategy for medium to long-term trading is to keep enough cash, raise prices to sell off, buy back after a drop, and rolling operations are the best strategy.
6. Short-term trading mainly looks at trading volume and patterns; trade actively with significant fluctuations, and do not touch those that are inactive.
7. Downtrends tend to slow down, while rebounds will also be very slow; accelerated downtrends will lead to quick rebounds.
8. If you make the wrong purchase, admit it, cut losses in time, and preserve your capital; that is the fundamental principle of survival in the market.
9. You must look at the 15-minute candlestick chart for short-term trades, as the KDJ indicator can help you find good buying and selling points.
10. The techniques and methods for trading cryptocurrencies are countless; you only need to master a few to be sufficient, do not be greedy.
The martial arts secrets have been given to you. Whether you can become famous in the arena depends on yourself.
These methods should definitely be collected and reviewed multiple times. If you find them useful, you can share them with more cryptocurrency traders around you. Follow me to learn more cryptocurrency trading insights. Having been through the rain, I am willing to hold an umbrella for the 'chives'!
Intraday Focus: OM SUI SOL FUN BTC
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