#BinanceHODLerC A Guide to Reading the Most Common Cryptocurrency Price Action Chart Patterns
Summary
Price action charts are a popular tool used in technical analysis to identify potential buying and selling opportunities.
Price action chart patterns, such as the hammer, bullish harami, hanging man, shooting star, and doji, can help traders identify potential trend reversals or confirm existing trends.
Traders should consider other factors, including volume, market conditions, and the overall direction of the trend, when making trading decisions.
What are price action charts?
Price action charts are a type of charting technique used to describe asset price movements. They were first developed in Japan in the 18th century and have been used for centuries to identify patterns that may indicate the direction of asset prices. Today, cryptocurrency traders use price action charts to analyze historical price data and predict future price movements.
Individual price action charts form patterns that can indicate the potential for price rises, falls, or stabilization. This provides insight into market direction and potential trading opportunities.
What is a price action chart?
Imagine tracking the price of an asset, such as a stock or cryptocurrency, over a period of time, such as a week, a day, or an hour. A price action chart is a way to visually represent this price data.
A candlestick on a price action chart has a body and two lines, often referred to as price fluctuation lines, wicks, or shadows. The candle body represents the range between the opening and closing prices during that period, while the price fluctuation lines, wicks, or shadows represent the highs and lows reached during that period.
The green body indicates that the price has risen during this period, while the red body represents a bearish candle, indicating that the price has fallen during this period.
Using price action chart patterns
Price action chart patterns consist of multiple candlesticks arranged in a specific sequence. There are many price action chart patterns, each with its own interpretation. While some price action chart patterns provide insight into the balance between buyers and sellers, others may indicate a reversal, continuation, or oscillation.
It's worth noting that price action chart patterns do not, on their own, indicate a need to buy or sell. Instead, they are a way to look at current market trends to identify potential upcoming opportunities. Therefore, it's always helpful to look at patterns in context.
This context could be the broader market environment or a technical pattern on a chart, including the Wyckoff Method, Elliott Wave Theory, and Dow Theory. It could also include technical analysis (TA) indicators, such as trend lines, the Relative Strength Index (RSI), the Stochastic RSI, the Ichimoku Pullback, or the Parabolic Stop and Reverse Indicator.
Price action chart patterns can also be used in conjunction with support and resistance levels. Support levels are price levels where demand is expected to be strong, while resistance levels are price levels where supply is expected to be strong.
Bullish price action chart patterns
hammer
A hammer is a candle with a long lower wick at the bottom of a downtrend, and the wick is at least twice the size of the candle body.
The hammer pattern shows that despite increased selling pressure, bullish traders pushed the price to a level close to the opening price. The hammer can be red or green, but green hammers may indicate a stronger bullish response.
inverted hammer
This pattern is very similar to a hammer, but with a longer wick at the top of the candle body instead of the bottom. Like a regular hammer, the upper wick should be twice the size of the candle body.
The inverted hammer occurs at the bottom of a downtrend and may signal a potential uptrend. The upper wick indicates that the price has halted its ongoing downward movement, although sellers were eventually able to bring the price down to a level close to the opening level. Therefore, the inverted hammer could indicate that buyers may soon take control of the market.
The Three White Soldiers
The Three White Soldiers pattern consists of three consecutive green candles, each of which opens within the body of the previous candle, near a level that exceeds the high of the previous candle.
These candles should not have long lower wicks, indicating that continued buying pressure is pushing the price higher. The candle size and wick length can be used to identify potential continuation or rebound opportunities.
Bullish Harami
A bullish harami is a long red candle followed by a shorter green candle completely encompassed within the body of the previous candle.
A bullish harami can unfold over two or more days, and this pattern indicates that selling momentum is slowing and may be coming to an end.
Bearish patterns of price action charts
The Hanged Man
The hanging man is the bearish equivalent of the hammer. The hanging man pattern typically forms at the end of an uptrend with a small body and a long lower wick.
The lower wick indicates a massive sell-off, but bullish traders were able to regain control and push the price higher. With this in mind, selling after a long uptrend could be a warning that bullish traders may soon lose momentum in the market.
meteor
A shooting star consists of a candle with a long upper wick, a short or nonexistent lower wick, and a small body, usually near the bottom. The shooting star's shape resembles that of an inverted hammer, but it forms at the end of an uptrend.
The shooting star indicates that the market reached a peak, but sellers took control and lowered the price. Some traders prefer to wait for the next candle to confirm the pattern.
The Three Black Crows
Three Black Crows consist of three consecutive red candles that open inside the body of the previous candle and close below the low of the last candle.
This is a bearish pattern equivalent to the Three White Soldiers. Ideally, these candles should not have long upper wicks, indicating that continued selling pressure is pushing the price down. The candle size and wick length can be used to identify continuation opportunities.
Bearish Harami
A bearish harami is a long green candle followed by a shorter red candle completely encompassed within the body of the previous candle.
A bearish harami can unfold over two or more days, appearing at the end of an uptrend, and possibly indicating a decline in buying pressure.
dark cloud cover
The Dark Cloud Cover pattern consists of a red candle that opens above the close of the previous green candle, but closes below the midpoint of that candle.
This pattern is typically accompanied by high volume, indicating that momentum may be shifting from bullish to bearish. Traders may wait for the third red candle to confirm the pattern.
Three Continuation Patterns of Price Action Charts
Bullish triple pattern
The bullish triple engulfing pattern occurs in an uptrend, with three consecutive red candles with small bodies followed by a continuation of the uptrend. Ideally, the red candles should not break beyond the range of the previous candle.
The continuation is confirmed by a green candle with a large body, indicating that the bulls have regained control of the price trend.
bearish triple pattern
The bearish triple pattern is the opposite of the bullish triple pattern and indicates a continuation of the downtrend.
Aldochi
A doji forms when the open and close levels are identical (or very close). The price can rise or fall from the open level, but ultimately closes at or near the open level. Therefore, a doji may indicate a point of volatility between buying and selling forces. However, the interpretation of a doji depends heavily on the context.
Depending on where the open/close line is located, the Doji can be described as follows:
Doge grave witness
It is a bearish reversal candle with a long upper wick and an open/close near the bottom.
Long-legged Doge
An oscillating candlestick has a lower and upper wick, and the open/close level is near the midpoint.
Dougie the Dragonfly
A bullish or bearish candle, depending on the context, with a long lower wick and an open/close level near the high.
According to the original definition of doji, the open and close levels should match. But what if the two levels don't match and are too close together? This is called a spinning bee pattern. However, since cryptocurrency markets can be highly volatile, typical dojis are rare. Therefore, the spinning bee pattern is often used to describe the doji pattern as well.
Price action chart patterns based on price gaps
A price gap occurs when a trade in a financial asset opens at a level higher or lower than the previous closing price, resulting in a gap between the two charts.
While many price action chart patterns include price gaps, patterns based on this type of gap are not common in the cryptocurrency market, where trading occurs 24/7. Price gaps can still occur in illiquid markets, but they are not useful as actionable patterns because they primarily indicate low liquidity and high bid-ask spreads.
How to Use Price Action Chart Patterns in Cryptocurrency Trading
Traders should keep the following tips in mind to effectively use price action chart patterns while trading cryptocurrencies:
1. Understand the basics
Cryptocurrency traders must have a solid understanding of the basics of price action chart patterns before using them to make trading decisions. This includes understanding how to read price action charts and the different patterns they can develop.
2. Combine different indicators
While price action chart patterns can provide valuable insights, they must be used in conjunction with other technical indicators to form more comprehensive forecasts. Examples of indicators that can be used with price action chart patterns include moving averages, the Relative Strength Index (RSI), and the Moving Average Convergence Divergence (MACD).
3. Use multiple time frames
Cryptocurrency traders should analyze price action chart patterns across multiple time frames to gain a broader understanding of market trends. For example, if a trader is analyzing a daily chart, they should also look at hourly and 15-minute charts to see how patterns appear on different time frames.
4. Practice risk management
Using candlestick patterns involves risks, like any trading strategy. Traders should always practice risk management techniques, such as placing stop-loss orders, to protect their capital. It's also important to avoid overtrading and only enter trades with a favorable reward-to-risk ratio.
Concluding thoughts
Every trader can benefit from learning about price action charts and what their patterns indicate, even if they don't incorporate them into their trading strategy.
While they can be useful in analyzing markets, it's important to remember that they are subject to error. They are useful indicators of the buying and selling forces that ultimately drive markets.
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