Understanding Candlestick Patterns: A Practical Guide for Traders

Why Is It Worth Learning to Read Candlestick Charts?

For every cryptocurrency trader, the ability to interpret candlestick charts is a key skill. This technical analysis tool originates from Japan centuries ago and remains the most commonly used method for identifying turning points in the market. Candlestick patterns such as hammer, bullish harami, hanging man, or doji help investors identify potential entry and exit points from positions.

Nevertheless, candlestick formations should be treated as one element of a comprehensive trading strategy, and not as a standalone signal to act.

Building a Candlestick Chart – What Are Candles?

Each candle on the candlestick chart contains four key pieces of information from the given period (hour, day, week):

• Body of the candle – shows the range between the opening and closing price
• Knoty (cienie) – lines above and below the body indicating the highest and lowest price
• Color – green indicates a price increase over the period, red indicates a price decrease.
• Size – The larger the body, the stronger the pressure from buyers or sellers.

Reading a candlestick chart is based on observing how individual candles connect to form larger patterns. These patterns usually signal whether the market is in a phase of growth, decline, or indecision.

Recognizing Bullish Patterns

Hammer – Reversal Signal at the Bottom of the Trend

The hammer appears at the end of a downtrend and is characterized by:

• Small body
• With a long lower wick (at least 2x larger than the body)
• The color can be red or green (the green hammer is stronger)

Meaning: Despite significant selling pressure, buyers managed to push the price back up. This means that bulls still have control over the market and the trend may reverse.

Inverted Hammer – Potential Bottom

This formation resembles a hammer, but the wick is at the top. It also appears at the bottom of a downtrend and suggests that selling pressure is weakening. The long upper wick indicates an attempt to push the price up, which has been pushed down by sellers. This may signify the beginning of a revival phase for buyers.

Three White Soldiers – Confirmed Increases

This formation consists of three consecutive green candles that have:

• Opening within the range of the previous candle's body
• Closing above the previous candle's high
• Lack or minimal lower wick

Interpretation: The structure shows a clear dominance of buyers, especially when the bodies are large and the wicks are short.

Bullish Harami – Selling Fades

Bullish Harami is a combination:

• Long red candle (downtrend)
• A small green candle fully contained within the previous body

This indicates a weakening of the sales pace and a possible breakout to the upside when the bear energy is exhausted.

Recognizing Bearish Patterns

The Hanged Man – Warning at the Trend Peak

The Hanging Man appears at the end of a bullish trend and has:

• Small body
• Long lower wick
• Meaning: After a strong rise, a large sell-off occurs, although the bulls managed to partially regain territory. This signals a turning point – bears may take control.

Falling Star – Reversal at the Peak

A formation similar in shape to an inverted hammer, but appearing at the top of an uptrend:

• Long upper wick
• Small body close to the bottom of the candle
• Minimal or no lower wick

Meaning: The market has reached a local peak, but sellers have taken control. Some traders are waiting for confirmation with another red candle before taking action.

Three Black Crows – Confirmed Drops

The hereditary equivalent of three white soldiers:

• Three consecutive red candles
• Opening within the range of the previous candle
• Closing below the previous minimum
• No long upper wicks

The structure indicates strong selling pressure and a possible continuation of the downward trend.

Bearish Harami – Exhaustion of Buyers

Combination:

• Long green candle (uptrend)
• A small red candle contained within the previous body

It signals a weakening of buying momentum, especially when it appears in the final phase of a rally.

Dark Cloud Cover – Sentiment Change

This formation includes:

• A green candle with an increase
• A red candle that opens higher but closes below the midpoint of a green candle.

Especially important when accompanied by high volume – this can signal a transition from a bullish phase to a bearish one.

Neutral Patterns and Engulfing

Doji – Indecision Point

A doji occurs when the open and close are at the same or very similar level. Different variations of the doji have their own interpretations:

Doji Tombstone – Potential reversal point of a downtrend (long upper wick, open and close at the bottom)

Long-legged Doji – A large uncertainty in the market (candles both above and below, open/close in the middle)

Dragonfly Doji – Can be bullish or bearish (long lower shadow, open/close at the top)

Bull Market – Continuation of Growth

Appearing in a bullish trend, where three small red candles are interrupted by a large green candle that confirms the dominance of buyers.

Bear Market – Continuation of Decline

Reverse scenario – three small green candles interrupted by a large red candle, confirming the dominance of sellers.

How to Trade Practically Using Candlestick Patterns

1. Master the Basics Before You Start

One should not engage in any transactions without solid knowledge of reading candlestick charts and recognizing individual formations. Understanding the fundamentals is a safe foundation for any strategy.

2. Combine Technical Indicators

Candlestick patterns should work together with other analysis tools:

• Moving averages
• RSI (Relative Strength Index)
• MACD
• Trend lines
• Support and resistance levels

Such an approach reduces the risk of false signals.

3. Analyze on Multiple Intervals

Browse the same asset on different timeframes – daily, 4-hour, hourly, and 15-minute. This provides a fuller picture of how long-term trends play out over shorter periods.

4. Always Apply Risk Management

• Set stop-loss orders
• Only risk a specific portion of your capital on a trade
• Look for opportunities with a favorable risk-to-reward ratio of at least 1:2(
• Avoid overtrading – it's better to miss an opportunity than to lose money

Candlestick Chart Limitations

It is important to remember that candlestick formations are not infallible. The cryptocurrency market is open 24/7, which means that price gaps ) that are common in traditional markets ( are rare. Additionally, even a perfectly shaped formation may fail if the market sentiment, volume, or other conditions change.

Summary

A candlestick chart is an indispensable tool in the arsenal of every trader. The ability to recognize candlestick formations – whether it be a hammer, bullish harami, hanging man, shooting star, or doji – provides the capability to react to changes in trend direction ahead of time.

The key to success, however, is treating candlestick patterns as part of a larger ecosystem of technical analysis, rather than as a means to make trading decisions independently. Add to this disciplined risk management, and your chances of profitable trading in the cryptocurrency market will increase.