Investing in digital currency is a very risky venture. Cryptocurrency prices tends to fluctuate more often than fiat currency prices. The cryptocurrency market is fairly young, hence it is generating much mistrust on the investors’ side. Important to note, most jurisdictions lack a proper regulatory framework for cryptocurrency-related business. More worryingly to would-be investors, some countries prohibit the use of digital currencies and support of any crypto-related information in their jurisdictions. What you need is predictive power. Analysis via candlestick charts can give you a modicum of that power.
Clearly, the cryptocurrency market presents a lot of challenges, most of them being systemic. Contrary to the widespread mistrust of the market and lack of official government support, cryptocurrencies have a trading market which is gradually picking up speed. There are a number of cryptocurrency trading exchanges that offer a platform for buying and selling digital coins.
Obviously, the exchanges understand that many investors need the means to help them make their best judgments when there’s a decision on whether to buy or sell a coin. To achieve this, there are a number of visual aids that illustrate the behavior of a coin trading over a given period of time. The most used means is the candlestick chart. Unlike simple graphs, candlestick charts are comprehensive and represent real-time data. An investor can follow the real-time trades of a coin on some exchange helping them to make informed trading decisions.
Knowing the Candlestick
Otherwise known as the Japanese candlestick chart, the graph describes price movements of a digital currency. Although they may look similar to box plots, candlestick charts closely represent a mixture of line charts and bar charts. Particularly, movements along the chart are marked by shapes in the form of long-edged boxes. The boxes, dubbed candles and wicks, have specific colors to represent a gain or a drop in a coin’s price. Looking at the “candles and wicks,” investors can easily determine a coin’s pattern and can subsequently make a decision on whether to buy or sell.
For a trader to understand how the chart works, one needs to understand the basic nature and features of the chart. The figure below shows a typical illustration of a candlestick.
A single candlestick contains two major parts, the body and the shadow. The body is the thick middle part of the candlestick. This part shows the opening and closing prices of the candlestick for the given period of time. The candlestick records the opening price as the first on the body. The last price recorded indicates the closing price.
Long Periods of Data
Important to note, the movements of the candlestick greatly determine the open and closed positions. This is for the reason that the candlestick measures the price movements over long periods of time. The chart can compress years of trading data into one single chart. In some cases, one candlestick can represent even one month’s trading prices. If the price of a cryptocurrency rises during the candlestick, the candle appears green in color. In this instance, the opening price is at the bottom of the body whereas the closing price will be at the top of the body. On the other hand, a dropping cryptocurrency price shows a candlestick colored red. In this case, the opening price will appear at the top of the body while the closing price will make its appearance at the bottom of the body.
The candlesticks have other descriptions that help investors easily identify them. The one green in color is the If the candlestick is hollow, it means the price closed above the open while if it is a full bar, the price closed below the open. The names help differentiate market status and help investors make quick decisions.
The Shadow or Wick
The shadow section of the candlestick plays another very important role that is critical to the reader’s comprehension. It’s represented by thin lines and appears at both ends of the body. One shadow, the upper shadow, appears at the top of the body while the lower shadow appears at the bottom end of the body. The shadows indicate the highest and lowest prices recorded in trades during the candlestick.
Most importantly, the thin lines indicate the presence and severity of volatility of cryptocurrency prices in the market. For instance, a very long shadow on both sides of the body implies a very high rate of fluctuation in the cryptocurrency’s prices. The cryptocurrency is said to be very volatile in the time period of the candlestick. In contrast, shorter shadows are evidence of a stable price and a cryptocurrency that is less or not at all volatile.
The Candlestick Chart
Candlesticks are important influencers of investment decisions. A candlestick that is of the full body represents an opportunity to make an investment decision. It indicates a period of certainty, a period of solid indicators. If it does not grow to its full height, it represents an “indecision period.” At this point, the market is not sure what direction to take. Sometimes a candlestick might not “grow” a body at all.
Bulls and Bears
Candlesticks fill up during trades. If a full candlestick comes after another one, and the body color is green, the market is bullish. A bullish trend implies a period of rising prices. It indicates that a lot of investors are buying, hence pushing up the demand for the cryptocurrency.
On the other hand, the end of a bullish trend implies a fall in prices. In the great selling phase, otherwise called bearish, a “filled candlestick opens at a higher price than the previous hollow candlestick. This is followed by a sharp drop, causing the price to fall below the previous low.”
The changing shape of this chart is what investors rely on to make decisions. As prices change, the shape of a candlestick shifts constantly. Meanwhile, the color (or the filled-ness and hollow-ness) of the candlestick changes constantly.
This article should not be taken as, and is not intended to provide, investment advice. Users are ultimately responsible for the investment decisions he/she/it makes based on this information. It is your responsibility to review, analyze and verify any content/information before relying on it. Trading is a highly risky activity. Do consult your financial adviser before making any decision. Please conduct a thorough research before investing in, or creating any cryptocurrencies, and read our full disclaimer.
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