Read signals from candlestick charts - A guide for cryptocurrency traders

Do you want to better understand price movements in the cryptocurrency market? Candlestick charts are the key to that success. But reading them is not just an art for art’s sake — it’s a skill that can change your trading game. Let’s see how to truly interpret these charts.

From Theory to Practice: What You Need to Know About Candlestick Charts

Before you start trading, you need to understand exactly what you’re seeing on the screen. Candlestick charts are an old, proven method of price analysis. Japanese traders developed this technique in the 18th century, and today it is standard worldwide.

Each candle on the chart represents a specific time frame — it could be five minutes, an hour, or a whole day. The choice of period depends on your strategy. If you trade quickly (scalping), you look at five-minute charts. If swing trading, you focus on hours or days.

The structure of a candle is simple but tells a lot. The thick part of the candle (body) shows the opening and closing prices. Thin lines at the top and bottom (wicks) represent the highest and lowest prices in that period. The color of the candle indicates the direction: green means an increase, red a decrease.

Elements to Watch During Every Trade

Forget complicated theories. Focus on three things:

Body size indicates the strength of the move. A large body signifies a decisive price move and strong engagement from buyers or sellers. A small body indicates uncertainty — market participants don’t know which way to go.

Wick length shows market pressure. A long upper wick means sellers managed to push the price down. A long lower wick indicates buyers stepped in and pushed the price up. This is a sign of strength.

Candle position on the chart matters. A candle at the top of an uptrend signals something different than one at the bottom of a downtrend.

Candlestick Patterns — Learn to Recognize Market Patterns

When you look at several candles together, patterns start to form. These are candlestick formations — recurring combinations that market players know and trade.

Doji — a candle with minimal body and long wicks. It indicates hesitation — neither buyers nor sellers have control. What happens next? It depends on the context. At a trend’s peak, it could signal a reversal. At a bottom, a potential upward move.

Hammer — appears after declines. A small candle with a long lower wick signals that buyers are coming in and pushing the price up. If the next candle confirms the rise, it’s a buy signal.

Morning Star — a three-candle bullish reversal pattern. After a decline, a small candle (uncertainty) appears, followed by a large bullish candle. It’s a classic sign that the bottom is near.

Bullish Engulfing — a large bullish candle engulfs a small bearish candle. Buyers take control. It’s a signal to go long.

Shooting Star — appears at the top. A small candle with a long upper wick indicates sellers managed to push the price down. A warning for buyers.

Bearish Engulfing — a large bearish candle breaks through a small bullish candle. Sellers take control. It’s a signal to close or exit long positions.

Three Soldiers (rise) or Three Warnings (decline) — three consecutive candles of the same color. The trend continues strongly. It’s a trend signal.

How to Truly Read Candlestick Charts — Practical Steps

Knowing patterns isn’t enough. You need to know where and when to look for them.

Step 1: Determine the market direction

Switch to the weekly chart. Long-term trends are your compass. Are prices making (higher highs and higher lows), or (lower highs and lower lows), or sideways? This changes everything.

Trading against the main trend is the fastest way to lose. Prefer to trade in the direction of the trend.

Step 2: Switch to a short-term chart

Now look at an hourly or four-hour chart. Search for candlestick patterns that confirm the main trend. If the main trend is upward, wait for bullish patterns (hammer, bullish engulfing).

Step 3: Check volume

The pattern looks good, but volume is its strength. High volume on a bullish candle indicates the move is genuine. Low volume could be a trap.

Step 4: Place your stop-loss below the last candle’s low

It’s a numbers game. If you’re wrong, you lose a known amount. If you’re right, you gain more.

Step 5: Set your profit target at the previous high or support

Don’t be greedy. Take profit when the market gives it to you.

Combining Candlestick Charts with Other Tools — Increase Accuracy

Candlestick patterns are powerful, but never trade solely on them. Add other indicators:

Moving Averages show trend direction. 50-day above 200-day? Uptrend. This confirms your patterns.

RSI (Relative Strength Index) shows if the market is overbought (above 70) or oversold (below 30). If you see a bullish pattern and RSI below 30, it aligns. A stronger signal.

MACD shows momentum. When MACD lines diverge, the move accelerates. When they converge, the move loses energy.

Fibonacci Retracements show natural support and resistance levels. When the price breaks out of a pattern, it often retraces to Fibonacci support before continuing.

Combine everything: candlestick pattern + confirmed indicators + volume + main trend = a trade worth taking.

Mistakes That Will Cost You and How to Avoid Them

Mistake 1: Fascination with patterns

You see a beautiful morning star and immediately buy. But RSI is above 70, the main trend is down, volume is weak. It’s not a good trade. Wait for better conditions.

Mistake 2: Ignoring stop-loss

You think you won’t be wrong. Then the market pushes you back harder than expected. Without a stop-loss, you lose more than planned. Always set a stop-loss.

Mistake 3: Poor risk management

You risk 50% of your account on one trade. That’s not investing, that’s gambling. Risk a maximum of 2-3% per trade. Maximize your chances of survival.

Mistake 4: Trading without a plan

You look at the screen without a strategy. Something moves, you buy. Something drops, you sell. That’s emotions, not trading. Write a plan: what conditions are you looking for, where do you enter, where do you set stops, where do you take profits. Trade the plan, not the moves.

Mistake 5: Ignoring market context

A candlestick pattern looks nice, but the whole market is in a frenzy of overvaluation. Bad conditions. Wait for more normal markets.

Practice Makes Perfect — What to Do Now

Candlestick charts are a skill. Skills are learned. Start with historical data. Look at old charts, find patterns that worked and those that didn’t. Understand why.

Then move to simulation. Trade on paper, not real money. Create a plan and follow it. When you get a good feel for it, start with small amounts.

Remember: no indicator is perfect. Even the best patterns fail. But if you combine them well, apply risk management, and trade with a plan — your chances are in your favor.

Candlestick charts are not a magic crystal ball. They are what they are — a tool to read what the market is doing. Learn to read them. The rest will follow.