A candlestick is a type of price chart used in technical analysis for the purpose of forecasting the future price direction of stocks, commodities, forex and cryptocurrencies. Each candlestick is a graphical representation of a price movement for a specific period of time. Four different price points are displayed on each candlestick. They include open, high, low and close.
Candlesticks are one of the oldest forms of technical analysis. According to historical records, candlestick charting can be traced back to Japanese rice merchants during the 18th century. Most financial historians agree that Munehisa Homma was responsible for popularizing candlestick charting.
Candlestick formations are based on a strict set of rules which are universally accepted among all traders and investors. Let’s review a few of the most basic candlestick formations and patterns.
If the opening price is above the closing price, a solid red candlestick is displayed (Chart #1).
If the closing price is above the opening price, a solid green candlestick is displayed (Chart #2).
Bullish Candlestick Patterns
Big White Candle – The market opens near the low and closes near the high (Chart #3).
Doji – The opening and closing price is virtually identical (Chart #4).
Hammer – A candlestick that consists of a small body near the daily high with a long lower tail (Chart #5).
Bearish Candlestick Patterns
Big Red Candle – The market opens near the high and closes near the low (Chart #6).
Inverted Hammer – A red or white candlestick with in an upside down hammer position
Shooting Star – A red or white candlestick with a small body, a long upper shadow combined with little or no upper tail (Chart #8).
Based on my personal trading results, the most reliable candlestick pattern is the inverted hammer, particularly in a bear market. An inverted hammer is formed when the market opens and closes near the low of the day. A perfect example occurred on 15 November 2021, when BTC opened and closed near the same price level. Another example is 20 January. An inverted hammer developed when BTC opened and closed near $41,500. As you can see from the chart, Bitcoin generated a sharp decline on both occasions following the inverted hammer.
The inverted hammer is just one example of a successful candlestick chart formation. During the past five years, my personal trading account has consistently generated profitable results using candlestick charts. Many traders prefer candlestick charts over traditional bar charts because candlesticks provide a rules-based approach. Therefore, disciplined traders have produced much better results with candlestick charts. Most likely, candlestick charts will continue to gain in popularity within the crypto community, as the majority of Bitcoin traders prefer a rules-based method.
Successful Trading Is More Difficult Today Compared To The 1990s
My trading career began in 1989, with stocks and commodities. I added Bitcoin in 2017. Based on my personal experience, it is definitely more difficult to generate consistent profits today versus thirty years ago. Why has successful trading become more challenging during the past several years? Let’s discuss the details.
The main reason why speculative trading has been less profitable is because there are substantially more traders today compared to thirty years ago. Commodity futures trading volume began to rise exponentially following the introduction of electronic trading in 1992. Electronic trading has dramatically increased the demand for speculative trading.
Speculative markets like stocks, commodities and crypto become more efficient as additional traders participate. Consequently, price inefficiencies disappear, which decreases the profit potential. This explains why an increase in the number of market participants actually reduces the level of profitability.
Another reason why speculative trading has become less profitable is because markets rarely move in the same direction for an extended period of time. When I began trading in 1989, stocks and commodities would generate sustainable moves on a regular basis. These days, speculative markets rarely move in the same direction for more than a few days. Markets have a tendency to be very choppy. Therefore, trend-following systems are less profitable.
Although profitable trading has become more difficult during the past several years, it is still possible to generate a consistent rate of return in stocks, commodities and cryptocurrencies. However, it requires a great deal of patience and discipline.