A Comprehensive Guide to Reading Candlestick Charts for Crypto Trading Success



Any retail trader with at least some experience in trading is accustomed to seeing Bitcoin candlestick charts. However, many people do not fully understand how candles work and why so many experienced investors don’t even bother with indicators. While you cannot build a good crypto trading bot or any other automation system without some tinkering, manual trading without understanding candles will be suboptimal.

Introduction: What are Candlestick Charts and How to Read Them?

While many variations of crypto trading charts exist, the vast majority of traders prefer using candlesticks since they provide the most full and concise information about the price action at any given moment. The anatomy of a candlestick is quite simple:

  • The upper shadow formed by the highest price reached by an asset.
  • The body formed by closing and opening prices for the selected period.
  • The bottom shadow formed by the lowest price reached by an asset.

These three components form a very simple yet highly recognizable form that immediately provides crucially valuable information to retail traders. Trading with candlesticks is a centuries-old approach to earn money by carefully analyzing what is happening in the market at any given time!

One of the oldest iterations of this price action tracking method is the one used by Japanese rice farmers and traders in the 18th century. The initial idea was formulated and later implemented on several Japanese farmers markets by Munehisa Honma who was also nicknamed the God of Markets by his contemporaries.

Rice price fluctuations were quite violent depending on various events during the harvest season and the geopolitical situation. Honma wanted a way to quickly identify the situation in the market and price dynamics without reading through spreadsheets and market reports. Candlestick was a genius invention that persevered through centuries without changing that much.

Today, thousands of prolific retail traders prefer trading with candle charts over lines, bars, and other visualization methods. The modern candlestick chart became quite popular during the Forex era when millions of people who wanted to trade on the international currency exchange learned about price action and technical analysis using simplified financial theory taught by people who specialized in using candles.

The approach proved to be extremely efficient at communicating the relevant information quickly. As the speed of trading became instant thanks to the expansion of the world wide web, the ability to assess a situation and make a decision promptly took the center stage for many experts and financiers. A contemporary investor uses a candlestick chart for crypto, stocks, fiat, commodities, and a variety of other asset classes.

In this article, you will learn how to read candlesticks for beginners and how to apply the knowledge to your personal investment strategy!

A Step-by-Step Guide on Interpreting the Signals of a Candlestick Chart

The first question that we must answer is “what are candlesticks in trading?” A candle represents price action change within a trading period selected by a user. In some cases, the period is too short to provide enough data to form a candle. Depending on the terminal that you are using, you will see either a long shadow (the highest and the lowest prices) or a body (the opening and closing prices).

A candle, by itself, does not provide a whole lot of information even to highly trained technical analysts, but the dynamic of the price action observed on a chart plotted on a horizontal line representing time frames can be extremely insightful. Some people believe that candlestick chart analysis can be done without looking at the context and still provide useful results.

So, how to read a candle graph? Here are steps that you need to take to extract information from an isolated candlestick:

1.   Look at the dynamic. The first thing that you must pay attention to is whether the candle is solid or hollow. Most retail traders prefer using colored candles, but hollow/full can be quite informative too. When you see a hollow candle, it means that the closing price was lower than the opening. When you see a solid candle, the closing price was higher than the opening. This short term dynamic can be quite useful and provides additional context to your next steps.

2.   Take a close look at the body of a candle that, in essence, represents the spread of closing and opening prices showing you the general mood of the market and its participants. Longer bodies usually say that bulls and bears are fighting and the spread of prices increases. Shorter bodies indicate that there is either not enough demand at the moment or price equilibrium took place during the time frame.

3.   Shadows allow you to make adjustments to the overall conclusion of what you see in the body. Many crypto trading strategies with candles often utilize the approach of searching for large discrepancies between highest or lowest prices and the body. Long shadows often indicate real volatility and may point at trends that are forming at the moment. For example, a large difference between the body and the upper shadow often comes before a significant bull push.

4.   Focus on understanding the trend. The color of the candle will show you what is happening to the price action dynamic right now. What do red and green candlesticks mean? When you see the green color, it means that the closing price of the current candle is higher than the closing price of the previous one. The opposite is true for red candles.

Understanding how to read crypto candlestick charts is very important for any trader who wants to engage with the cryptocurrency market. After some training, you will do these four steps automatically without ever paying attention to the whole thought process. It will dramatically increase your reaction time and the quality of decision-making. In a market that operates around the clock and never stops, this skill is more than just useful.

Now, when you know how to interpret a candlestick chart, let us talk about various strategies that contemporary retail traders employ to optimize profitability. We want to start with acknowledging the fact that technical indicators are hugely important and can be used to a great success, especially when automation is involved, but learning candlesticks for manual trading is also a good idea just because it gives you more context for big decisions.

Multiple crypto trading strategies with candles became quite popular among crypto enthusiast. You should not use them in isolation without ever testing the validity of each signal by using various confirmation tools. However, these strategies can be quite useful.

Types of Bullish & Bearish Candles & Strategies for Trading Each

As mentioned previously, you can determine the current dynamic using nothing but candles themselves. This information is limited and does not have enough value to be the basis for any meaningful analysis. Nevertheless you may use simple tricks to identify good moments to enter the market or confirm other predictions made by technical indicators.

Some day traders and scalpers rely solely on candles which may be a good idea since you need to place multiple orders per day and have to make decisions based on your intuition quite often. Using candlestick analysis can be a viable strategy.

Let’s take a look at some scenarios that may grab your attention if you plan to trade on short and ultra-short time frames like M5 or M30. The same logic can be applied to other time frames, but it feels natural to use candle analysis for in-the-moment decisions rather than for complex analytical work. When you want to open a long-term market position, it is better to use a more sophisticated trading system.

  • One of the simplest ways to use candles is to look at bullish patterns in candlesticks when you view them as full/hollow. A solid candle means that the current period closed with a price higher than it opened. Very often, the market will correct itself in a process we call price retracement. It means that any strong deviation from the median will be corrected in the short term. When you see a solid candle with a long upper shadow, it may indicate that the next period will correct the price at least a little.
  • You can also use bearish patterns in candlesticks. Note that we are not talking about specific shapes that form on the chart or anything like that. Instead, we are focusing on candles themselves. Noticing bearish patterns is easier when using color mode. A red candle indicates that the closing price of the current period was lower than the previous suggesting that the market is moving down. Since colors signify the change from one candle to another, it is a better representation of the current dynamic in the market.
  • Reading candle sticks can be also informative if you learn how to read candle wicks or shadows. These can be extremely useful when trying to understand how the retail traders react to changes in the order book. Long shadows suggest strong deviations from the mean value of the price which may lead to corrections. A series of longer upper shadows with shortening bottom shadows may indicate that a bullish trend is forming right now.

While comparing bearish vs. bullish candles when trying to use various types of candles for trading purposes can yield good results, often these results are produced by your intuition and other technical indicators. Even if you learn how to read candlesticks for crypto, you will still notice that the amount of false positives is quite high. It strongly depends on your ability to discern good signals from questionable ones.

Common Technical Indicators and How They Help With Crypto Trading

While understanding the purpose of parts of a candlestick is a great skill to pick up for any investor, you need to look at the situation through the lens of context. The dynamic and the character of change may provide useful insights and inform your future investment decisions. Identifying bullish patterns in crypto can be quite challenging when you don’t use the full spectrum of techniques and indicators.

A wide range of common technical indicators in crypto trading can be used to a great success. In essence, many indicators do the same thing as an analyst trying to read the market by tracking how price action changes over time. These reads can be made by looking at different candlesticks.

Let’s take an example. What do the red bars at the bottom signify? When you see a series of red candles gathering at the bottom of the chart, it means that the bear trend is getting stronger with more and more orders executed at prices lower than during previous frames. You could gather this info by looking at the last red candle, but seeing the change in motion generates a much better visualization.

If you understand how to read a candlestick chart in crypto, you have a solid foundation to build on. Adding technical indicators to your strategy will be the next step toward improving your investment game. Which indicators should you try using?

  • Relative Strength Index (RSI Indicator) is a powerful tool used by thousands of retail traders and analysts who want to see the power of the current trend and identify moments when the market is ready for a reversal. In most cases, prices go up and down. Often, you will notice that prices correct themselves returning to a larger median value. RSI helps analysts to see when assets are overbought or oversold to help you find moments when the market is ready to go in the opposite direction.
  • Moving Average indicator for cryptocurrency is like butter for your bread. You can do without it, but it greatly improves everything. Moving averages are lines showing gradual changes of prices by averaging closing or opening prices (you can choose various sources of data) over a chosen number of frames. When overlaid on top of a Bitcoin candle chart, it creates a much better picture of the situation and the intensity of changes in the market.
  • Combining three MAs gives you the 3MA indicator which can be deployed as a ready-to-go tool on platforms like TradingView, but can also be constructed and fine-tuned manually by simply deploying three separate moving averages with different number of frames. Experienced traders play with numbers a lot, but usually arrive at a very simple system: one MA has a very short period (3 — 5 frames), one — a medium one (5 — 9), and the last one has a long period (9 — 15). When these lines diverge, it means that the trend is getting stronger.
  • MACD is another hugely popular technical indicator which a simplified and improved view of the previous system with multiple moving averages. MACD allows users to clearly see when trends fortify and weaken. Using MACD as a confirmation indicator is a good idea for many retail traders who use sophisticated trading systems with multiple ways of signal generation.

You can also use a wide range of other types of indicators like Stochastic, Hash Ribbons, Ichimoku Cloud, and more. However, RSI and MACD are considered staples. Using them on top of conducting a thorough analysis of crypto candlestick patterns is a good idea when you are trying to improve your trading game.

Why building a good technical analysis strategy is important

When you rely on analyzing candlestick patterns in crypto, you spend too much time on identifying good moments. While this approach can work for markets where speed does not matter that much, the crypto market is unforgiving and fast-paced.

Yes, whales and big-time investors don’t have to think about speed too much as they often open big market positions and hold them for a long time. Small deviations and price retracements do not bother them. However, over 80% of all retail traders operate much smaller portfolios and often engage in day trading.

It means that people who use advanced trading tools like automation or copy trading crypto often come out on top and make money consistently while people who do everything manually struggle to achieve reliability. You can use any collection of technical indicators to build a fully automated trading system using the power of the TradingView platform and services of automation vendors like WunderTrading.

It is hugely important to learn how to read a candlestick chart for crypto, but it is even more important to use the full spectrum of analytical and trading tools available to contemporary retail traders working in the cryptocurrency industry. Then, you strategy won’t be reduced to seeing a “big green candle” and buying.

Time-tested automated trading systems

Understanding the depth of information you can extract from viewing a Bitcoin price candlestick is important for many strategies. However, using this approach to improve how your bots perform is an even greater idea which works exclusively in the crypto market. Using your analytical skills to predict the next trend will help you find the right moment to activate some of your bots.

Which automated trading systems should you use?

  • DCA buying is the main approach adopted by experienced BTC enthusiasts. The abbreviation stands for Distributed Cost Average which is a time-tested system of acquiring assets at a lower price by splitting your order into multiple market positions during a downtrend. This ATS can run in the background and slowly buy assets to increase the size of your portfolio.
  • GRID bots are excellent for people who are looking for ways to build a source of passive income. You don’t need to learn how cryptocurrency candlestick charts work to make this system work, but it is a good idea to use your technical analysis skills to search for good moments to launch the GRID system. It is a bot that follows the DCA method, but also places take-profits and stop-losses strategically for each individual orders forming a net or grid of orders on the price chart.
  • Arbitrage is an excellent method of making money with a high degree of certainty. While opportunities for arbitrage do not appear frequently, you can use bots to make them buy low and sell high automatically. Arbitrage can be done using different assets on the same platform (triangular arbitrage), the same asset on different platforms (intermarket arbitrage), or even on groups of correlated assets (statistical arbitrage).

Using automation is a great way to create a balanced portfolio with different tools providing various levels of expected profitability and risk. The use of automation is intrinsically connected to technical analysis since you need a good system to generate signals for your bots. However, it also means that you must understand technical analysis on a deep level which means excellently reading candle sticks!

While building your portfolio and including different types of asset types and financial products in it, you need to continuously monitor the situation in the market. The easiest way to do it is to have multiple price charts open at all times and looking at candles to analyze the price dynamic. Only after mastering the skill of reading candlesticks in crypto, you can start focusing on other tasks.

The thought process must be instant and never take more than just a couple of glances to provide you with enough context to make an informed investment decision or verify a signal from your trading system. While it may seem unachievable for novices, it just requires some time and dedication to reach this level of awareness.

The main takeaway

The art of reading candlestick charts is something that must be learned and perfected by all retail traders and investors who want to focus on dealing with assets directly. This centuries-old method of monitoring prices is quite useful and provides valuable insights to all participants of the market. If you want to make informed decisions and optimize your investment game, learn how to read candlesticks and use technical indicators!


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