Are Candlestick Patterns Reliable?

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Candlesticks are some of the most important technical indicators in the financial industry. You can observe hundreds of forex and cryptocurrency traders using them for better trading results. So, let's dig deeper into this subject and see if they are truly reliable or not.

Candle patterns are some of the earliest used chart patterns that have been used for hundreds of years. Here are some of the most common:

1. Bullish Engulfing Pattern

Understanding candlestick patterns and how they relate to cryptocurrencies can help you better predict the movement of prices in both directions. One of the most reliable patterns is the bullish engulfing pattern. This occurs when a previous bearish candle, or red candle, is engulfed by a bullish candle, which is a green candle. This typically occurs at the end of a downtrend and indicates that a reversal is about to happen. You can take this opportunity to buy long using a call option.

2. Morning Star

The morning star signals the possibility of a beginning reversal in the price of an asset. The candlestick pattern forms at the end of a downtrend and comprises three candles, with a large bearish candle, followed by a small bullish one, and then capped off with a large bullish candle that closes above both the first and second candles.

It shows up in every timeframe and can be used as part of an overall trend-following trading strategy. For example, if you wanted to go long on Bitcoin when it is trending upwards, you could look for signs that suggest it is about to bottom out. Conversely, if you see a morning star appear on your chart, then this would indicate that it may be worth opening a long position because there is a high probability that Bitcoin will start rising again soon.

If traders look to trade against trends, they can use this information. If they notice that an asset has formed multiple morning stars over several days or weeks, then they might assume that it is time for the market to reverse its direction and begin climbing back up again.

3. Evening Star

The evening star is a bearish reversal pattern that has three candles. It is formed when a long white candlestick is immediately followed by a small-bodied candle (either red or green) and then another long red candle. The first candle in the pattern gaps up from the previous day's close, and the last two candles are similar in size.

It is a strong sign of weakness after an uptrend and suggests that the bulls lose control of their position. It can also signal that buyers are starting to take profits, as the pattern is often found at the top of an uptrend, signaling a potential reversal.

4. Bullish Harami Cross

Bullish Harami crosses are one of the most commonly seen candle patterns, and they show up in many different markets. They occur when there is a big sell-off and then the market rebounds, but this rebound isn't enough to push prices above the previous day's opening price.

When this happens, investors will often start buying up shares because there's a good chance that prices will continue going up from here. If you see this pattern on your charts, it could mean that there's an opportunity for you to make money by buying low now and selling high later.

5. Three White Soldiers

The Three White Soldiers (3WS) is a bullish reversal pattern you can find in most cryptocurrency markets. This pattern consists of three long, bullish candlesticks with small wicks and closes near their highs. The closing prices are also above the opening prices, and these candles signify an increase in bullish momentum.

The 3WS pattern starts with a bearish candlestick that can occur within a downtrend or after a pullback in an uptrend. The first white candle in the 3WS pattern begins to confirm that the market is reversing and the bears are losing control of price action. The second white candle in the 3WS pattern confirms that the bulls are gaining control of price action, and the third white candle solidifies this control as it confirms an increase in buying pressure pushing price action higher.

It indicates that there has been a previous trend, either bullish or bearish, which has reversed direction, which is why it is considered a reversal candlestick pattern. It can indicate that the market has changed from bearish to bullish.

6. Bearish Harami Cross

This is a reversal pattern composed of two candlesticks. This pattern consists of a large white body followed by a smaller black body that gaps above the white body. The bearish Harami cross is considered a reliable signal, with an 80% success rate. However, this signal requires confirmation from another signal or indicator.

7. Hanging Man

The Hanging Man candle pattern is a price action signal that appears at the end of an uptrend in a cryptocurrency market. It contains one candle, and it is considered a bearish reversal pattern. It occurs when there is an increase in supply as the day opens. This causes the opening price level to be higher than the closing price level, which creates the long lower wick of the candle.

The reliability of this pattern depends on which part of the chart you are looking at. The longer-term trend should be upwards for this pattern to be considered reliable. A reliable Hanging Man pattern typically has a lower wick at least two times bigger than the candle's real body. Anything less than this may not be considered reliable.

Are candlestick patterns reliable in cryptocurrency? Unfortunately, there is no simple answer to this question. Candle patterns have many limitations, and they can't predict the future with 100% accuracy. However, we can certainly say that candlesticks are a useful addition to your crypto trading arsenal.

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