Steemit Crypto Academy – Season 3 - Week 4 - Post for @reminiscence01

Question 1 - In your own words, explain the psychology behind the formation of the following candlestick patterns

Bullish engulfing Candlestick Pattern

The Bullish engulfing candlestick pattern is basically a type of candle stick pattern and one of the easiest price pattern to identify and understand. A Bullish engulfing Candlestick pattern is simply a candlestick that forms when the red candle which has a small body, is followed by a green candlestick which has a larger body which engulfs the body of the previous candlestick. The Bullish engulfing candlestick pattern is also known as a reversal pattern because it forms at the bottom of the downtrend and shows that the downtrend is coming to an end and is about to reverse to an uptrend.

The psychology behind the bullish engulfing candlestick pattern is that the price of a particular cryptocurrency pair opened on the high on the red candle, the sellers pushed the price all the way down and the price finally closes on the low of the day. The green candle which follows next, opened near the low of the previous red candle, shows that buyers came in and the buying force pushed the price all the way up, that the price engulfs the previous red candlestick.

Doji Candlestick Pattern

The Doji candlestick pattern is simply a candlestick that forms like a plus or cross shape. The doji candlestick occurs when the open and close of the candlestick of a particular cryptocurrency pair are at the same price level. The doji candlestick pattern doesn’t not represent any direction of the market as the opening price and close price are at the same level. The Doji candlestick pattern is also known as an indecision in the market because neither the buyers nor sellers have taken control. However, the Doji candlestick pattern can also represent that the momentum of the existing trend has slowed down before the market continues in its current trend direction or reverses.

The psychology behind the Doji candlestick pattern is that the price of the particular cryptocurrency pair opened and closed on the same level. This means that both the buying pressure and selling pressure in the market were on an equilibrium. Also, when the Doji candlestick appears at the bottom of a current trend either uptrend or downtrend, it can be an indication that the market is about to reverse from the current trend. For instance, if the market is in a downtrend and the Doji candlestick appears at the bottom of the downtrend, it can be an indication of a possible reversal.

The Hammer Candlestick Pattern

The Hammer candlestick pattern is simply a candlestick that forms like a hammer shape. The hammer candlestick that occurs at the bottom of a downtrend can be an indication that the market could be heading for a reversal. The hammer that occurs in an existing uptrend, it indicates the strength of the buyers and that the buyers are still in control of the market. The bullish hammer is the most common and it has a small body with a long wick which indicated that the market rejected lower prices. Aside from the regular bullish hammer, another hammer type is the inverted hammer which is simply the inverted or upside-down version of the bullish hammer.

The psychology behind the hammer candlestick pattern is that the sellers where at some point in control, pushing the price down, however, the buyers came in and reversed the price movement to the upside and closing very close to the high of that candlestick. The buyers eventually took control after overcoming the selling pressure and closed the price very close to the high.

The Morning Star Candlestick Pattern

The morning and evening star candlestick pattern are simply candlestick patterns that forms with three candlesticks. The morning star candlestick pattern forms with three candlesticks that forms at the bottom of a downtrend. The morning star shows that the downward momentum is slowing down before there is a bullish move that indicates there is a possible reversal to an uptrend. The morning star comprises of a Doji or a small body red/green candlestick in-between a large red/bearish candlestick and large green/bullish candlestick.

The psychology behind the morning star candlestick pattern is that on the red or bearish candle where the sellers are in control, the selling pressure pushes the price all the way down and closing near the lows. The next candlestick that follows is a Doji candlestick which shows an indecision in the market and slowdown in the downward momentum, because the buyers and sellers are in equilibrium, causing the opening price and close price are at the same level. The next candlestick that follows is a green or bullish candlestick where the buyers have now taken control, the buying pressure pushes the price all the way up and closing near the highs.

The Evening Star Candlestick Pattern

The evening star candlestick pattern forms with three candlesticks that forms at the top of an uptrend. The evening star shows that the upward momentum is slowing down before there is a bearish move that indicates there is a possible reversal to a downtrend. The evening star pattern comprises of a Doji or a small red/green body candlestick in-between a large green/bullish candlestick and a large red/bearish candlestick.

The psychology behind the evening star candlestick pattern is that on the green or bullish candle where the buyers are in control, the buying pressure pushes the price all the way up and closing near the highs. The next candlestick that follows is a Doji candlestick which shows a slowdown in the upward momentum, because the buyers and sellers are in equilibrium, causing the opening price and close price are at the same level. The next candlestick that follows is a red or bearish candlestick where the sellers have now taken control, the selling pressure pushes the price all the way down and closing near the lows.

Question 2 - Identify these candlestick patterns listed in question one on any cryptocurrency pair chart and explain how price reacted after the formation

Bullish engulfing candlestick pattern

The Bullish engulfing candlestick pattern is also known as a reversal pattern because it forms at the bottom of the downtrend and shows that there is a potential that the downtrend is coming to an end and is about to reverse to an uptrend.

Looking at my screenshot of the BNB/USDT chart, we can see that the bullish engulfing candlestick pattern formed after the downward movement of the market and after the formation of the bullish engulfing candlestick pattern, the market reversed to an uptrend which is a clear example that the bullish engulfing candlestick pattern is a reversal pattern. We can say that the price of a BNB/USDT pair opened on the high on the red/bearish candlestick, the sellers pushed the price all the way down and the price finally closes on the low of the day. The green/bullish candlestick which follows next, opened near the low of the previous red candle, shows that buyers came in and took control of the market, and the buying force pushed the price all the way up into an uptrend.

Doji Candlestick Pattern

The Doji candlestick pattern is also known as an indecision in the market or the buyers and sellers are in equilibrium because neither the buyers nor sellers have taken control. The Doji candlestick pattern can also represent that the momentum of the existing trend has slowed down before the market continues in its current trend direction or reverses.

Looking at my screenshot of the AAVE/USDT chart, we can see that the Doji candlestick pattern formed at the bottom of a downward movement of the market and after the formation of the Doji candlestick pattern, the market reversed to an uptrend which is a clear example that the Doji can indicate that the market can either continue in its current direction or reverse to the opposite direction. We can say that the price of AAVE/USDT pair opened and closed on the same level. Both the buyers and sellers were on an equilibrium. The buying pressure and selling pressure in the market were on the same level. However, the buyers eventually took control of the market and reversed the direction to an uptrend.

The Hammer Candlestick Pattern

The hammer candlestick can also be bullish hammer or inverted hammer candlestick pattern, is also known as the bullish reversal pattern. It is a good indication that the market could be heading for a bullish reversal. When the hammer appears at the bottom of a downtrend, it could indicate that there could be a reversal coming. Also, the hammer forming in an existing uptrend indicates the strength of the buyers and that the buyers are still in control of the market.

Looking at my screenshot of the BTC/USDT chart, we can see the appearance of the hammer having a small body with a long wick which indicated that the market rejected lower prices. The market showed strength of the buyers and continued in its uptrend direction. We can say that after the formation of the hammer in an existing uptrend, it showed that the buyers are still in control and closed the price very close to the highs. The market continued in its uptrend direction.

The Morning Star Candlestick Pattern

The morning star candlestick pattern is a good indication that the market could be heading for a bullish reversal or an uptrend. When the morning star appears on a downward movement, it shows that the downward momentum is slowing down before there is a bullish move that indicates there is a possible reversal to an uptrend and the buyers would eventually take control of the market and drive the price up.

Looking at my screenshot of the AAVE/USDT chart, we can see the appearance of the morning star that is formed with three candlesticks, comprising of a small body red/green candlestick in-between a large red/bearish candlestick and large green/bullish candlestick. We can see that there was selling pressure from the sellers that pushed the price all the way down and closing near the lows. The next candlestick that formed was a bearish candlestick with a small body. The next candlestick that followed was a bullish candlestick with a large body. After the formation of the morning star candlestick pattern, the market went into an uptrend direction. The chart showed that after the formation of the morning star candlestick pattern, the market reversed to an uptrend movement.

The evening star candlestick pattern

The evening star candlestick pattern is also a bearish reversal pattern. It is a good indication that the market could be heading for a bearish reversal or a downtrend. When the evening star appears on an uptrend movement, it shows that the uptrend momentum is slowing down before there is a bearish candlestick move that indicates there is a possible reversal to a downtrend and the sellers would eventually take control of the market and push the price down.

Looking at my screenshot of the BTC/USDT chart, we can see the appearance of the evening star that is formed with three candlesticks, comprising of a small body red/green candlestick in-between a large green/bullish candlestick and large red/bearish candlestick. We can see that there was buying pressure from the buyers that drove the price all the way up and closing near the highs. The next candlestick that formed next was a bearish candlestick with a small body. The next candlestick that followed was a bearish candlestick with a large body. After the formation of the evening star candlestick pattern, the market went into a downtrend direction. The chart showed that after the formation of the evening star candlestick pattern, the market went to a downtrend movement.

Question 3 - Using a demo account, open a trade using any of the Candlestick pattern on any cryptocurrency pair

For this demonstration, I will be making use of the bullish engulfing candlestick pattern on the ADA/USDT price chart. I spotted the bullish engulfing candlestick pattern on the 30mins chart. I placed a buy order for 80 ADA at $1.2110 with a stop loss at $1.2014 below the bullish engulfing candlestick, and take profit at $1.2211. Once my buy order triggers, I will wait for it to hit my take profit level, if the price retraces and goes back down, my stop loss is there as a risk management strategy.

Conclusion

Candlestick patterns is one of the most popular technical analysis tools used in technical analysis. It is considered as one of the most powerful ways to determine what is happening in the market because the candlesticks gives clear indications of price actions in the market and can be used in combination with technical analysis indicators to determine the best entry point and exit point on the chart. When used correctly, candlesticks can be very powerful in helping traders make more profit.

@reminiscence01