How to Spot a Promising Trading Setup Using Candlestick Chart Patterns — Octa Broker Explains

This is particularly evident in crypto, where high volatility is the norm. Technical analysis—an analysis of historical price action and chart patterns—is one of the main methods to predict price direction. Candlestick analysis, a part of technical analysis, allows traders to visualise potential price movements. Octa, a broker with globally recognised licences, shares how candlestick analysis can be used to identify specific patterns that might suggest future price changes.

Understanding Candlestick Charts

Candlestick charts help traders respond quickly to market shifts by providing clear visual signals. Unlike line charts, candlesticks offer more details within a specific time frame, which is essential in the fast-paced crypto market. Common bullish patterns include:

• Hammer. A candle with a small body and long lower wick. It may signal a reversal to the upside when it appears after a downtrend.
• Bullish Engulfing. A two-candle pattern where the second bullish (green) candle fully engulfs the first bearish (red) candle. It often indicates potential upward movement when found at the bottom of a bearish trend.
• Double Bottom. A formation with two similar lows, suggests a reversal and possible price increase.

Bearish patterns include:

• Hanging Man. A small-bodied candle with a long lower wick, appearing at the top of an uptrend, often suggests a downturn.
• Bearish Engulfing. A two-candle pattern where the second bearish (red) candle completely engulfs the first bullish (green) candle.
• Double Top. A structure with two similar highs often warns of a reversal to the downside.

These candlestick patterns allow traders to anticipate potential price reversal points on time, develop a proactive strategy, and confirm their trading decisions in a volatile crypto market.

Besides bullish and bearish patterns, there are so-called neutral candlestick chart patterns like doji. They often signify indecision in the market when the relative strength of buyers and sellers is roughly balanced. Here are some typical doji candlesticks:

• Classic Doji. The opening and closing prices of the candle almost coincide. The candle resembles a thin horizontal line with short shadows at the top and bottom. If the closing price is higher than the opening one, a bullish doji may appear, indicating a potential asset price increase.
• Long-legged Doji. A pattern with long shadows up and (or) down. It signals major indecision, with more potential for a bearish market.
• Riksha Doji. This pattern has a similar shadow length, and the price is in the middle of the trading range.

Key Elements of Graphical Analysis

To forecast price direction and spot valuable trades, traders should also use other tools of graphical analysis. Here are the main ones to consider when analysing candlestick patterns.

Support and Resistance Levels

• Support: a level where prices tend to stop falling and start rising due to increased buying interest.
• Resistance: a level where prices often stall or reverse due to selling pressure.

These levels are identified from historical highs and lows. The more times the price reacts to a level, the stronger it becomes. Notably, a support level can become resistance if the price drops below it, and vice versa.

Traders often look to trade on bounces from these levels or breakouts beyond them. For example, on a historical 4H BTC/USD chart, the price approached the $99,320 resistance level, formed a bullish doji mentioned above, and then decisively broke upward.

Trend

• Uptrend: drawn through higher lows, indicating support in a rising market.
• Downtrend: drawn through lower highs, indicating resistance in a falling market.

Avoid trading against the trend to reduce risk. A trend reversal can be a powerful signal for identifying market turning points.

A Guide to Reading Candlestick Chart Patterns

Candlestick charts offer valuable insight into market sentiment but correctly interpreting them is essential. Here are several practical tips for traders:

Read patterns in context. In uptrends, look for bearish reversal signals (e.g. bearish engulfing). In downtrends, seek bullish signals (e.g. hammer, bullish engulfing). In sideways markets, dojis and long-wick candles suggest uncertainty—it’s often best to wait for a clear signal.

Focus on key levels. Patterns forming near major support or resistance levels (local highs/lows or historical pivots) are more likely to play out successfully.

Analyse candle size and shape. Large candles with solid bodies suggest strong momentum. Small-bodied candles with long wicks (doji) indicate indecision and uncertainty. Weakening impulse and smaller candles often precede reversal patterns like hammers or engulfing formations.

Backtest with historical data. Studying historical price action helps reinforce your understanding of patterns. For instance, the 1D BTC/USD chart shows that the trend turned upward after the Bullish Engulfing pattern was formed at the support of $40,779. Then, the price approached the resistance at $64,933 and after forming a Bearish Engulfing candle stick pattern, the asset failed to continue the uptrend, and its price sharply declined towards the $40,779 support and then down to $35,387.

‘Relying on single candlestick patterns is risky, as they fail to showcase the full picture—yet when analysed in context, they can pinpoint early signals of potentially promising assets. ‘Trading decisions should always be confirmed with additional technical indicators. Combining candlestick analysis with technical tools can increase the accuracy of your forecasts’ — says Kar Yong Ang, financial market analyst at Octa broker

Conclusion

Graphical analysis helps traders identify promising assets by interpreting visual price patterns. However, no approach guarantees accuracy. To minimise risk, use a holistic strategy: study candlestick formations alongside key levels and trends, combine them with indicators and volume data and always consider the fundamental context. Macro events, trading volume, liquidity, market sentiment—all of these factors shape the price trajectory of a cryptocurrency. The more data you evaluate, the higher the chances of making a well-informed decision and avoiding costly mistakes.

Disclaimer: CFD trading involves risk. This content is for educational purposes only and not investment advice. Past performance does not guarantee future results. Trade responsibly.

Octa is an international broker that has been providing online trading services worldwide since 2011. It offers commission-free access to financial markets and various services used by clients from 180 countries who have opened more than 52 million trading accounts. To help its clients reach their investment goals, Octa offers free educational webinars, articles, and analytical tools.

The company is involved in a comprehensive network of charitable and humanitarian initiatives, including the improvement of educational infrastructure and short-notice relief projects supporting local communities.

Since its foundation, Octa has won more than 100 awards, including the ‘Most Reliable Broker Global 2024’ award from Global Forex Awards and the ‘Best Mobile Trading Platform 2024’ award from Global Brand Magazine.