Most binary options traders utilize Japanese candlesticks for taking decisions. Some prefer to use tick charts. However most of the time it’s the multi-year-old candles system that is still being used today (candlesticks were invented in Japan a few centuries ago).
The nearest thing to the genuine price is simply the… price ticker. But The candlesticks give information about the immediate market dynamics which is the materialization of speculators’ attitude.
Candlesticks are one the clues that you should use to make puts or calls when trading binary options. Here are the most important to anticipate reversals or trending markets. But before that, let’s delve into the candlestick anatomy.
A candlestick shows the price at which the asset opened for the chosen period (1 min, 1 hour, 1 day, etc.), at how much it closed, and how high and how low it moved. If the candle is green (or white), it means that the price went up. If it is red (or black), that the price went down. The line above (upper shadow) shows the high, the line below (lower shadow) the low. It is therefore a very visual and concise way to grasp price action, what is the sentiment of the market.
Candlesticks on their own can give precious information in order to predict market moves. But it’s also their sequences that provide priceless clues on where the price is going next. Here are the most basic candles, how to recognize the patterns and how to use them at your advantage when trading smart options.
1. The Doji
The Doji is a candle with a very thin body (and ideally long upper and lower shadows that are almost equal). The doji clearly indicates that the market is not sure about where to go next. If the shadows are long, it indicates that there is a lot of action, but at the end of the period the asset price is almost flat. It is usually the sign of a reversal (when the market starts moving in the opposite direction). A doji is even more predictive of a reversal if it happens near the limits of the Bollinger bands. Doji strategy can be applied for puts or calls, according to the direction of the trend.
The example above shows the daily EURUSD chart. After 2 days of substantial downside action, a doji candle followed. The day after the market went up significantly.
2. The Dragonfly Doji Candle
The Dragonfly Doji candle looks like a T. It has a very long lower shadow and a rather thin body. It can signal the end of a downtrend. It shows that the bears wanted to push the price lower, but that the end of the period they were out powered by the bulls. It is a more potent indicator when it happens near the lower Bollinger band. Fibonacci retracement lines are another useful extra indicator to confirm a potential reversal that will continue for a while.
The dragonfly doji example above shows that the reversal did not happen, probably because the close was way abover the lower Bollinger band.
3. The Gravestone Doji
The gravestone Doji is the complete opposite of the dragonfly doji. Which means that this candlestick has a very long upper shadow and a rather thin body. It says that traders initally wanted to push the price up, but that they failed at the end of the period. It might indicate that the price is poised to continue in a downside fashion, especially when it occurs in the context of high volumes.
4. The Shooting Star
The shooting star pattern is a candlestick that is characterized by a very small body (green) and a very long upper shadow. It usually indicates that the bulls are losing control and that the bears are about to prevail. Which means that the price should start to go down. It should be preceded by a powerful upside candle.
5. The Hammer Candlestick
As the name suggest, this candle looks like a hammer. It must have a red body of limited size, no upper shadow and a lower shadow at least two times longer than the real body. It says that the asset went down during the specified period, but that the bulls managed to minimize losses by erasing a significant part of the losses (compared to the low). You should see up action immediately after the formation of the hammer candlestick to get the confirmation that the price is about to go up. The hammer is another candlestick pattern that is indicative of a potential reversal. You can afterwards use the new trend at your advantage when trading binary options.
The exampe of hammer above shows how a week of downtrend followed by some upside actions in the following days (EURUSD daily chart).
6. The Hanging Man
The hanging man looks exactly like a hammer, but it has a green body. It means that it occurs in the context of a market that is going up. At first bulls took control (which is confirmed by the long lower shadow), but that the end the bulls prevailed (the price closed higher than the previous close). The hanging man can indicate that more and more traders became bearish on the asset. A price reversal might therefore be in the cards. The longer the lower shadow, the most reliable the hanging man is. It is also more accurate when it appears on above average volumes.
7. The Belt Hold (Yorikiri)
The Belt Hold, or Yorikiri in Japanese, can indicate a bullish or bearish reversal. As it is the case with most candlesticks, its reliability is enhanced when it forms itself near the upper or lower Bollinger band. The Belt Hold candle has very big body (a bit like the Marubozu) and no or very small shadows. When the Belt Hold is red and happens when the price is going up, it might signal that the asset has reached a top and a reversal is coming (bearish belt hold). To the contrary, after the price went down the big green belt hold might indicate that the price will go up again. Usually this candle appears in the context of the engulfing pattern, or the dark cloud cover.
Candlestick patterns and smart options: good to know
There are a lot more candle patters that we will inspect in different exercises, however, these are great to keep an eye out for when you exchange binary options. Realizing how to peruse candle value examples will likewise be useful in affirming binary options signals, should you choose to utilize them.
Understand that candle designs have a higher achievement rate on upper time periods, 4 hours and up. Brief candle arrangements probably won’t be dependable.
Candle outlines function admirably without anyone else and in the event that you figure out how to peruse them well, you will comprehend certain market assessments that will improve your trading results.
It is prudent to see candle diagrams with Bollinger Bands (moving Averages) or potentially different markers. Utilizing such a large number of specialized pointers can be very diverting. It’s ideal to concentrate on value activity and afterward affirm it with most extreme 2-3 different markers and volumes.