Candlestick chart pattern is a technique used by traders to identify the price movement of an underlying asset, and forecast future price movement. Candlestick patterns can be traded both on the currencies and the stock market. They were first discovered in Japan by Munehisa Homma (1724–1803), hence they are known as candlestick patterns or Japanese candlesticks.
Candlestick chart is composed of two main parts- The body and the shadows. The body is the rectangular box that shows the trading range between the opening and closing prices, i.e., the maximum price of the candle is the white and minimum price if the candle is black.
The shadows are lines projecting from the upper and lower edge of the body. Shadows are usually short, but some long candlesticks have no shadows at all.
Strategy fundamentals
Traders employ a variety of signals and patterns to analyze the market and set trades due to the highly visual nature of candlesticks. Some patterns will be referred to as “advanced techniques,” but there are some common ideas that those new to Japanese Candlestick should be aware of.
Some of these are:
The stronger the real body, the greater the pressure. A long green body, for example, indicates more buying pressure than a little green one. A lengthy red body has more selling pressure than a tiny crimson one.
The closing of a candle may be used to determine the group of traders that was strongest at the end of the bar. While not always, it’s probable that the most powerful group after the previous bar will be stronger going into the following bar.
If you have a long lower shadow coupled with only a little upper shadow, it indicates that sellers attempted to drive the price down, but were ultimately outdone by buyers who were able to force the price back up and held their ground at the close.
The presence of a long upper shadow but very little lower shadow indicates that purchasers attempted to push the price higher, but ultimately the sellers were able to force the price back down and hold their ground at closing.
Reading the tails
Many traders overlook the tails, or wicks, of a candle. They record the highs and lows in price over the period, as well as where the price closed about the highs and lows.
On most days, upper and lower shadows are formed on average, and they don’t have much significance. However, on certain days, when the price is trading near support or resistance levels, or along a trend line, or during a news event, a powerful shadow may develop and provide a trading signal of genuine importance.
The most important thing to remember about candle wicks, shadows, and tails is that they are excellent indicators of market support, resistance, and turnaround possibilities. Let’s take a look at two distinct candle signals with long upper or lower shadows to illustrate this idea.
Binary Options candlestick strategy: Tails, Wicks, And Shadows
Figure 1 shows an example of a hammer candle on the USDJPY Daily Chart.
Look for them on candles; they’re crucial. A cluster of several lengthy tails, such as in figure above, indicates a support or resistance zone. Expect a reversal if the support/resistance holds and a hammer or gravestone candle appears near it.
The head of a candle consists of a hammer, which opens and closes near the top of the candle. The lower tail is lengthy. A gravestone opens at the bottom and closes towards the top of the candle, with a long upper tail.
They’re powerful on their own, but when combined with other analyses like support/resistance, stochastic, MACD, trend lines, and others they become a very useful tool in the modern trader’s arsenal. The next thing to look for is the Doji, a candle that combines characteristics of the hammer and tombstone into one strong signal.
Candlestick charts and patterns
These are composed of many candlestick patterns which occur together and reveal potential reversals or continuations in the current market trend and are based on the fact that these patterns have appeared throughout history as reliable reversal signals.
It is important to note before we go any further that not all of these candlestick patterns indicate a change in direction for prices. In some cases, they can be used to confirm the current trend if they appear in the same direction as the trend.
The best candlestick patterns for binary options are composed of certain lines which need to be combined to work properly. The first line is created by drawing two or more trendlines that act as support or resistance for price action. The second line is created by connecting at least two or more candlestick patterns that indicate potential reversals.
The first line, which is generally composed of two trendlines, must form a chart pattern to be effective because it will act as support or resistance for price action depending on whether it appears above or below the current market price.
The same applies to the second line which is generally composed of candlestick patterns forming potential reversal signals. However, this line should not be connected until these candlesticks appear first because it will act as support or resistance depending on whether they are above or below the current market price.
Once these two lines combine, we know that price is likely to either reverse or continue in the same direction depending on whether these lines are broken.
The key to reading a candlestick chart pattern is to know what the different parts represent. Once this is understood, you will be able to efficiently use the patterns in your trading strategies. Identifying candlestick patterns is one of the simplest and most effective ways an investor can look for quick profits (or losses).
And, with the help of “candlestick patterns” that are part of the candlestick chart you can increase your chances for a successful trade.
Here are some of the most popular Candlestick patterns for Binary Options:
Doji
A Doji is a candle with virtually no shadow in it (or only a very short shadow). It is formed when the price of a security at the end of the day (when the session closes) has not changed much from opening. This means that no strong forces are pushing up or down during this time, so it is likely to continue moving in the same direction as when these forces were last seen.
Hammer
This looks like a hammer formation with the difference that the body has to be at least two times larger than the real body of the previous session. A hammer is a candlestick formation that represents the reversal of a bearish trend and signals support. The body is formed by a wide bar with small shadows at the top and bottom. Then, there is one large shadow usually located at the bottom of the candlestick indicating that the price opened higher than it closed during this period but then closed at a price lower than where it opened.
This suggests that the market was not able to sustain its current level and soon went down, pushing the price below the opening price of the day.
Figure 1 shows an example of a hammer candle on the USDJPY Daily Chart.
It also means that buyers came into the market and were able to push the price significantly higher than where it opened for this session, but sellers fought back and pushed the price slightly lower before the period closed. The confirmation of a hammer is when this candlestick pattern is followed by a gravestone Doji or spinning top which appears within three days from following the candlestick’s closing.
If the confirmation is not provided within three days of the second candlestick’s closing, it means that there is no trend reversal and therefore this pattern becomes unreliable.
Engulfing
The engulfing pattern looks like a more complicated version of a Doji because it has a much longer body on both sides of the session, with small shadows at the top and bottom of the candlestick. This pattern typically occurs during an uptrend when the price opens within the previous candle’s body, but closes significantly higher than the opening price, showing that buyers are in control for this period.
The confirmation is when this candlestick pattern is followed by a candlestick with a short body that appears within three days from following the candlestick’s closing.
If the confirmation is not provided within three days of the second candlestick’s closing, it means that there is no trend reversal and therefore this pattern becomes unreliable.
Shooting Star
A shooting star occurs when the price opens at a high level during a bullish trend and then closes significantly lower than the opening price. This suggests that sellers took control of the session and drove prices down to a level where they were able to push it up again slightly before closing. The lower part of this candlestick represents resistance which was not surpassed during the period.
There is no confirmation following a shooting star, but if it is part of a bearish reversal pattern then it can be worth taking note of.
Hammer and Hanging Man
A hammer is a candlestick formation that represents the reversal of a bearish trend and signals support. The body is formed by a wide bar with small shadows at the top and bottom. Then, there is one large shadow usually located at the bottom of the candlestick indicating that the price opened higher than it closed during this period but then closed at a price lower than where it opened. This suggests that the market was not able to sustain its current level and soon went down, pushing the price below the opening price of the day.
The confirmation is when this candlestick pattern is followed by a candlestick with a short body that appears within three days from following the candlestick’s closing.
If the confirmation is not provided within three days of the second candlestick’s closing, it means that there is no trend reversal and therefore this pattern becomes unreliable.
The Hanging Man formation looks like a hammer, but with one or more shadows located on the upper part of the candlestick. This means that the price opened either at the same level as it closed during its previous session or even slightly higher, and then closed significantly lower than where it opened.
There is no confirmation following a hanging man, but if it is part of a bullish reversal pattern then it can be worth taking note of.
Gravestone Doji
This is a special kind of Doji that is formed when the market closes at or near the high of the period and has no shadow at all on top of it. This means that sellers controlled the price during this session, but buyers were able to push the price back up before the period closed.
There is no confirmation following a Gravestone Doji, but if it is part of a bearish reversal pattern then it can be worth taking note of.
Below is an example of a gravestone candle on the EURUSD hourly chart.
Bullish Engulfing
This candlestick pattern looks like an engulfing pattern with the difference that the second candlestick has to open within the body of the previous period following its closing. This suggests that buyers came into the market and were able to push the price up significantly higher than where it opened for this session.
The confirmation is when this candlestick pattern is followed by a candlestick with a short body that appears within three days from following the candlestick’s closing.
If the confirmation is not provided within three days of the second candlestick’s closing, it means that there is no trend reversal and therefore this pattern becomes unreliable.
Morning Star
This is a bullish formation where we see a long bearish session followed by a period during which the price opens lower than it closed during the previous session and then moves significantly higher, and closes near the high of the session. This means that buyers were able to fight off any selling pressure and push prices significantly higher by the end of this period.
The confirmation is when this candlestick pattern is followed by a candlestick with a short body that appears within three days from following the candlestick’s closing.
If the confirmation is not provided within three days of the second candlestick’s closing, it means that there is no trend reversal and therefore this pattern becomes unreliable.
Evening Star
This is a bearish formation where we see a long bullish session followed by a period during which the price opens higher than it closed during the previous session and then moves significantly lower, and closes near the low of the session. This means that sellers were able to push the price down by the end of this period.
The confirmation is when this candlestick pattern is followed by a candlestick with a short body that appears within three days from following the candlestick’s closing.
If the confirmation is not provided within three days of the second candlestick’s closing, it means that there is no trend reversal and therefore this pattern becomes unreliable.
Breakout Trading
This pattern is a more advanced version of a bullish or a bearish engulfing candlestick pattern, and it suggests that the trend which was dominant during the period before this pattern formed will reverse. This is because after the price closes on the second session at least 25% lower than where it closed during the first session, buyers come into the market and push the price back up. This means that the downtrend is over and there might be a reversal to the upside, but during this reversal, sellers will try to return prices down by pushing them slightly lower before closing the session.
Trendlines
These are flat lines drawn based on the highs and lows of consecutive candlesticks. If the price is above a trendline, it means that this trendline is going to be used as resistance during a potential reversal which will be revealed by a breakout from below or breakdown from above. The opposite applies for a downtrend where if the price is below a trendline, it means that this trendline is going to be used as support during a potential reversal which will be revealed by a breakout above or breakdown below.
This is because these lines are drawn based on the highs and lows of consecutive candlesticks, so if price manages to break above one of them it means that there is more supply than demand and therefore there is more room for prices to decrease. The opposite applies if prices break below one of these lines.
The main problem with trendlines is that they are not very precise on their own, but when combined with other indicators or candlestick patterns, they can provide some valuable information.
This is because the length of the shadows indicates whether there is more supply or demand at this point, which means that if the shadow is long it means that the current price is coming from a place where demand exceeds supply. The opposite applies when the shadow is short.
To make things even more precise, when combined with one of the trendlines mentioned before, they can help us determine whether there is more room for prices to decrease if the candlestick’s shadow touches the downtrend line, or whether there is more room for prices to increase if this same candlestick’s shadow touches the uptrend line.
The second main problem with trendlines on their own is that they are not precise enough to use on their own. This is because they don’t provide us with any specific information about the reasons why prices are moving in a certain direction, which means that all we know is that there is more supply or demand at these levels without knowing anything else.
Doji’s and Spinning Tops
These two candlestick patterns have the same function, which is to reveal potential reversals in the current market trend, and it does this by showing that there might be more room for prices to move in either an upward or a downward movement.
The Doji represents indecision in the market where buyers and sellers are in equilibrium and price is not able to reach new highs or lows. This means that this indecision can be used as an indicator that there might be room for prices to move upwards or downwards, depending on which direction the session closed in.
The spinning top represents indecision similar to the doji, except it is more advanced because it shows that buyers and sellers are in equilibrium but the price can reach new highs or lows. This means that this indecision can be used as an indicator that there might be room for prices to move upwards or downwards, depending on which direction the session closed in.
The main problem with both of these candlesticks is their short shadows which don’t provide enough information by themselves.
Fake Breakouts
These are just a variation of the breakout strategy which is used by traders to determine whether or not the price has broken an important barrier or not.
The basic premise behind this strategy is that you will only be trading following a breakout from a chart pattern, and this works because these patterns have been previously established as reliable reversal signals.
For this strategy to be effective, your chart patterns must have a reliable reaction after breaking out from them. Make sure you know what you are doing before trading the breakouts because they can lead to false signals if not used properly.
The best candlestick patterns for binary options trading include both reversal and continuation signs which means that you should be trading following these signals. The tricky part about this is that you cannot trade both of these types simultaneously because they will cancel each other out and the result will be a false signal.
This strategy works best with continuation candlestick patterns and can let you trade in the direction of the current trend. However, it only works if the candlestick patterns which you are following appear within a bearish or bullish trend.
For this strategy to work properly, the chart pattern that is broken must have a reliable reaction post-breakout and it must not be too close to your current entry point.
Candlesticks with long shadows
These are composed of at least two small candlesticks which appear consecutively with their shadows providing resistance to the current trend.
If you are using this strategy for trading binary options, make sure that your chart patterns have a clear reversal sign to work properly. Also, it is important to remember that these signals will only provide reliable entry points if they appear during bearish or bullish trends.
It is usually not recommended to use this strategy with the current trend because it will only provide false signals and result in losses for you.
Doji candlesticks: These are composed of small candles which have shadows that do not reach their body or wick. The Dojis must appear consecutively, which means that you should be using a 5-minute chart to ensure that this happens.
This strategy is simple, and it works by providing reliable entry points following the consecutive Dojis. This means that you should only trade in the direction of these patterns if their shadows touch each other as well as the previous candlestick’s body.
The best time to use this strategy is during a strong trend because it will help you identify reliable entry points following the Dojis, which may result in continuous movements of the same direction.
For this to work best, make sure that your chart patterns have been previously established as reliable reversal signals and that they appear during a bearish or bullish market.
The Doji strategy for Binary Options
If you aren’t using Dojis, you should be. Candlesticks are by far the most effective way to plot binary options on a chart, and dojis are among the most popular and simple to identify of the numerous candlestick signals derived from candlestick charting.
There are several different varieties of dojis to be aware of, yet they all have several things in common. To begin with, they’re candles that lack a discernible body; that is, the open and closing prices of that session’s trading are nearly identical or very close together. Dojis also frequently feature big shadows. These factors, when taken together, provide a great deal of insight into the market and can show times of balance as well as extremes. In terms of predicting market reversals, they are very accurate if you read them correctly.
Doji candles, like all signals, can appear at any time for a variety of reasons. All they indicate is that the current traders are in balance; if buyers and sellers are in equilibrium during a session, prices will remain stable.
The first thing to consider is how big the Doji is. If it’s tiny, with short upper and lower shadows, it might just be a spinning top candle, suggesting an aimless market. But if it’s huge, with long upper and lower shadows, the Doji signals strength.
Doji is also useful regarding trendlines. If a Doji candle appears right on one of your tested support or resistance lines it might indicate that the current price range is about to break out of that pattern – for better or worse.
Finally, when a Doji appears in an uptrend it signals that the market is about to reverse direction. It’s that simple!
Conclusion: The best Candlestick Patterns and strategy for Binary Options
Candlestick charts are a visual aid that was designed to help traders better understand market changes and identify opportunities. There are many candlestick patterns, dojis being one of the most popular. But there is no right or wrong when it comes to identifying candle signals. There are some general patterns and strategies for binary options, but ultimately you must rely on your analysis to make a profitable trade.
In conclusion, candlestick charts are a useful tool that can give you an easier time when it comes to understanding market changes and identifying opportunities within those changes. There are many patterns in a Candlestick chart but the Doji is one of the most popular and simplest to identify. There are some general strategies but it is best to rely on your analysis as you will be the one making a trade decision.
Thank you for reading this article, I hope you enjoyed it!
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