How to read Candlesticks for Binary Options?

Do you want to learn how to read candlesticks for binary options? Candlestick charts are the most popular way of trading in the financial markets. They provide a clear picture of market sentiment and price action, which is why they’re used by traders around the world. There are many different types of candles that can be used to make trades but this article will focus on one specific type – doji candles. These candles indicate indecision between buyers and sellers, which means there may be an opportunity present at that moment in time. If you’d like to know more about how these candles work, then keep reading!

What are candlesticks, and how do they work?

Candlesticks are a type of chart that shows market changes. The price is plotted on the inside and outside of a rectangle. The rectangle represents the opening, closing, and maximum/minimum values for some time. The candlestick chart was created by Japanese rice traders who used to hang a piece of paper from their office window with prices listed for buying or selling rice. The top of the rectangle represented the highest price during that time and the bottom of the rectangle represented the lowest price. The left side was white, or blank, and the right side was black. They used a thin vertical line at the top to indicate where they had bought rice and a thin vertical line at the bottom where they sold it.

Back in 1979, Steve Nison turned this traditional Japanese financial chart into a more simplified version that American traders could understand, the candlestick chart. Today, you see it everywhere in finance. Candlesticks are easy to read, but also have some drawbacks. They work best when plotting an asset with a high trading volume.

How to read and understand candlesticks and their performance

Knowledge of the candlestick chart is more useful than most people realize. If you can just look at one and know what it means, then you’re already better than the average trader.

Price Charts

You’re not seeing the hundreds of thousands of prices for which this asset was traded throughout the year when you look at a chart that’s half the size of your hand. You may see 50 prices if you’re lucky if you view a price graph that is half the size of your hand. You see one dot and say, “Oh, the price was $10 there.” But how do you know if it was high or low? How can you tell if other traders thought this was fair value at that time?

You need to look at what’s called a Price Chart which represents the raw data for the stock in question, and it tells you how many shares of this stock were bought or sold for each price throughout the trading day. It’s called a Price Chart because it shows you all the prices at which your stocks were traded throughout the year and allows you to see how this stock has been trading at various points throughout the year.

You should find a chart that shows you a vertical line representing each day, and a horizontal line showing where the closing price was for this stock throughout the year. If you have 100 years of data, then you would have 100 individual lines going from left to right across your screen. These represent the highest and lowest prices that your stock was traded for each day. This is called a “High-Low-Close” chart.

You may find other forms of price charts, such as candlestick charts, but this is the simplest form to understand. You can see where people were willing to buy or sell this asset at various points throughout the year.

You look at a daily chart and find historical prices for this stock between days 50 to 100. You use the closing price of each day on this chart to make a new line on your candlestick Price Chart by plotting it from left to right across the screen starting with day 1, then day 2, etc…

Missing Data

You can make incorrect judgments when you miss out on a lot of data. Assume that an asset is moving upwards. Assume that an asset was in an upward trend. The price movement has come to a halt. During the previous period, the price increased gradually but then reversed and plummeted rapidly. After the period, it had fallen to roughly the same position as at the beginning.

In a line chart, it would be represented as a single sideways line. It would be impossible to tell apart from a period when nothing occurred, and the market has been sideways. The first and last portions of such a period would appear identical as well. For example, if a stock begins at 50 dollars and falls to 45 dollars before rallying back to its opening price, this is seen as the same. This is significant because the outcomes of both periods are extremely distinct.

Hidden Indicators

Now, in a time when the market rose and then reversed direction, it is rapidly moving down. It’s likely that this trend will continue and that future periods may see even cheaper prices. But how can you tell with your simple line chart? There is no indicator.

  • In a market that rose before reversing, the market is now moving steadily downwards. This trend is expected to continue, and the following cycle will likely see lower prices.
  • There’s no telling what will happen in the future, but the market may have gained new momentum during this time. There’s not much of a reason to abandon your prior forecasts during this period.
  • A correction of about 10% has already happened. Now, at this point, the market is strongly moving upwards. It’s likely that the increase will continue and that future periods will see higher rates as well.

Candlestick Patterns Indicate Additional Data

Candlesticks alleviate the ambiguity issue by displaying all of the prices for a particular time in an easy-to-understand format. A candlestick is made up of a thick body and two thin wicks that reach to the top and bottom of it.

  • The body represents the price range from the opening to the closing price.
  • The wicks represent the highs and lows of each era.
  • When prices are rising, candlesticks are colored differently from when they are falling.

This basic method tells you all there is to know about a period. The wicks indicate the market’s inability to maintain its highs, while the body represents the successful movement of each cycle.

Candlestick pattern

Candlestick charts, like their name, implies, consist of hundreds of candlesticks. Each candlestick aggregates the market changes for a given period.

Typical periods range from 30 seconds to one day (each candlestick aggregates the market movements of an entire day). You may zoom in and out by changing the period.

Candlestick charts are usually composed of thousands, if not hundreds of thousands of data points. Each candlestick represents the price range at a given period. The most popular timeframes are 30 seconds, five minutes, one hour, four hours, and one day. You can also look at longer or shorter periods.

forex candlestick chart

Candlestick charts are very different from the typical line chart. They provide a clear and detailed view of how the market is changing. The information for candlestick charts comes from the real-time data feed of the binary options exchange platform, so prices will always correspond to the current state of the market. On some exchanges, you can find historical candlestick data.

For price display, the candlestick charts use only four colors (green, red, blue, and black). If the market is open at a certain time and closes at another time with different prices, it will be displayed as two candlesticks. For example: If you open your order when the market opens and close it when the market closes, this information will be displayed as two candlesticks in your chart.

For each candlestick, three data points tell you how much time in minutes passed during the session and the open price, close price, and high/low prices of this particular period.

Components of a Candlestick Chart

A candlestick chart may appear complex at first sight, especially if you’re more acquainted with other sorts of charts. The simplicity of this basic design hides a wealth of data.

forex candlestick chart breakdown

The candlestick consists of two distinct components: a broader one and a thinner one. The broader one is called the real body and can be white, green, or red. The wider the real body, the more intense is the market’s movement during the given period.

The thinner component of a candlestick is called its wick. It displays both highs and lows for a specific period so you’ll know when they occurred.

breakdown of a candlestick

The wicks are often green, red, or white depending on the market’s movement. If a candle was up to during a given period, its wick will be green. The opposite applies to those candles that were down during the session.

What are simple candlestick formations?

They are special candlesticks that let you forecast future market changes are called simple candlesticks. Consider our previous example: instead of a line chart, which showed the same sideways for all three movements, candlesticks offer a more comprehensive picture:

Simple indicators

With this basic knowledge, you can now understand what is going on and what will happen next.

You would want to purchase a call option if the price is going up and you would take a put if it’s going down:

Every type of simple formation has its own rules for identifying what market movement will follow after it occurs.

The reliability of candlestick patterns depends on how often they match. The more often a pattern matches, the more reliable it is for predicting the future movement of prices.

To identify candlestick formations that are strong enough to act as reliable indicators in binary options trading you need to remember one simple rule: “the more often a pattern matches.

Other forms of candlesticks include the Gravestone Doji, Tweezer Tops, Tweezer Bottoms, Saucer Bottom, Dark Cloud Cover, and Piercing Line. 

The color of the Body does not matter as much as its other components: the thicker Wick or Real body, how much did prices change during a certain period, and whether they stayed above/below a specific. Candlestick charts are an extremely popular technical analysis method. The candlesticks provide you with information about the volatility of the market in a given timeframe, which is especially helpful when you’re trading shorter timeframes.

What is a hammer candlestick?

A hammer is a price pattern in candlestick charting that occurs when a security trades significantly lower than its opening value, yet rebounds within the period to close near to it. This pattern forms a hammer-shaped candlestick, with the lower shadow having a size that is a minimum size of two times the real body.

The body of the candlestick stands for the variation between the opening and closing prices, whereas the shadow illustrates the high and low prices for that time. The hammer candlestick formation determines what market movement follows after this pattern is formed depending on whether the wick of the candle is longer or shorter than the actual candle’s body. 

If it was White, it would mean that buyers are back in charge and if it had been Black, then sellers took control of the market,

DOJI

A doji candle is formed when both buyers and sellers have equal power over pricing during a given period of time (usually 1-hour). The result is a candle with no real body or wick, just small lines representing where prices opened and closed during that period. Traders look for patterns within these candlesticks so they can predict future price movements based on past trends. For example, if there was only ever one doji candle every month then it would suggest that neither party has enough strength to move prices higher or lower than their current levels – meaning we could see some sideways movement before any significant changes occur again soon after! This information allows us as traders to take advantage of opportunities while minimizing risk because we know what might happen next instead of being completely blindsided by unexpected events! 

Dragonfly Doji

Dragonfly Doji pattern appears during the bearish market when the market opens and closes at the same level.

Tweezer tops & bottoms: 

https://www.elearnmarkets.com/blog/wp-content/uploads/2020/09/778_ELM_Blog-Image_Final-1-1.jpg

This pattern is very common, formed by 2 candles, the second candle wicks are at the same level as the first one. It means that buyers/sellers were trying to break through previous high/low but failed.

Tweezer Candlestick top and bottom

The top of a tweezer candlestick pattern is regarded as a bearish reversal, whereas the bottom of a tweezer candlestick pattern is seen as a bullish reversal. After an uptrend, two candlesticks with nearly or the same high are called Tweezer Top Candles.

Dark Cloud Cover 

Dark Cloud Cover is a bearish reversal candlestick pattern is a very bearish candlestick formation. It appears during a bullish trend when the price closes below the opening level. It means that the whole market has turned against this currency and most likely we will see a strong bearish movement.

Belt-hold line:

This is another important reversal pattern, it’s the opposite of hammer ones. A bullish belt hold is a single-day Japanese candlestick formation that suggests the possibility of reversing the current downtrend. The stock price rises throughout the day, resulting in a long white candlestick with no lower shadow and a short upper shadow.

Divergence is the difference between the price action of a certain timeframe and the movement prediction based on certain indicators.

The most commonly used indicator for determining divergences in candlestick charts is called Moving Average Convergence/Divergence (MACD). That’s why it has such importance in divergence. It is a signal that market sentiment may be changing. The most commonly used indicator for candlestick chart divergence is the MACD indicator.

Candle Colors and Why They Matter

Each candlestick has at least one color but their colors can represent various aspects of the market’s movement during the session.

The green wicks indicate that prices were up for a given period, red indicates that they went down and white means there was no change at all.

The candlestick’s body will display how much did prices change during a given session: if it is narrow, prices moved a little and if it is wide, prices moved a lot.

The color of the real body depends on whether a session closed at a price higher or lower than the opening one: green means the closing price was higher than the opening one and red means it was lower.

This data helps you observe market trends and find key points to open and close orders.

How to identify trending markets using candlesticks

Candlestick charts also help you identify trends in an asset’s price movement. For example, if prices were constantly going up during a given session, there was no fluctuation at all and the last candle closed higher than its opening one, it means that the asset is displaying an upward trend. Vice versa, if prices were constantly going down and there was no fluctuation during the session, it means that you are looking at a downward trend.

How to read candlestick charts of binary options trades

The simplicity of candlestick charts can be very helpful for binary options traders as well. Candlesticks are only one type of chart. Any reputable trader should be able to read them all. To perform technical analysis using candlestick charts, you’ll need to identify trends in market movements and determine when the time is right for opening and closing orders.

If you’ve identified that prices are moving downward or upward in a clear trend, it’s time to think about opening a call/put option: if your analysis is correct and the price will go in the direction you’ve predicted, you’ll make a profit. In case your prediction is incorrect and the price changes its direction, you’ll lose the invested funds.

How candlestick charts are formed for various timeframes:

In the one-hour timeframe, dark green lines indicate that in an hour the market opened higher, turned lower, and closed at a price that was lower than its opening one.

The opposite applies for red candlesticks: the market opened lower, turned higher, and closed at a price that was higher than its opening one.

One-minute charts display green/red lines every five minutes. Some traders prefer to use one-minute charts for short-term trading, however, they may find it difficult to identify a certain trend in a fast-moving market.

If you want to perform technical analysis of higher timeframes (eg. daily or weekly charts), you may use the candlestick’s wicks which indicate highs and lows for specific periods.

The color of the candlestick’s body does not matter as much as its other components: the thicker wick or real body, the more significant is a specific movement during a given timeframe.

The tail of a candlestick displays how much did prices change during a certain period and whether they stayed above/below a specific price level during that period.

Candlestick charts are a useful tool for both experienced and novice traders as they can help you to accurately predict market movement and make the right decisions.

Why how to read candlestick charts are important in binary options trading?

Candlesticks are a popular technical analysis tool for traders, used to identify trends in the market and predict future price movement.

In binary options trading, candlestick charts show you the price activity for a given timeframe and assist you in making the right trading decisions.

When you perform binary options technical analysis using candlestick charts, you need to identify trends in the market and determine when it’s best to open or close a call/put option.

If you have identified that prices are going up or down in a clear trend, it’s time to think about opening a call/put option: if your analysis is correct and the price will go in the direction you’ve predicted, you’ll make a profit. In case your prediction is incorrect and the price changes its direction, you’ll lose the invested funds.

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