7 Candlestick Formations Every Binary Options Trader Must Know
Most binary option traders use Japanese candlestick charts for technical analysis. Some choose to trade using tick charts but in most cases it’s the 300 year-old candlestick chart system that is still in use today. The closes thing to the actual price is the price data itself and the candlestick chart represents current price data and its direct supply and demand dynamics which translates into investors’ mind-set. The candlestick formations illustrated below are especially helpful in trading binary options because they signal an upcoming correction or a change of trend.
1. The Doji
The length of a Doji may very but a perfect one would be with the same opening and closing price, so visually as thin as a thin line. If a Doji appears in a sideways market it is insignificant but if it appears alone and at the peak of a trend, a watchful binary options trader should take notice and prepare for a sudden possible reversal. If you’re using Bollinger Bands and the price action is touching or beyond the bands the presence of a Doji may signal a quick correction or a trend change. The Doji can appear in the bullish and bearish markets. The picture illustrates a Doji that could also be seen as a Spinning Top, but both candles signify market indecision.
2. The Dragonfly Doji
The appearance of a Dragonfly Doji candle at the end of a downtrend is very bullish. It basically shows that the sellers were able to drive the price lower but were unable to sustain the downward price movement because the price closed at the same amount it opened. This may indicate an upcoming bullish movement and quite possibly a strong upward trend. The signal marked by a Dragonfly Doij can be much stronger when it touches support resistance lines or Fibonacci retracement lines.
3. The Gravestone Doji
If the upper shadow is very long it means the sentiment is bearish. What happens during the defined time of the candle is prices open and trade high and then return to the opening price. This type of movement shows that investors rallied but failed to reach a higher price. This shows a bearish sentiment and if this candle formation is seen touching resistance lines, or Bollinger bands or Fibonacci levels than it may signal an upcoming reversal.
4. The Hammer
This pattern has a small real body and a long lower shadow which must be at least twice the length of the body. Hammers appear in the downtrend market and they derive their name from trying to ‘hammer out the bottom’ of the trend. A Hammer shows that buyers, despite the bearish sentiment, were able to push the prices higher than the opening price. This failure of the sellers reduces the bearish sentiment and may signal a trend reversal.
5. The Hanging Man
The Hanging Man is essentially The Hammer but it appears at the top of a trend or in an uptrend. In order for the Hanging Man to form the price action must trade much lower than the opening price and then rally to close near the high. This forms long lower shadow and may signal that the market will begin a selloff and a possible reversal will start soon. The Hanging Man with a black or red (depending on your candlestick configurations) real body is more bearish than one with a full or green body.
6. The Belt Hold – Bullish & Bearish
A Belt Hold consists of two real bodies of opposite colour. It forms when the market is trending and a significant gap occurs in the direction of the trend on the open but the trend reverses and the candle goes into the opposite direction, Bullish Belt Hold or Bearish Belt Hold, sometimes engulfing the previous candle and changing the trend. The Belt Hold candle formation signifies a change of investor’s mind set and is a sign of a possible reversal and trend change.
7. The Harami Patterns
The Harami pattern can be bullish or bearish and is similar to the Belt Hold. It also consists of two candles with real bodies of opposite color but the open price of the second candle is within the close price of the previous candle. The second candle, although it closes in the opposite direction it does not engulf the previous candle entirely as in The Belt Hold. A lack of upper shadow (in downward trend) or lower shadow (in upward trend) of the second candle indicates a stronger trend.
The are many more candlestick patters that we will examine in other lessons but these are good to watch out for when you trade binary options. It’s important to note, however, that candlestick patterns are usually best read on daily charts and hourly charts. They can also be considered on the 5 or 15 minute charts but 1 minute candlestick formations might not be very reliable. Having said that if you take a closer look on your 1 minute charts you will recognize the candle formations discussed here and you will see the trend that follows them.
Candlestick charts work well on their own and if you learn to read them well you will understand certain market sentiments that will definitely improve your trading. It is advisable to view candlestick charts with Bollinger Bands (moving Averages) and/or other indicators. Using too many technical indicators can be very distracting. It’s best to focus on price action and then maybe confirm it with maximum 2-3 other indicators and volumes.Published in Education