Candlestick Binary Option Trading Strategy
In modern day financial markets, candlesticks are widely used to track how the price of an asset moved for a certain period of time and therefore predict the reaction of traders in the market. With the right kind of analysis and strategy, candlesticks can be an important binary option trading strategy to indicate when to enter or leave the market.
Basics of Candlestick charts
To display this information, the candlestick is made up of three major components; the wide vertical body and two wicks on the upper and lower end of the candlestick. The body of the candlestick represents the difference in price from when the markets opened to when they closed for that day. The two wicks, also referred to as shadows, represent the highest and lowest point that the prices reached during the trading period.
Candlesticks usually have different shades of colours depending on the trader’s preference. This color is however important since it gives a quick indicator of the general movement of the price. The most common colours are black or red to represent a stock that closed at higher price and white or green to represent a stock that closed at a lower price.
Market Analysis Using Candlesticks
The characteristics of a candlestick will change to reflect the market’s situation. A good candlestick trading strategy is based on how fast you can read and interpret the market’s behavior using the shape, color and pattern formed by the candlesticks. These shapes can indicate whether the market is bullish or bearish. To develop a binary options trading strategy that works you need to observe the following common patterns.
It will basically entail a bigger candlestick following a smaller candlestick, and thus ‘engulfing’ it. The arrangement can either be a bullish engulfing where a bigger bull candle follows a smaller bear candle. This indicates that the price will go higher. Alternatively, a bearish engulfing will have a much larger bear candlestick following a smaller bull candlestick and it informs a subsequent price drop.
The doji is used to show a market situation where the price opens and closes at the exact same point or very close to the same point. This shows that neither the buyer nor the seller took the day. As a trader, a doji should tell you that a reversal of the prevailing trend is about to take place.
Hammers or Hanging man
A hammer is represented by a candle whose lower shadow is exceptionally long, usually twice the size of the body. Hammers indicate a reversal situation in the market. This reversal is indicated by how far down the shadow extends from the body. For instance in a downtrend situation, the hammer will show that sellers dominated the market but buyers eventually took the day.
A harami is the opposite of an engulfing – you have a smaller candle preceded by a longer candle. Depending on the shade of the preceding candle, the harami can indicate either a bullish or bearish market situation.
This pattern is formed when there is a series of either bullish or bearish candlesticks which are then followed by a sudden reversal. For instance in the bullish situation you will have a series of downward moving candles. The following candle instead shoots up and the opening price is way above the previous trade’s high. Such a situation in the bullish market will triggers short sellers. The vice versa for a bearish market is also true.
Morning or Evening Star
Similar to the kicker this pattern is depicted by a series of bearish, neutral and bullish candlesticks. The arrangement and sequence of appearance determines the market situation. In the morning star, you expect to have a bearish candle followed by a neutral candle then finally a bullish candle. This arrangement indicates that prices will rise. The evening star is a reversal of this arrangement and it shows a potential fall in prices.
Using Candlestick in Binary Options Trading
The most important information that you will get from candlesticks to use as an options trading strategy is identifying potential price reversal points. Generally, when you have a downtrend series followed by a bullish reversal candle, this would be a good opportunity to buy a Call option. On the other hand if there is an upward trend then you see a bearish reversal candle, you can predict a price drop and therefore buy a Put option.
Can You Spot all of the different Candlestick Patterns on a Real Time Trading Chart?