Using Candlesticks to Trade Binary Options

Hamish Raw
20th February, 2013 - Posted by in Technical Analysis


Binary options/digital option trading is a financial derivative product that attracts no taxation in many countries because it is classified as a form of gambling. The all or none nature of this market also prompts many of its participants to approach the market with the same mentality that those in the casinos of Las Vegas and Macau use in their activity. When these gambler traders start losing money, they blame everyone else but themselves. Binary options trading is not a gambling activity; something as easy as a little candlestick trade analysis can radically transform trade outcomes and push the trader into profitability.

Candlesticks have long been recognized as a way of analyzing the market for trade signals. If they can work in the conventional markets and the same assets traded in these markets are traded in the binary options market, why can’t candlesticks be used to trade binary options?

Using candlesticks to trade binary options is one weapon that a trader can use to pick out trade signals that can be used to trade the Call/Put and the Touch/No Touch trade types.

Candlestick patterns can be divided into the continuation and reversal candlestick patterns. Whichever one you decide to use is immaterial. What is more important is being able to use a candlestick pattern correctly for a trade type that you have chosen.

Call/Put

In order to decipher if an asset will end the trade higher or lower than the market price, the first thing is to determine what direction the candlesticks are saying. If the trader is using a reversal candlestick, the odds of the trade succeeding are actually greater than if a continuation candlestick pattern is used.  Reversal patterns have a reliability index. There are the highly reliable patterns (such as the morning and evening Doji star patterns), and there are those with moderate reliability. There are also some that require added methods of technical analysis to confirm the reversal (the pinbars). Let us demonstrate the use of a candlestick pattern to trade binary options.

Step 1:

Pull the various asset charts and identify those with candlestick patterns showing promise. To access the charts, simply download the MT4 platform from a forex broker with an asset base that touches on the asset class traded in the binary options market. FXCM is a good example as it has currencies, stock indices and commodities in its asset list.

Step 2:

When you have identified a chart with candlesticks for potential of profits, take note of the time frame of the chart being shown. This will come in handy when calculating the expiry.

Step 3:

Identify the candlestick pattern being shown, and note the direction that it indicates the trade will go.

candlesticks 300x154 Using Candlesticks to Trade Binary Options

The first three steps are illustrated on this chart of the crude oil asset. The time frame is the daily chart, and the candlestick pattern is the bearish harami (a bearish reversal pattern). This points out to the trader that the bias for the asset is decidedly bearish, and so the trader should be positioned to go for a PUT trade. This takes us to the fourth step.

Step 4:

It is possible for the trader to get the first three steps right, and then have the trade knocked off by a faulty expiry setting. Setting the expiry for the trade requires the trader to look at the time frame of the chart, and then give enough time for the trade to end in the money. For the trade above, it would be foolhardy on the trader’s part to set an intraday expiry following the bearish harami. We can see that the next candle that formed is a hanging man, and this pinbar is formed by price retreating to intraday lows before being pushed higher to its close that completes the pinbar pattern. The intraday push upwards is something that can easily ruin the trade if an intraday expiry is used.

The correct thing to do is to give away at least two candles, using the second candle time as the expiry. The time frame of the chart will then educate the trader on what that will translate into in terms of the expiry time to be used.

Touch/No Touch

There are a few differences with the Touch/No Touch trade. The TOUCH strike price should be in the direction of the reversal, and the NO TOUCH strike price should be set above the highs of the candlesticks that form the reversal pattern.

 candsticks2 300x161 Using Candlesticks to Trade Binary Options

Using these principles, the trader can easily pick profits every week from the markets.

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