Binary options trading is a way of buying or selling a stock or any given asset by speculating its price. While trading may sound easy, in reality, it is not that simple.
That’s because if the price movement of an asset is not correctly speculated, the trader will lose all the invested amount. But accurately predicting the price movement of binary options commodities is a little tricky.
As a trader, you have to keep an eye on the price trend, market fluctuations, and financial news. With the relevant information, you can make the right choices. One tool that can help you analyze the market for making profitability is the candlestick chart.
But what is a candlestick chart? How can you read a candlestick chart? What are its patterns? How to do chart analysis? Well, the answer to all of these questions and more are given in this guide.
What you will read in this Post
What Is Candlestick Chart?
Candlestick chart is a tool that is used by traders while trading binary options. It is an easy way of displaying the price movement of the assets traded in the options market in a better way.
Through a candlestick chart, a trader can quickly understand the open, close, high, and low price of a commodity in a given time. Since this chart helps a trader understand the price movement quickly, it has become a reliable tool for trading.
In a chart, there are several candlesticks, and each of them signifies a trading session. By seeing an individual candlestick, a trader can understand what the price of an asset will be in the near future.
The market analysis of candlestick patterns is more successful and accurate than any other binary options trading chart. That means this method of market review really works.
Also, candlestick charts help professional traders to know the basic sentiments of the market. Thus, giving deeper information. So, it makes sense why traders use candlestick charts.
Quick History of Candlestick Charts
It would be great to know the candlestick chart origins to get a better idea of how it started.
Well, candlestick charts are not a new concept or method of analyzing the market. It’s been around for more than a decade. A Japanese rice trader created this successful trading chart back in Eighteen century to understand the price fluctuation of an item.
Munehisa Homma, the candlestick chart creator, understood that the emotions of traders play a significant role in fluctuating the price of commodities. Thus, he started candlestick charts, and it’s getting popular ever since.
This chart has become a staple of every trading platform and has helped several traders to get a clearer insight into the market.
Candlestick vs. Bar Charts
Candlestick and bar charts- both are a way of representing the trading data. However, there is a difference. As compared to the bar charts, the candlestick is better as it’s easy to understand.
Candlestick presents the information with more colors and visuals. That means it highlights the price difference in a better way.
Different Candlestick Components
It’s essential to understand the components of a candlestick to read the price trend of the commodity on a chart.
A candlestick chart is made of two different elements, i.e., body and shadow. They come in red and green colors. Here, the shadow represents the high and low of trade, whereas the body indicates open and close range.
Even a tiny change in color of the body or the size of the shadow indicates a significant fluctuation in the trading world.
In the green color candlestick, represented in white, the top part tells the closing price of an asset, and the bottom part is the opening price.
That means the market has moved upwards because the closing price is more than its opening price. Also, if the green color candlestick is long in size, it means that the particular asset has been purchased a lot in a given time.
On the other hand, in a red color candlestick, also represented in black, the bottom part indicates the closing price, and the top part indicates the opening price of an asset.
So, when the candlestick is red, you can interpret that the market has moved downwards. That’s because the opening price is more than the closing price. A long red color candlestick shows that a given item was sold a lot at a particular time.
In a nutshell, the color of a candlestick in the chart represents the price movement of an item.
Like candlestick color, its shadow also indicates a change in the market. Since many traders fail to analyze the data represented by the wick and tail of a candlestick, they lose their money.
If the shadow is above the body of a candlestick, it’s called the wick. However, if the shadow is below, it’s called the tail. Also, the mood of the trading market can be interpreted by the length of the shadow.
The upper and lower shadow of a candle is almost never the same in size. When the candlestick’s wick is longer than its tail, it shows that the buyers controlled the market during the trading session.
Similarly, if the tail of a candlestick is longer than its wick, it means that the market sellers were active during the trading session. Irrespective of the position, a long shadow generally appears when a trend is about to end.
But if the wick and tail of a candlestick are of the same size, it indicates the indecisiveness of traders and buyers.
What Candlestick Body and Shadow represents in Chart?
Since you know what candlestick body and shadow mean, here’s what their size, ratio, and position mean in the chart.
Size of Candlestick Body
If the size of a particular candlestick in the chart increases continuously, its price has also increased. But if the length of the candlestick decreases, that shows the opposite, i.e., the price of the commodity has fallen in the market.
Candlestick Body to Shadow Ration
Compared to the shadow, if the candlestick’s body is long, the price of a commodity in the market has moved up with the trend. If the situation stays similar and the direction keeps strong, the body of a candlestick will further increase.
On the flip side, if a candlestick’s body is smaller than the shadow, that means the commodity’s price is not moving with the trend. Thus, there is uncertainty in the market.
Position of The Body
Along with the candlestick size and ratio, the body’s position also plays a significant role.
For example, if the candlestick is small in size and has a long tail and wick, it means the price of a given asset has returned to its original value. It generally happens when the buyers try to increase the price while sellers are decreasing it.
The next position is when the candlestick is placed on one end and has a long shadow on its other side. It happens when the asset’s price has moved in a particular direction, either by the buyers or sellers.
How to read the Candlestick Chart?
A trader can examine an asset’s price in the market by analyzing the two parts of the candle, i.e., the body and the shadow. Each candlestick in the chart represents the price movement of an asset in a given time, like one day, one week, or one month.
Also, each candlestick chart has four data points, i.e., high, low, open, and close. So, if a trader has fixed trading time, the chart would update accordingly.
You can analyze the shadow and candlestick’s body to know the mood of the market. And based on your speculations, you can make a trade.
Different Candlestick Patterns
While there are several patterns, not all of them work effectively. Meaning they won’t help you correctly predict the market. And this can make you lose a considerable amount of money.
Candlestick patterns are divided into two categories, i.e., bullish and bearish patterns. Based on these two, traders can understand the different patterns.
When the buyers dominate the market instead of sellers, a bulling pattern is formed. It means the closing price is more than the opening price. Green or white color represents the presence of bullish in the market.
The bearish pattern is the opposite of the bullish pattern. That means the sellers are controlling the market. After seeing the bearish pattern, one can conclude that the opening price is higher than the closing price. Also, it is represented by red or black color.
Here are some helpful bearish and bullish candlestick patterns that can increase the profitability of your trading.
When the binary market is neither controlled by the bearish nor bullish, it shows the market’s indecision. And that’s when the Doji pattern is formed. This pattern is further divided into four parts.
Four different Doji patterns are common Doji, dragonfly Doji, Gravestone Doji, and long-legged Doji. But not all of them represent market indecisiveness. Traders can easily find a Doji pattern in the candlestick chart because it is represented by the cross shape.
Advantages of Doji Method
While trading, if the market moves upward and there is a Doji pattern, you can conclude that the selling action is getting to start by slowing down the buying momentum.
If you exit the market based on Doji pattern analysis, you can make a considerable profit. But it’s important to confirm that the market is indicating just what the Doji pattern has shown. Otherwise, you could face a huge loss.
Understanding Different Candlestick Variants
Here are the four popular Doji pattern variants and what they indicate.
A standard Doji in the candlestick chart means buying and selling prices are the same. Its represented by a cross or a plus sign.
Dragonfly Doji is the “T” shaped candlestick in the chart. It has a small body on the top, followed by a lower long wick. This pattern indicates that the market opened at a high price and came down. However, it increased to the same price level at the end of the trade.
In a nutshell, dragonfly Doji is formed when the price is going down, but the buyers pushed it upwards at the last minute.
Gravestone Doji is the opposite of Dragonfly Doji. This pattern is formed when the closing and opening price of an asset is at the same lower level.
Gravestone Doji shows that when the market was opened, its price was suddenly pushed down by the sellers. Traders can make good profitability if they trade the gravestone Doji pattern.
A long-legged Doji looks similar to a common Doji. However, it has a comparatively longer upper and lower wick. The long wick shows the indecisiveness of the market.
When you see a long-legged Doji, try not to trade, as it can make you lose all of your invested money. Once the wick gets shorten, you can trade.
A breakout trading in the candlestick chart shows the price movement of an asset. The price of a commodity has either moved beyond the resistance level or above the support level.
The resistance or support level can also be seen as the stop loss point or an entry-level that can help traders earn huge profitability.
When the price moves beyond the resistance or support level, traders have two options. First, they can exit the market if they don’t want the price to break out. Leaving the market can help those traders save themselves from huge losses. Secondly, the traders waiting for the breakout can jump in when the breakout happens to make a significant profit.
After the breakout, market volatility increases, and the price moves towards the breakout direction. Since breakout indicates a bigger price fluctuation and more volatility, it brings more profitability.
How Breakout Trading works
To trading using this pattern, you need to analyze two things. Firstly, the consistency of touching the resistance level. If the asset price has touched resistance and support level multiple times, their analysis becomes more valid.
And secondly, the length of time it stays in play. If the support and resistance level remain in their position for a long time, the outcome is more favorable.
Traders can quickly identify the chart pattern breakout as it is generally found at the starting point of a trend. So, if you know how to identify a breakout in the market, you can increase your profitability.
Fake Breakout Trading
The next candlestick trading pattern is the fake breakout. This pattern is the opposite of breakout, and it is exactly what it sounds like.
One thing that makes a fake breakout pattern interesting is its unpredictability. The price moves in a way that traders assume that it might break out. So, they trade; however, the price deceives the trader by returning to the same level.
Fake breakout is one of the important trading patterns that even inexperienced traders can understand and identify. A false breakout in the trading chart represents one of two things. Either the price trend is going to resume soon, or the price is going to change shortly.
This situation arises when traders try to enter the market when everything is stable. However, when they make an entry, the price reverse. Thus, time frame matters in the fake breakout.
How to Trade False Breakout?
False breakout can happen in any market condition and price trend. To trade successfully in the false breakout, traders need to do a couple of things.
- Pay attention to the financial news.
- Try to understand the reason behind the fake breakout.
- Asses fake breakout and how it will impact the price trend.
- Pay attention to the extreme points in the market.
If you don’t want to get caught in the fake breakout trading, you can wait for the asset’s price to close outside the range. If this happens a couple of times, you can assume that the price trend will start again.
A trendline is a way of knowing the price trend of an asset in the market. Identifying the trendline can help traders to make successful trades. That’s because trendline assists traders in knowing whether or not the market is working in their favor.
A trendline is a simple and easy-to-use tool, divided into categories, i.e., downward trend line and upward trend line.
An upward trendline in the candlestick chart indicates there is an excess amount of buying in the market. That means the price of an asset is likely to increase. On the other hand, a downward trendline indicates the supplying pressure. A downward trendline makes the price fall.
Also, if the trendline is flat, that means the market price is moving in a steady direction. Traders must not hold a long position when they see a downward trendline.
A trendline in a chart is created by connecting a series of prices. To get a better idea, traders must only focus on the major swing points. Once you have made a trendline, you can identify the market quickly.
You must trade around the trendline to grab better trading opportunities and increase your profitability. For entering the market, you can wait till the price breaks the trendline.
Bullish/Bearish Engulfing Pattern
Another popular candlestick pattern is the bullish/bearish engulfing pattern. It is one of the few patterns that can be easily identified and contains all the essential information.
The bullish engulfing pattern in the candlestick chart shows a downtrend. That means there is a rise in the buying pattern in the market. Two green candles represent it. The second green candle swallows up the body of the previous red candle.
The bearish engulfing pattern is the opposite of the bullish engulfing pattern. This pattern occurs when the price of the asset falls as more sellers are entering the market. This pattern is represented by two red candles where the red candle engulfs the next green candle.
When you notice the bearish or bullish pattern, this means there will be a reversal in the trend. If traders hold a position on an asset whose price trend is about to end, they can use this pattern to exit the trending market.
Morning Star/Evening Star Pattern
The morning star and evening star pattern are slightly different from the bullish engulfing and bearish engulfing pattern as it includes three candles rather than two.
Morning star pattern can be defined as the visual representation of three candles that form a downtrend. The presence of a morning star in the candlestick chart indicates the price trend is going to reverse.
The evening star pattern in the candlestick chart is the exact opposite of the morning star pattern. It represents an uptrend in the market. Evening star patterns also tell about the future price reversal of an asset.
This pattern generally appears when the market is showing either higher lows or higher highs. If you want to trade the Evening Star candlestick pattern, do not wait for prices to drop down, as you might lose the trade.
A piercing pattern is formed during pullback or at the end of the downtrend. It is further divided into two categories, i.e., bearish candle and bullish candle.
This pattern can be found in the chart when the second candle, i.e., the bullish candle, is closed at the middle of the first candle, i.e., bearish candle. This situation arises in the downtrend market.
While multiple charts can be used to represent the price movement in the binary options market, it’s better to choose a candlestick chart. That’s because it’s easy to understand and it tells about the complete mood of the market.
But to make a profit, it’s essential to choose a candlestick pattern that gives detailed information about the price trend. With the right information, you can correctly speculate the market and make a winning trade.
To become a successful trader, you can pick the right candlestick pattern, stick to a detailed strategy, and never stop learning.
(Risk warning: Trading involves risks)