candlesticks formations Binary Options 2020

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Demo Account!
    Free Trading Education!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Good Choice For Experienced Traders! 2nd place in the ranking!

The 5 Most Powerful Candlestick Patterns

Candlestick charts are a technical tool that packs data for multiple time frames into single price bars. This makes them more useful than traditional open-high, low-close bars or simple lines that connect the dots of closing prices. Candlesticks build patterns that predict price direction once completed. Proper color coding adds depth to this colorful technical tool, which dates back to 18th-century Japanese rice traders.

Steve Nison brought candlestick patterns to the Western world in his popular 1991 book, “Japanese Candlestick Charting Techniques.”   Many traders can now identify dozens of these formations, which have colorful names like bearish dark cloud cover, evening star and three black crows. In addition, single bar patterns including the doji and hammer have been incorporated into dozens of long- and short-side trading strategies.

Key Takeaways

  • Candlestick patterns, which are technical trading tools, have been used for centuries to predict price direction.
  • There are various candlestick patterns used to determine price direction and momentum, including three line strike, two black gapping, three black crows, evening star, and abandoned baby.
  • However, it’s worth noting that many signals emitted by these candlestick patterns might not work reliably in the modern electronic environment.

Candlestick Pattern Reliability

Not all candlestick patterns work equally well. Their huge popularity has lowered reliability because they’ve been deconstructed by hedge funds and their algorithms. These well-funded players rely on lightning-speed execution to trade against retail investors and traditional fund managers who execute technical analysis strategies found in popular texts.

In other words, hedge fund managers use software to trap participants looking for high-odds bullish or bearish outcomes. However, reliable patterns continue to appear, allowing for short- and long-term profit opportunities.

Here are five candlestick patterns that perform exceptionally well as precursors of price direction and momentum. Each works within the context of surrounding price bars in predicting higher or lower prices. They are also time sensitive in two ways:

  1. they only work within the limitations of the chart being reviewed, whether intraday, daily, weekly or monthly.
  2. their potency decreases rapidly three to five bars after the pattern has completed.

Top 5 Candlestick Patterns

This analysis relies on the work of Thomas Bulkowski, who built performance rankings for candlestick patterns in his 2008 book, “Encyclopedia of Candlestick Charts.”   He offers statistics for two kinds of expected pattern outcomes:

  1. reversal – Candlestick reversal patterns predict a change in price direction
  2. continuation – while continuation patterns predict an extension in the current price direction.

In the following examples, the hollow white candlestick denotes a closing print higher than the opening print, while the black candlestick denotes a closing print lower than the opening print.

  • Three Line Strike

The bullish three line strike reversal pattern carves out three black candles within a downtrend.   Each bar posts a lower low and closes near the intrabar low. The fourth bar opens even lower but reverses in a wide-range outside bar that closes above the high of the first candle in the series. The opening print also marks the low of the fourth bar. According to Bulkowski, this reversal predicts higher prices with an 84% accuracy rate. 

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Demo Account!
    Free Trading Education!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Good Choice For Experienced Traders! 2nd place in the ranking!

  • Two Black Gapping

The bearish two black gapping continuation pattern appears after a notable top in an uptrend, with a gap down that yields two black bars posting lower lows.   This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 68% accuracy rate. 

  • Three Black Crows

The bearish three black crows reversal pattern starts at or near the high of an uptrend, with three black bars posting lower lows that close near intrabar lows. This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. The most bearish version starts at a new high (point A on the chart) because it traps buyers entering momentum plays. According to Bulkowski, this pattern predicts lower prices with a 78% accuracy rate. 

  • Evening Star

The bearish evening star reversal pattern starts with a tall white bar that carries an uptrend to a new high.   The market gaps higher on the next bar, but fresh buyers fail to appear, yielding a narrow range candlestick. A gap down on the third bar completes the pattern, which predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 72% accuracy rate. 

  • Abandoned Baby

The bullish abandoned baby reversal pattern appears at the low of a downtrend, after a series of black candles print lower lows.   The market gaps lower on the next bar, but fresh sellers fail to appear, yielding a narrow range doji candlestick with opening and closing prints at the same price. A bullish gap on the third bar completes the pattern, which predicts that the recovery will continue to even higher highs, perhaps triggering a broader-scale uptrend. According to Bulkowski, this pattern predicts higher prices with a 70% accuracy rate. 

The Bottom Line

Candlestick patterns capture the attention of market players, but many reversal and continuation signals emitted by these patterns don’t work reliably in the modern electronic environment. Fortunately, statistics by Thomas Bulkowski show unusual accuracy for a narrow selection of these patterns, offering traders actionable buy and sell signals.

Putting the insights gained from looking at candlestick patterns to use and investing in an asset based on them would require a brokerage account. To save some research time, Investopedia has put together a list of the best online brokers so you can find the right broker for your investment needs.

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 closest 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. Download a Doji Indicator for MT4

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. Download Fibonacci Doji/Pin bar MT4 Indicator

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.

Do you need an easy to follow and very profitable candlestick strategy?

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.

Conclusion

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.

Knowing how to read candle stick price patterns will also be helpful in confirming binary options signals, should you decide to use them.

It’s important to understand that candlestick patterns have a higher success rate on upper time frames, 4H and up. They can also be considered on the 5 or 15 minute charts, but 1 minute candlestick formations might not be reliable.

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 confirm it with maximum 2-3 other indicators and volumes.

Master your trading skills with the The Candlestick Bible that reveals in detail the candlestick trading techniques used professional and successful traders.

Trading Candlestick Formations

By far in binary options trading, candlestick formations are regarded as the most effective ways to carry out the technical analysis. To give you an insight into the swings of price action in the market, these candlesticks are used by the experts. It actually represents the instincts related to the price action of a particular trading entity and how it can affect the overall pricing. Its use helps one to determine the current strength and direction of the trend enabling him to frame his strategy accordingly.

Sample candlesticks formations sometimes used for trading

The price action, thus measured, is shown in the numerous candlestick patterns while not altering its basic format. If you are a novice, then it may be quite difficult for you to get the useful information as you will have no idea what data has to be used. For that, you have to know very well what candlesticks are and how can you use its functionality to the optimum. Candlestick is an effective unit to see the various changes that the price of a certain trading entity undergoes during a specific period. In a close rectangular-shaped box, the price action is represented. The pattern is comprised of opening, highs and lows, which is ultimately followed by closing.

You should also consider the backdrop colour of the box. An empty and white-coloured box stands for a bullish session which means that the trade is closed with a price higher than the opening price. On the other hand, a bearish session is represented by a black-coloured box and short horizontal lines. A session is said to be bearish when the closing price is almost same as that of the opening price.

Advantages of Using Candlestick Formations

  • Market Turns can be Predicted: As compared to traditional indicators, candlestick charts facilitates the investors to predict the market turns more effectively. As such, he can hit the market whenever he wants.
  • Deep Insights to Forex Market Condition: Unlike the traditional bar charts, candlestick patterns also enable the investor to know the underlying force that is causing the move.
  • Improves Analysis of Western Charts: If you wish, then you can also use western technical tools on candlestick patterns. By combining the Eastern and Western analysis in this way, you will be able to perform better in the trading than a person who uses only the bar charts.
  • Can be Understood Easily: Anyone, from an experienced trader to a novice, can derive immense benefits by using these patterns as they are easy to understand.

TIP: Three White Soldiers and Three Black Crows Trading Strategy

Normally, the Three Black Crows Pattern in an uptrend signals the bearish reversal of the trend. And, in a downtrend, it signals the continuation of the trend in the same direction. In this way, the traders are able to identify …

Undoubtedly, these patterns play an indomitable role in revealing myth and riskiness associated with the market of Forex trading. As such, the novice traders gain self-confidence to go on trading on the entities they like. After all, the clarity and the accuracy level that these formations have given to the enthusiasts are far beyond comparison.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Demo Account!
    Free Trading Education!
    Get Your Sign-Up Bonus Now!

  • Binomo
    Binomo

    Good Choice For Experienced Traders! 2nd place in the ranking!

Like this post? Please share to your friends:
Guide How To Become Binary Options Trader
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: