Learn the basics of candles
During the course of this article you’ll learn the answers to so vital questions beginners to binary options trading should know to improve their analytical skills. These include:
- What are candlesticks?
- Why are they used in binary options trading?
- How can I use candlestick charts in my technical analysis?
So let’s dive straight in with the first answer for beginner traders who want to learn more.
What are candlesticks?
Candlesticks are a type of stock price activity indicator that helps you quickly judge the state of the market prices and in which direction the prices are likely to go.
By understanding how the formation of the body of a candlestick looks along with it’s wicks you can make a quick analysis of how the prices are likely to move in the near future.
Candlestick charting lets you know how the prices are moving and what they are likely to be rather than the environmental or economic factors affecting why the prices are, which is better dealt with in fundamental analysis.
Note: A bearish candle is where opening price ends up below the close price and a bullish candle is where the opening price ends up above the close price
Why use candlestick charts with binary options?
As the fundamentals of binary options trading is to predict the direction in which the future asset prices will go, candlesticks can help with this by looking at the formation of them.
Helping to forecast price predictions helps us to know when to make that all important PUT or Call and is the difference to landing in the money or out of it when trading.
So now you know what they are and how they can help you, let’s understand how they can be used and what specific candlestick patterns to look out for on the charts.
Identifying candlestick chart patterns
The formation of the candlesticks real body can tell you how strong the buying or selling pressure on the option is. A longer body coincides with more volatility and heightened pressure on a sell or buy. Where as a shorter body corresponds to greater consolidation and less potential for movement.
The longer the red or filled body the higher the pressure on a selling, whereas the opposite is true for green or empty candlestick bodies where the pressure is greater on buying.
Candlestick shadows, the upper and lower divide
When looking at candlestick formations if you notice that there is a long lower shadow and a short upper shadow above the body this represents that initially sellers were more dominant during the start of the interval however then buyers managed to drive the prices back up before the close.
On the opposite side of that a long upper shadow and a short lower shadow shows that buyers drove the prices up from open and were more dominant. Then at the end of the interval sellers managed to drive the prices downwards quickly before the close.
If you notice that there is equality between the length of the upper and lower shadow along with a short consolidated body, you can gain insight into the fact that neither sellers or buyers were dominant in their trading. These types of sticks are often called spinning tops and if they appear within the right trend on a chart they can represent the potential for change either bullish or bearish.
Bullish and bearish engulfing candles
A bullish engulfing pattern is where the body of a red/filled candle is engulfed within the open and close of the next green or empty candle. These show that there could be a great chance for change from a downward trend to an upward trend. At this point it likely that a CALL option would prevail.
The opposite can be said for a bearish engulfing pattern. Where a green candles body is engulfed by the open and close of the next red candle body. This shows the sentiment for a greater chance at a reversal of the current upward trend and the start of a downward trend. When this occurs then a PUT option would be best.
These are some of the basic patterns of candlestick charts, with more including the hammer and hanging man, tweezers and doji.
You will be able to find this form of analytic tool within most technical analysis sections of the each binary options brokers trading platform. However even though most get their information straight from the source there might be delays, which could affect your decisions. Therefore it can be best to look at dedicated charting platforms for instant up to the minute/second data.