The candlestick strategy is one of the most popular ways of trading binary options. When you understand candlesticks, you can find trading opportunities in any market environment, and you will always be able to trade a binary option. In this article, we explain how to execute a candlestick strategy with binary options.
In detail, we will answer these questions:. Candlesticks are a way to help short-term investors find profitable trading opportunities.
This way is necessary because, to find profitable trading opportunities, you first need to know what is currently happening with an asset. The only way to know what is happening in the market in the short term is technical analysis, and candlesticks are one of the most essential tools of technical analysis. Technical analysis is based on a simple assumption.
It is impossible to tell where this supply and demand is coming from, and it is impossible to understand why traders are currently buying or selling, but it is possible to understand that they are currently buying or selling and whether the supply is exceeding demand or the other way around.
This knowledge is enough to win a binary option. Technical analysis shifts the focus from why something is happening to that it is happening. As long as you know that the market will rise or fall, there is no need to know why it is rising or falling.
Candlesticks are one of the most essential tools of technical analysis. Candlestick charts are a form of visualizing the price movement of an asset, which is why they are an essential tool for any technical analyst. Compared to the line charts most traders know from the newspaper, candlestick charts have one major advantage: Line charts only use one price per period. To understand this difference, think of the limitations of a line chart. When you look at the market movements of one day, one month, or one year, a line chart is unable to display every single market movement — the chart simple is not that detailed.
Consequently, the line chart has top aggregate the data into multiple periods and displays only one price per period, most commonly the closing price. The line chart ignores all other prices, which leads to significant inaccuracies. A line chart denies technical analysts many of the information that they need to understand what is happening. Consider these two examples:.
Technical analysts would draw the same conclusions, even though both market environments are fundamentally different and should be traded differently. Candlestick charts can solve this problem.
A candlestick chart can compress all the information of a given time period into one candlestick. A candlestick charts compact, quickly accessible information helps you to apply certain strategies a regular price chart would not allow you to. Each candlestick represents the price movement of a certain time interval from a few seconds to days and consists of a body and a wick. Sometimes the body colors are replaced by red and green, gray tones, or other colors.
Candlesticks are ideal for technical analysts because their unique forms create patterns and formations. These formations can consist of one single candlestick with a special form or more candlesticks that create a certain pattern. A skilled trader can use these formations to predict future price movements. Often, one glance at the price chart is enough for skilled traders to understand where the market will move next.
There are too many candlestick formations to explain them all in one article. We will focus on a brief overview here. In the interest of clarity, we will present you with an example for each here and explain the details in specialized articles.
The Big Candle is an example of a formation created by a single candlestick. The Big Candle is characterized by an unusually large body that opens and closes very near the maximum high and low of the time period. If the candlestick is white, in other words in a bullish direction, this likely indicates the beginning of a longer bullish movement.
If the candlestick is black, or in a bearish direction, this likely indicates the beginning of a longer bearish movement. You can use this information to purchase options in the direction of the candle and predict further price movements in this direction. Which option type you should use depends on the timescale of your chart.
On a smaller timescale, you should use options with a shorter expiration time, 30 seconds or 60 seconds options for example if your timescale is one minute or less. The larger your timescale, the more option types you can use.
For example, when you trade a timescale of hours, you can use High or Low and Touch options. One example for a more complex candlestick formation is the 3-Method Formation.
The 3-Method Formation builds on the Big Candle. Instead of a single Big Candle, it consists of a Big Candle followed by a number of smaller candlesticks included within the range of the Big Candle, but in the opposite direction.
The formation is completed by another Big Candle at the end that breaks out of the first Big Candle. This movement is predicting a price movement in the direction of the Big Candles, too. When you learn to recognize a good amount of candlestick formations, your trading will benefit greatly. They can enable you to avoid bad trades you otherwise would have made and find new opportunities to make good profits.
The shoulder-head-shoulder formation is a candlestick formation that can easily contain 50 candlesticks or more. It is an example of reversal patterns, which can tell you when a trend is over. The opposite of reversal patterns are continuations that indicate that a trend is likely to continue. The shoulder-head-shoulder formation indicates that an uptrend has ended and a downtrend has begun. As you can see in the picture, the market has risen in a trend for quite a while but then ran out of momentum.
The market went through a consolidation period but failed to pick up new momentum. As a result, he fell below the previous low of the uptrend, effectively ending the uptrend and starting a new downtrend. This quick, decisive shift in market direction changes the market environment fundamentally. Where all signs previously pointed to rising prices, traders now have to expect falling prices.
Consequently, they have to exit their long positions and invest in short positions, creating additional supply and reducing demand to a minimum, which results in a strengthened downwards movement. This downwards movement is predictable, which means that, as a binary options trader, you can profit from it. To trade a candlestick strategy with binary options, you have a couple of options. In the following paragraphs, we will walk you through the process of creating your own candlestick strategy with binary options.
This process includes three steps:. Your own candlestick strategy with binary options, step 1: Choose the right candlesticks Your first step in creating your own candlestick strategy with binary options is choosing the right candlestick formation to trade. As we have detailed above, you have three options:. Simple candlestick formations are the most common. Because they require only one candlestick, simply candlestick formations can form in any market environment at any time, and you should be able to find plenty of trading opportunities based on them.
The downsides to simple candlestick formations are that their predictions are only valid for the next candlestick and that they are the least reliable of all candlestick formations. When you trade simple candlestick formations, you accept these limitations.
If you know what you are doing, you should be able to turn a profit nonetheless, but you will win a lower percentage of your trades than with complex candlestick formations. This is not a problem. The lower winning percentage of simple candlestick formations is no disadvantage because you can make up for it by investing in more trades.
Since simple candlestick formations are the most common of all candlestick formations, they provide you with more trading opportunities than any other type of candlesticks.
These added opportunities more than make up for the reduced winning percentage. It is more profitable to win 70 of trades than to win 8 of 10 trades. Simple candlestick formations exploit this relationship and provide you with the biggest earning potential of all candlestick formations.
The downside of this high potential is that simple candlestick formations also contain the most risk of all candlestick formations. You will probably experience longer losing streaks, and you have to manage your money well to execute a strategy based on simple candlestick formations profitably.
More complex candlestick formations offer more security but less trading opportunities. Candlestick formations based on two candlesticks will form less often than those formations that require only one candlestick, but because the market took longer to create these candlesticks, their predictions are more reliable. Very complex candlestick formations such as the shoulder-head-shoulder formation will allow you to win the highest percentage of your trades, but they form only rarely. After a shoulder-head-shoulder formation, the market will fall almost always, but you might only find one should-head-shoulder formation in an entire day of trading.
For you as a trader, it is important to base your candlestick strategy on the type of formations that suit your character. There is no right or wrong in this matter, and as long as you are able to make money by the end of the month, you have done everything right. Your own candlestick strategy with binary options, step 2: Once you have found the candlestick formation that you want to trade with your strategy, you have to decide how you want to trade it.
Binary options offer you a number of different options to make predictions, and which option you choose will define the character of your strategy just as significantly as which candlestick formations you trade. Binary options offer you these tools to trade the predictions generated of your candlestick formations:. All you have to do is to predict whether the market will be trading higher or lower than right now when your option expires.
With this system, you can make safe predictions for your candlestick strategy. To win a trade, it is enough if the market moves in the right direction by the smallest possible increment. When you trade a candlestick that indicates an upward direction, for example, a high option maximizes your chances of winning the trade.
Any movement in the right direction will be enough, and you get your payout. Winning one or two trades will hardly make you rich, but you can avoid longer losing streaks and win trades on a regular basis. One touch options allow you to predict whether the price of an asset will reach a certain target price at least once before your option expires.
Generally, switching to one touch options will reduce your winning percentage but increase your average payout, which is why trading candlestick formations with one touch options is a strategy that appeals to risk lovers.More...