Every new trader has to decide whether he wants to use candlesticks, bar charts, or line charts to display price movements. As any successful trader will confirm, candlestick are by far the superior method.
To understand why, this article will explain the advantages candlesticks can provide you with.
Advantages of using candlesticks for binary options trading
Using candlesticks for your price chart has a number of advantages:
1) While bar charts and line charts only display price movements, candlesticks work as an indicator itself. Many traders can reliably predict future market movements using nothing but candlesticks.
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2) Simple candlestick patterns are easy to use and intuitive to understand chart patterns that consist of only one candlestick. Some of them indicate rising prices, some indicate falling prices, some indicate indecision.
New traders can use simple candlestick patterns to quickly learn how to make first predictions about future market movements, and to understand the power of technical analysis. Experienced traders can use simple candlestick patterns to know what an asset is doing in on quick glance. All in all, simple candlestick patterns are a powerful tool worth having in your toolbox.
3) More complex candlestick patterns are a little bigger, but allow for even better predictions about future market movements. Some complex candlestick patterns consist of two to three candlesticks, some of even more. All complex candlestick patterns have memorable names, such as “abandoned baby”, “dark cloud cover”, or “falling star”.
4) Many candlestick formations indicate significant changes in market behavior that are completely invisible with line charts and, at best, hardly visible with bar charts. Breakaway gaps, island reversals etc. are a sign of fundamental events and must not go unrecognized for any trader serious about making money.
5) Candlesticks can indicate impending direction changes in market direction long before any other indicators picks them up. A changing trading range, for example, is usually one of the first signs the market environment is changing. With line charts, however, the trading range is impossible to evaluate. With bar charts, too, it is much harder work than with candlesticks.
All of these advantages come with not a single downside to candlesticks. For binary options traders, these very lopsided pros and cons make candlesticks an absolute must to use.
Evaluating a candlestick
While there are many simple candlestick formations, and we recommend you read the article about them, every single candlestick can tell you a story. To be able to understand it, you have to know what the components of a candlestick, the body and the wick, indicate:
1) No body: A candlestick without a body is called a doji. A doji indicates a change in market sentiment. Dojis often indicate the end of a movement or a trend.
2) The wick (sometimes the wick is also called the shadow) is less significant than a candlestick’s body. Still, the wick can gain significance in any of these two situations:
a) The wick is missing
To generate a candlestick with a missing wick on one end, the opening or closing price has to be at the top or bottom of the period. In general, any candlestick with little or no wick at one end indicates a strong market sentiment in the direction of the candlestick. All the periods’ trading has pushed the market either upwards or downwards, which indicates that this movement is still likely to continue for the next periods.
b) The wick is very long
When a wick is longer than the candlestick’s body, the market was obviously trying to push in a certain direction, but did not have enough energy to maintain the movement. Therefore, prices retreated back. This could simply be the result of a normal correction in a trend that will stop soon and let the trend resume its main direction.
It could, however, also be the result of a support or resistance the market is unable to break. Check for nearby trend lines, significant moving average lines, and other resistance and support levels.
If you find them, do not invest in the movement or trend any longer. If you do not find them, switch to a shorter time frame and find out whether the long wick is simply the result of a normal correction in a trend. If so, you can keep investing in the trend. If you find neither, wait until the market makes up his mind and gives you a clear indication about what it will do next.