Candlestick formations are a powerful tool to predict future market movements. Still, before you start basing your trading decisions on candlesticks alone, there are a number of thing you have to know. Learn about trading on candlesticks alone, right here:
1) Trading on candlesticks alone – candlesticks only predict the near future
The prediction power of candlesticks is limited to the near future. In general, the more candlesticks a formation contains, the longer it allows for predictions about the market future. Simple candlestick formations that consist of only one candlestick only create reliable predictions for the next candlestick.
- Futher reading: Trading candlesticks
Though more complex candlestick formations that consist of two, three, or more candlesticks can generate predictions that can last longer, candlesticks are unlikely to cause new trends or end existing trends. Therefore, swing traders will find candlesticks more useful than trend followers. Swing traders can use candlesticks to find the end point of one movement and the beginning of another.
Make sure to match the expiration time of your binary option accordingly to the time their prediction is valid. Choosing a too short or too long expiration time will render your prediction invalid and cause you to lose trades and money.
2) Candlesticks are not 100 percent accurate
As with any indicator, candlesticks only work some of time. Since each trading situation is different and there are over 100 different candlestick formations, it is hard to find comparable situations to analyze. Therefore, there is no general measurement for the accuracy of candlesticks.
Nonetheless, some analysts have tried to come up with a percentage value for the number of times candlesticks work. Usually, their results are somewhere around 60 percent to 66 percent of all cases in which candlesticks create valid predictions. Still, it is hard to quantify a “valid” prediction, which makes all of these studies somewhat inaccurate.
The important thing to understand is that the accuracy of trading on candlesticks alone is far from 100 percent. How far, that depends on your skills when executing candlestick analysis. In any case, it might be a good idea to use another indicator to validate the prognosis of candlesticks, and to increase the accuracy of your trading.
3) The meaning of candlesticks largely depends on their context
Many candlesticks allow for multiple conclusions. Which one is right for the candlestick you are currently looking at depends on the context you see the candlestick in. If a hammer appears after a number of falling periods, for example, it is a strong indication that the market will turn up soon. If the hammer appears in the middle of a sideways movement, however, it is most likely insignificant.
To judge candlesticks correctly, you have to know not only the candlestick but also the context it has to appear in. From this context, you have to evaluate whether the candlestick you are looking at has any significance or is just a result of mere coincidence.
4) Interpreting candlesticks is an art it takes years to master
As you have seen from the past three points, interpreting candlesticks takes more than simply finding a period that looks a certain way. Instead, it is a form of understanding the market as a whole and every single candlestick in it. Only then can you judge a formation correctly in the context it appears, and know how accurate this prediction is and how long it will be valid.
To understand all the elements it takes to arrive at such a sophisticated understanding of the market will take years. Therefore, traders looking to find a quick and easy form of technical analysis with learning only a few candlestick formations will be heavily disappointed. As with any trading approach, you have to find a way to reach a complete understanding of the market. There are no shortcuts, not even with candlesticks.