The overwhelming majority of all serious traders uses candlestick charts to display price movements. One of the biggest advantages of candlestick charts is that they form certain price formations that allow traders to quickly deduct invaluable information from a price chart that would be hidden in a line charts.
Compared to technical indicators, which all use an averaging mechanism over a number of periods and therefore delay the indication of market movements, price formations can help you discover a changing market environment very early, at best right when it is happening. This is a great advantage: The sooner you start making the right trading decisions, the better.
Types of Price Formations
Price formations come in many forms and types. The most important price formations are:
The most important, most significant, and most used price formation is the trend. The old saying “the trend is your friend” is one of the most profound truths of any form of trading.
When you look at a price chart, you immediately recognize that prices do not rise or fall in straight lines, but in zig-zag movements that seem to follow a certain pattern. These patterns are called trends. Recognizing trends and using them for your trading, either as a trend follower or a swing trader is the most essential step to becoming a successful binary options trader.
2) Simple & Complex candlestick formations
While trends help you to understand what the market is doing on large scale, candlestick formations let you know what is happening right now. While every single candlestick can tell you something about what is happening in the market, the most important single candlestick types have been defined as simple candlestick patterns. More complex candlestick formations that contain two, three, or more candlesticks can help you make even more sophisticated predictions.
To become a successful binary options trader, you can use trends to predict whether the market is rising or falling over a larger number of candlesticks. To understand what the market is doing right now – if the current movement is weakening or gaining momentum, if the market direction is likely to turn around any time soon, and whether you can trust the current movement or not – you should use candlestick formations.
Candlestick formations help you stay right at the pulse of the market and understand what it is doing right now.
3) Continuation & Reversal patterns
In short, continuation patterns are very large candlestick formations that easily can contain 20, 50, or more candlestick. Continuation patterns include such price formations as the flag, the pennant and the triangle. They all indicate that the current trend is going through a consolidation period to generate new momentum, after which he is likely to continue in its original direction.
Reversal patterns are equally large price formations as continuation patterns that indicate the exact opposite: The current trend has come to an end. In the near future a trend in the opposite direction is very likely to form and take the place of the current trend. Examples for reversal patterns are the double top and the Head and Shoulder formation.
Gaps are great investment opportunities. Gaps occur when prices jump from one level to another, leaving a gap between two prices. Gaps can indicate four events:
a) Big news hit the market and energized an otherwise slow trading day. This kind of gaps often start new trends in the direction of the gap. Recognizing them can provide you with a great investment opportunity.
b) Big news hit the market and energized an already existing movement. Usually, this movement will move faster and stronger for quite some time after the gap.
c) A trend is exhausted. In that case, the gap can indicate an impending reversal.
d) Coincidence. Sometimes, especially during trading periods with low volume, gaps occur randomly. Since these gaps are not supported by any change in market sentiment, the large price jump is not validated. Therefore, exhaustion gaps are very likely to close, which presents a trader with a great opportunity to predict a price movement in size and duration.
To determine which gap you have in front of you, we suggest our article on different gap types.