In binary options trading it is of fundamental importance to be able to get a fast, reliable and thorough picture of price movements in the market. This means that it is crucial to find some graphic representation of how the prices have been developing that is easy to read and informative. Instead of looking at endless price charts – that can become very confusing and big – most binary traders prefer candlestick charts instead.
A candlestick chart contains all the information you need in as little space as possible. By looking at candlesticks a trained professional can read exactly what has happened with the price of an asset during a timeframe of his choice. More importantly – based on this information he will be able to make inferences about where the price is headed next.
By mastering the art of reading candlestick charts, you can take an important step towards becoming an expert technical analyst. Needless to say this can help improve your results as a trader greatly.
In this article you learn what candlesticks can tell you and how you can use the information they contain in your strategy.
How can I apply a candlestick strategy?
A candlestick chart consists of two component parts. How big these two parts are in relation to each other will tell you how the price of an asset has been developing. The two parts are:
- The Wick
- The Body
So, just as in a normal candle, you have a thicker part, the body, and a thinner part, the wick. Now, please note that the visual similarity between a candlestick chart and an actual candle is not always present. Even if a chart like this looks more like a thin line with a small, fat box at one end, than something you’d light for a romantic dinner, it’s still called a candlestick!
So what do the Wick and the Body tell us? A candlestick covers a certain time period. You can determine that yourself, and it is very important that you always keep in mind what time frame a candlestick is operating on. If not, you really have no idea what it is telling you.
Let us use a 15-minute candlestick as an example to illustrate our point. In this case, it tells us the following:
- The Body represents the opening price and closing price of the asset in question over the last 15 minutes. If the price has moved up during that time, the body will be white. If it has been moving down, the body will be black. The shorter the body, the smaller the difference between opening and closing price, i.e. the price movement, that the asset has experienced in the last 15 minutes.
- The Wick tells you what the maximum and the minimum prices for the asset were respectively during the previous 15 minutes of trading. That is to say, that if at some point during the period, the price exceeded the opening or closing prices, the wick will protrude from the body to indicate this.
By looking at a candlestick chart, then, you learn in an instant how the price of an asset has moved over a set time. You learn where it started, where it ended, and what maximum and minimum swings occurred in between. Based on this, smart traders can make profitable strategic decisions.
Please note that you can look at more than one candlestick in one chart. For example, you can look at 4 15-minute candlesticks to see how prices moved in the last hour, or just one 60 minute candlestick. This will give you different perspectives on how the price has been moving during that time frame.
How can I formulate a candlestick strategy?
You can use the information contained in a candlestick chart to steer your trading strategy. In its most basic sense, a candlestick simply shows you what has been happening in the past, but this can indicate what will happen in the short-term future. And that is all we binary traders care about.
So, for example if a big, white candle that indicates that the price has been moving up in a big way in the last 15 minutes has a small wick, this tells you that a bullish movement is underway. The short wick indicates that the closing price and the maximum price are very close. This indicates that more upwards momentum might remain. A smart strategy here would be to invest in a option that will pay out if the price of the asset in question keeps going up..