Candlestick charts were first used by the Japanese in deciding prices of rice contracts more than 300 years ago. They were rediscovered by Steve Nison. Nison and many other traders such as Bulkowski have given us more insight into how these useful tools can be used. Binary options are relatively new vehicles for investments. Furthermore, trade outcomes for binary options are not simply direction-based Up or Down outcomes, but also involve other complex trade types such as Touch/No Touch and boundary trades. How do you use the candlestick charts for these set of complex financial products where the potential payout is fixed? It is important for traders to understand how trading works with candlestick charts. Those who want to use candlesticks as part of their trading strategy would have to learn how such candlesticks-based strategies can be adapted for trading this new financial product.
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Why are Candlestick Charts Important?
Those who want to earn money from fast paying binary options will soon realize that they have some challenges to overcome. Candlestick charts are not usually found on binary options trading platforms. Charts commonly found are the line charts, which do nothing else but simply give a visual indication of where the price of the asset is relative to the entry price. We have done a review of what most traders think of these basic line charts. The only good that these line charts seem to do is to tell the trader how much time is left for the tick fluctuation nightmares to end. But the moment you switch from a line chart to a candlestick chart, the trade dynamics change.
Why are candlestick charts so priceless that they have survived all these years, starting from the Dojima rice exchange in the early 1700s until date? It is because of the information that they provide. Candlestick charts can actually speak. They give information as to what they buyers and sellers of an asset are doing in the market. By looking at the shape of a candle and the positioning of the open, high, low and close prices, you get a clear picture of what action is occurring and what is likely to happen in the near-term as far as asset price is concerned.
Since your binary options platform may not present you with the candlestick charts, where can you get these charts so as to trade your live account or practice trading using a demo account?
Sources of Candlestick Charts
When it comes to sources of candlestick charts for binary options trading, there are free sources as well as commercial sources. You do not need to pay for things you can get for free. Therefore, your best bet for free candlestick charts is to get them from a forex trading platform. Whether you use the MT4 or TradeStation or JForex or even NinjaTrader, these forex platforms all have interactive candlestick charts loaded with indicators of all kinds. The advantage that you have is that you can also use your custom made indicators on the candlestick charts to generate trading signals, thus you get to kill two birds with a single stone. Some programmers have even developed software to detect candlestick patterns on the charts so you do not have to do the work by yourself. How much better can it get?
To get access to candlestick charts on forex platforms, all you need to do is to open a demo account. A demo account without deposit of any money on your part gives you access to candlestick charts.
The Best Candlestick Charts for Binary Options
Not every candlestick chart is important to the binary options trader. There are more than 30 candlestick patterns; no trader can memorize them all, or recognize them all when they occur on the charts. Furthermore, the best patterns are usually the simple ones. Candlesticks can give clear, legit signals and the easier it is to read a candlestick pattern, the more likely the trader will make a trade that will lead to a payout.
For the new and less experienced binary options traders, it is advisable to use candlestick patterns that do not contain more than 3 candles. This will make it easier to interpret and understand the patterns displayed by these candlesticks on the chart.
A full description of candlestick charts can be found here. You may also read the book “Encyclopedia of Candlesticks” by Thomas N. Bulkowski for a better understanding of candlesticks.
How to Use Candlestick Charts in Binary Options
The Call/Put binary option, which is a direction-based prediction option, is probably the most straightforward option to trade. With candlesticks, you can tell when buyers will be active (pushing prices up), or when sellers are dominating the market to push prices down. In binary options, it is not just enough to know that prices will go up or come down. You have to know the following:
- When a candlestick pattern that supports a move in a particular direction has formed.
- The exact point at which prices will start to push up or down.
- In what time the expected price move will be completed, which is how you will choose an expiry time (remember all option expire).
The answers to these two situations cannot be fully described and grasped in an article of this nature. Suffice it to say that practice is what is going to make perfect. A review of several candlestick pattern recognition indicators has revealed that many of them are non-selective and do not work perfectly. A human element is still needed in the recognition of these candlestick patterns. However, practicing on a demo account will allow you to compare indicators to see which works best, and will also produce an increased level of proficiency in pattern recognition.
Generally speaking, entries into trades are made at the open of the candle which follows the completion of the binary options candlestick chart pattern. Allow for a little price retracement on this candle before making your move. Candlestick patterns which are located at key areas of support and resistance usually produce the best results. You should also consider adding a volume indicator to the chart. Increase in volumes will support the price move in the direction the candlestick points to.
When it comes to expiry times, use the time frame of the chart as a guide. Usually, a candle is only open for the duration of the time frame chart used. So if you have a 15 minute chart open, a single candle will be equivalent to 15 minutes. When a candlestick chart pattern has formed and you have made your trade entry, you want the trade to have enough time to get into the desired trade direction. Therefore, you can count the number of candles that you think will suffice for this to happen and then multiply the number of candles by the number of minutes of the time frame chart. This will provide a possible expiry time for your trade option. Let’s illustrate this below.
This is a 15 minute candlestick chart for the EURJPY currency asset, taken from the MT4 platform of a forex company. This served as the source of our free candlestick chart for analysis of a possible binary options trade.
The candlestick pattern shown in the brown box is a bullish engulfing pattern. The closing price of the green candle is higher than that of the red candle, and the open price of the green candle is lower than that of the red candle. This is why the green, bullish candle, which represents buyers action, is said to engulf the red candle which represents selling action. The previous trend was a downtrend.
We can see that the 2nd candle in that formation closed just above the green support line, which is the pivot line of the pivot points for the day, traced by an automatic pivot point calculator to show possible areas of support and resistance. We also see that the green volume lines have started to increase in amplitude, all of which support the fact that buyers have started to dominate the market.
The trade entry for the binary options trader is to enter a CALL option, right at the open price of the candle which follows the bullish engulfing pattern. The trader has to give his trade enough time to move into the money. So a distance of about 2 or 3 candles is used to determine the expiry time to choose from the broker’s default settings. If 2 candles are chosen (including the entry candle), then the expiry time will be two candles long or 30 minutes (recall that this chart is a 15-minute time frame where a candle is open for 15 minutes). We can see that the move ended well into profit territory.
This is a guideline on how binary options candlestick trades can be conducted. Best practices will require extensive practice and testing on a demo, so you can learn how to fashion out your own trades using candlestick charts.
Q: Do binary options brokers offer candlestick charts?
Answer: Most binary options brokers do not offer candlestick charts. What is prevalent on the platforms of binary options brokers are line charts.
Q: My broker does not provide candlestick charts. Where do I get them from?
Answer: A cost-free way of obtaining a candlestick chart is by downloading a demo version of a forex platform such as MT4. The charts are free to use and come with several indicators.
Q: I have problems identifying candlesticks. What are my options?
Answer: You may use any of several candlestick pattern-recognition software on the internet. Some brokers even offer these tools for free.
Q: I am told that candlesticks are not reliable in trading binary options. How true is this?
Answer: Candlesticks are price action tools, which are some of the most reliable trading tools developed. Used in experienced hands, candlesticks are reliable tools of technical analysis.