One of the most powerful tools a binary options trader can possess is the ability to read a chart pattern for purposes of identifying and successfully profiting from price trends and market volatility. While fundamental analysis can be useful and beneficial for investors with a relatively long time horizon, the efficiency and lightning fast information flow of modern financial markets supersedes the ability of traders to capitalize on fundamentals in the short term. The goal for binary options traders is simply to identify the potential for the underlying asset to reach or surpass the designated strike price at expiration. Therefore, by its very nature, fundamental analysis falls short in providing the necessary tools for traders to evaluate the likelihood of favorable price movements during the specified time interval before the option’s expiration. Binary options traders can benefit by using technical analysis to inform their decisions over these short-term time intervals. Specifically, candlestick patterns are a powerful analytical method for traders to utilize in understanding what direction a particular market is likely to trend. In fact, candlestick patterns are so powerful that they have remained popular analytical tools among traders for the past three centuries.
Candlestick patterns originated from Japanese rice traders in the 18th century and gained mainstream popularity with technical analysts throughout the world during the technological transformation of the financial industry. Candlestick patterns are effective instruments for identifying price trends over all time intervals from minutes, hours, months and years. The primary benefit candlestick patterns offer technical analysts and traders is the unique ability to signal market pivot points on a chart which can reveal new directions for price trends. This is powerful information for binary options traders who are searching for market trend reversals on underlying securities when they are formulating their trading decisions to determine the best strike price. For instance, if a trader can quickly pinpoint a market top on a given security it simply follows that the appropriate trade should be a put purchase instead of buying a call. Likewise, a determination of a market bottom would entail a call purchase and avoid buying any puts. These infrequent, yet highly powerful, turning points in a market are where binary options traders can reap tremendous profits and minimize risks. Most markets typically trade within a specific range or follow an easily identifiable price trend. The unique ability for candlestick patterns to signal the top or bottom of the price range, or warn of a reversal in a trending market for a given security, makes these tools one of the most useful to a trader who is utilizing the power of technical analysis.
This method of displaying price information on a chart comes from the fact that the components being expressed often look like the form of a candlestick with a body that resembles a “candle” and “sticks” that can take the appearance of a wick or tail. Specifically, each “candlestick” represents a time interval on the chart that can be selected and defined by the trader according to the trading strategy that is being used, whether minutes, hours, days, or weeks. Within each interval, there are four primary components that give each candlestick its appearance. The body of the “candle” is illustrated by the difference between the opening and closing prices of the underlying security during the specific time period. The “stick” – either a “wick” or a “tail”, and sometimes both – represents the high and low prices for the time period. There is a final element that is a key to understanding candlesticks, and that is its color, which signifies whether the security closed higher or lower than its opening price. Typically, these colors are either white or green for a higher close, or black or red for a lower closing price. A trader is given a total of five vital elements regarding the price action of a given security in each candlestick, yet when combined on a chart with consecutive time intervals, these provide a clearer view of the market for binary options traders.
Generally speaking, a long solid body on a candlestick indicates a strong directional price trend for that interval. These are known as marubozu candles and can be useful in identifying a trending market and capturing a momentum trade. It is the candlesticks with long wicks or tails that create some of the best trading opportunities for binary options traders because they often signal market turning points. Candlesticks with small bodies and larger sticks are categorized as hammers, dojis, shooting stars, inverted hammers, and hanging men. These often represent indecisiveness and lack of market conviction in the prevailing trend. These patterns are especially useful for binary options traders, and when combined with other analytical tools such as volume and relative strength indicators, can result in executing precision trades. In technical analysis, each chart tells a story about the underlying security, understanding the power of candlestick patterns is an essential element to becoming a knowledgeable and successful binary options trader.