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Basic Candlestick Patterns
Alex

LEVEL 10 : SENIOR

REVIEWS 9 | REPLIES 84

#2237

Alex

September 28, 2015 at 3:27 pm

We have already covered where you can get candlestick charts. Now let’s get on to what Candlestick Patterns are and how to use them. If you are still a beginner and have not yet read the charting article, please do so before reading any further. The article is called Binary Options Charting Options. Candlestick patterns are formed with a single candle or a series of candles. There is a total of 42 recognized patterns which can be divided into simple and complex patterns. Candlestick patterns might look complicated to read at first, but it is actually very easy to spot and interpret once you get the hang of it. It is important to note that the recognition of these patterns can be subjective in some situations.

Why Do Candlestick Patterns Work?

Candlestick patterns are a great tool to use for binary options trading. It is believed that these patterns can predict the future price movement of any asset. Candle patterns are purely traders’ reactions to the market. These patterns work because we, as human beings, will often react en masse to situations. So when traders spot the same candlestick pattern, they will all put in the same orders to buy or sell the market. These patterns can act as a leading indicator.

How Reliable Are Candlestick Patterns?

It is important to note that these patterns tend to have a bigger impact on higher timeframes. However, not all candle patterns will have the same effect on the market as other. The popularity of these patterns has caused them to have a lowered reliability than what they used to have. This is due to the fact that big trading firms are using their software to trap traders when they trade these signals. They take the orders of other traders to fill their orders in the opposite direction. This might sound confusing at first, but remember for them to be able to make large sell orders they need people on the other side to buy their orders. Don’t lose hope yet, there are still some reliable patterns that appear on a daily basis.

Candlestick Pattern Categories

Now that you know that there are 42 recognized patterns, we can divide the most popular ones into three categories. They are categorized by how many bars make up the candlestick pattern. The categories look like this:

  1. Single: Shooting Star, Hanging Man, Inverted Hammer, Doji, Spinning Tops, Marubozu
  2. Double: Tweezer Tops and Bottoms, Bullish and Bearish Engulfing
  3. Triple: Three Black Crows, Three White Soldiers, Morning and Evening Stars, Three Inside Up and Down

Basic Candlestick Patterns

In trading, I would say that less is more, so that is why we are only going to concentrate on a few basic patterns that have stood the test of time. To increase the accuracy of candlestick patterns, you have to combine it with other technical analysis like support and resistance levels, supply and demand zones, Fibonacci Retracements, trend lines and so forth. It is also important to understand what is happening in each pattern in order to trade them successfully. These candlestick patterns can be used to trade a continuation of the trend or reversal. You will, more often than not, get burned when trading reversals. That is why I would recommend beginners rather focus on continuation patterns before moving on to trading reversals. Ok enough rambling for now; let’s move on to the actual patterns:

ENGULFING PATTERN

engulf-pattern

There is a reason I started off with this particular pattern. The Engulfing is the strongest pattern of them all. It consists of two candles, and it can indicate bullish or bearish sentiment. Both involve a small range bar followed by a large range bar. The larger candle must close above the prior bar’s high or low to classify as an Engulfing pattern. This pattern indicates that the one side is stronger than the other. For example, yesterday’s candle sold off 50 pips and today’s candle closed up 150 pips. This means that there are bigger buyers than sellers, and the chances that the price will go in the same direction as the engulf are extremely high.

HAMMER PATTERN

hammer

A Hammer is a bullish reversal pattern. When a Hammer appears in a downtrend, it can signal that the bottom is near and that prices may start to rise. The long shadow indicates that sellers pushed prices lower, but buyers were able to bring the price back up and close the candle near the top. Hammers can be recognized by:

  • Little or no upper shadow
  • The body is at the top of the candle
  • The shadow is two or three times the length of the body.

SHOOTING STAR PATTERN

shootingstar

A Shooting Star looks exactly the same as a hammer, but it occurs in an uptrend, and it is a bearish reversal pattern. Buyers push the price higher, but then sellers step into the market to close price near the opening of the candle. The categories are exactly the same as the Hammer to identify them, except the body will be at the bottom of the candle and not the top.

HANGING MAN PATTERN

hanging-man

The Hanging Man is a bearish reversal pattern. When a Hanging Man forms as prices are rising, it indicates that sellers are starting to outnumber buyers. The shadow shows that sellers pushed prices down, and then buyers brought the prices back up, but they were unable to close it bullish. This tells us that buyers don’t have enough steam left to continue the uptrend and prices are likely going to turn. You can recognize a Hanging Man by:

  • Little or no upper shadow
  • The body is at the top of the candle
  • Formed in an uptrend
  • The shadow is two or three times the length of the body

INVERTED HAMMER PATTERN

inverted-hammer

The Inverted Hammer is identical to the Hanging Man; the only difference is that it forms in a downtrend, and it is a bullish sign. It is very easy to get confused between a Hammer, Shooting Star, Hanging Man and an Inverted Hammer. Make sure you know the differences between them so that you don’t make the wrong trading decisions.

DOJI PATTERN

Doji

Dojis are the most popular candlestick pattern. A Doji is formed when a candlestick opens and closes at or near the open. It looks like a cross. Dojis represent indecision or consolidation in the market. They can be quite difficult to trade as they can cause reversals or trend continuation. Doji patterns can be found in an uptrend or a downtrend. They can be recognized by their small body and relatively short shadows on each side.

TWEEZER TOPS AND BOTTOMS PATTERN

tweezers

The Tweezer pattern is formed with two candlesticks. Tweezers will frequently cause a reversal at the end of an extended up or down move. The formation looks just like a pair of tweezers. You can recognize the Tweezer pattern by:

  • The first candle must close up and the second one must close down when the market is in an uptrend. Whereas, in a downtrend, the first candle must close up and the second down.
  • The candles’ shadows must be of equal length.

Candlestick Patterns Conclusion

The ability to identify these candlestick patterns will significantly improve your trading accuracy. I will recommend new traders first to get these basic patterns under the belt before moving on to more advanced candlestick patterns. A good exercise to do is to scroll through your charts and find at least 20 examples of each pattern. By doing this, you will train your eye to spot them easier and also see in which type of market conditions they work well and where not. Remember, this is the Forex market, and nothing is for sure, so don’t expect that every time one of these patterns appears that it will be successful. Trading is a game of probabilities so make sure that your technical analysis skills are on point as well as your money management. Only take the high probability trades!

Dennis BIG D

LEVEL 7 : QUALIFIED

REVIEWS 38 | REPLIES 23

#2259

dennis

September 28, 2015 at 7:58 pm

I must say what an amazing contribution Alex has been to MetaBinaryOptions and the growing community! An outstanding in-depth article on candlestick patterns! Well done mate. I am sure a lot of people will find this extremely useful!

Cheers,
BIG D

Solomon Scala

LEVEL 2 : NOVICE

REVIEWS 10 | REPLIES 2

#2360

Soloman

October 1, 2015 at 5:12 am

Thanks for the detailed article! I am a visual learner so I really appreciate the pics that you put in. They help me so much. I know that these articles must take a huge chunk of your time so I would like to thank you for all the effort you put in. It’s great to be a part of such an awesome community.

Vance Connolly

LEVEL 2 : NOVICE

REVIEWS 8 | REPLIES 3

#2361

VanceConnolly

October 1, 2015 at 10:15 am

I was struggling to spot candlestick patterns at first, but then I went back on my charts and did exactly as you said. Now I am spotting these patterns left and right without any hassle whatsoever.

Thanks for the tip!

Duncan Killian

LEVEL 2 : NOVICE

REVIEWS 9 | REPLIES 3

#2363

dutchtrader

October 1, 2015 at 1:20 pm

I love trading with candlestick patterns! It’s so simple, yet very effective…

Connie Chipps

LEVEL 1 : NEWBIE

REVIEWS 6 | REPLIES 3

#2364

chippa

October 1, 2015 at 5:32 pm

Me too Dutchtrader. It keeps my charts nice and clean.

Kristofer Ballou

LEVEL 2 : NOVICE

REVIEWS 9 | REPLIES 3

#2365

binops

October 1, 2015 at 8:03 pm

Yeah, I don’t like staring at indicators the whole day…. They make me dizzy. That is why I prefer trading with candlestick patterns.

Darin Hotard

LEVEL 2 : NOVICE

REVIEWS 8 | REPLIES 3

#2366

hotard190

October 1, 2015 at 11:46 pm

My favourite is the Engulfing pattern. It is basically all I trade combined with support and resistance levels.

 

Marvin Wines

LEVEL 2 : NOVICE

REVIEWS 8 | REPLIES 2

#2375

marvinthegreat

October 2, 2015 at 7:33 am

Since I started trading with candlestick patterns my accuracy has greatly increased. It’s funny how something so simple can make the world of a difference to your trading.

 

Zona Gigliotti

LEVEL 1 : NEWBIE

REVIEWS 7 | REPLIES 2

#2380

zonagig

October 2, 2015 at 11:51 am

I prefer trading the shooting star and hammer patterns when the market makes a pullback. Through my trading, I have found that when I stay with the momentum of the trend, the chances of success are much higher. Counter trend moves can be very difficult to catch in most cases… at least for me

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