How to Use Candlesticks in Binary Options Trading
When you open your binary options trading platform and pick an asset to trade, you should see a price chart appear. Depending on your broker’s defaults, that price chart will be displayed in one of the following three ways:
Most brokers also make it possible for you to switch to the format you prefer. In any case, candlesticks are favored by many traders because they provide a clear, detailed, informative visualization of price. In this article, I will tell you exactly how to interpret candlesticks. I explain their pros and cons, and help you set them up on your binary options charts.
What Are Candlesticks?
Let’s get started with this candlestick tutorial by explaining the basic concept of candlesticks. If you are an absolute beginner, you may still not be sure what I am talking about.
Open a binary options chart on your trading platform. Most have candlesticks selected by default. They are the long and short rectangles of varying lengths with little lines which extend from the tops and bottoms. The lines are like “wicks.”
If you instead see thin vertical lines (not rectangles) with little horizontal lines sticking out of them, then you are looking at bars, which are a similar concept.
If you see a single curvy line across your chart, neither candlesticks nor bars are selected, so you will need to select candlesticks to see them displayed.
Note that candlesticks are sometimes called “Japanese candlesticks.” This term refers to the exact same thing.
Each candle on your chart represents a specific unit of time. How much time depends on the interval you have selected for your chart. On a one hour chart, each candlestick is an hour. On a four hour chart, each candlestick is four hours. On a five minute chart, each candlestick is five minutes, and so on.
Anatomy of a Candlestick
Okay, now you can at least identify candlesticks on your chart. But you still probably have no idea what they mean or how to read them. Why are some of them longer or shorter than others? Why do some have wicks while others do not?
You are the basics of candlestick anatomy:
- The body is the rectangular part of the candlestick.
- The long lines or “wicks” which extend from the candlesticks are known as shadows.
- If a candlestick is white or green (or any other color selected on the platform to indicate a bullish candle), that means that the market trended upward during that candle. The candle closed above the value at which it opened.
- If a candlestick is black or red (or any color selected to indicate a bearish candle), then the market was trending downward during its formation. The candle closed below the value at which it opened.
- The top and bottom of the body tell you the prices at which the candle opened and closed (for a bullish candle, the top is the close, whereas for a bearish candle, the bottom is the close).
- The shadows tell you the high and low that price reached during the candle’s formation.
Here are some tips for interpreting binary options candlesticks:
- If you see a long candlestick, that indicates that the buying or selling pressure was strong. Price successfully has moved a considerable distance.
- If you see a short candlestick, that means that neither buyers nor sellers managed to push price far in either direction.
- A long shadow pointing up indicates that buyers pushed price significantly higher before it ended up closing lower again.
- A long shadow pointing down indicates that price dipped significantly before closing higher again.
Incidentally, if you see a candle with a long shadow pointing above or below and a close near the open, that is called a “pinbar,” and is a reversal pattern (more on that later).
Benefits of Candlesticks
Why use candlesticks on your charts instead of bars or a line? Here are some of their advantages:
- They provide you with a significant amount of information. A line does not communicate the open, high, low and close the way a set of candlesticks does. Candlesticks also show you intervals clearly.
- Candlesticks stand out. They are vivid and clear, and many traders find them easy to read at a glance. For some traders, bars just do not provide that level of simple visual impact.
- Candlesticks are tried and true. Seriously, they have been around for centuries. The guy who invented them was named Homma Munehisa. He was a rice merchant who lived from 1724-1803. There was a futures market for rice which showed up around that time, and Homma wrote a number of books on investing. His candlestick charts were so helpful that they have been used ever since.
Drawbacks of Candlesticks
There really are not a whole lot of reasons not to use candlesticks on your charts. There are only a couple reasons I can think of. One is that they might look a bit “cluttered” to you.
Plus, personally, I find OHLC bars easier to read, because the horizontal lines stick out in such a fashion as to tell you instantly where the open and close are at. The line that sticks out to the left is the open, and the line that sticks out to the right is the close. Candlesticks show this through the color, but I always have to think about it.
“Indeed, you do not even need colors on a bar chart to read whether bars are bullish or bearish, whereas with candlesticks they are critical.”
Experiment with bars vs. candlesticks and figure out what you prefer. What is great is that once you learn to use one, you know how to use the other. They really are just two different visual representations of the exact same information.
How You Can Set Up Candlesticks On Your Charts
Now that you know how to read candlesticks, you will need to know how you can place them on your binary options charts.
The exact steps you need to take depends on the layout of the platform you are using. That being said, a lot of binary options brokers are powered by a program called SpotOption. While elements may sometimes be rearranged, in general, this is all you have to do:
- Look for the chart on the trade page where you can see the movement of price for the asset you want to analyze.
- The chart may already be displayed as candlesticks, but if it is displayed as a line, you will have to change it manually.
- To do this, look for a set of pictograms which show different ways you can display price. There should be at least two of these. One should show a little zigzag line, while the other should show little candlesticks. You will likely find these pictograms on or near the chart itself.
- If you are currently looking at a line chart, the zigzag pictogram will be selected. If you want to switch it to candlesticks, then simply click on the other one which shows the candlesticks.
- Your chart should now reload as candlesticks.
Expert Tip: Make Your Candlesticks Red and Green
As one last step, some platforms may give you options when it comes to candlestick colors. Others may just load them as red and green automatically. If you are given options, I highly suggest that you make them red and green yourself. Set bearish candlesticks to display as red and bullish candlesticks to display as green.
Why do this? You just want to make interpreting the candlesticks as easy on yourself as possible, and red and green are colors which most of us can easily associate with the meanings they are set to convey. When you see a green candlestick, you automatically think, “bullish,” and when you see a red candlestick, you automatically think “bearish.”
“The less you need to think about these basics, the easier it will be for you to spot trade setups and focus on other aspects of trading which require more in-depth interpretation.”
Why not go with black and white? Well, if they are displayed on a white background, they look more like “filled” and “hollow,” and that does not really send a clear meaning. Why would one associate a hollow candlestick with upward movement? Personally, I find this confusing, and plenty of other traders do too, which is why green and red are now defaults on many platforms.
Using Candlesticks for Price Action Trading
Now you are ready to learn a little bit about trading with candlesticks. Candlesticks are great to display on your charts regardless of the type of analysis you are using—whether it be fundamental or technical analysis. But where they really are essential is with price action.
Price action is where you look for patterns in the formations of the candlesticks on your charts (note that you can use bars as well if you prefer). Certain patterns tend to correlate with certain movements in price. For example:
- Pinbars. I have sometimes also seen these referred to by other names, such as “hammers” and “shooting stars.” This is a fairly flat candle with the close and open right near each other. The body of the candle should be located in the top or bottom third to fourth of the candlestick, with a long protruding “nose” going the other direction (the high or low). Formed at an extreme, it is a signal to buy or sell.
- Inside bars. If you have a smaller bar contained entirely within the previous bar, it is called an “inside bar.” Even one good inside bar may point toward a breakout on the way. Multiple inside bars are even stronger. If you can get four or more to line up, you are often in great shape.
- Triangular patterns of consolidation. This is where you have a set of larger bars followed by progressively smaller ones which are inside of the preceding bars. It is a breakout pattern. Basically, it is just a nice set of inside bars.
If you get good at identifying these patterns, they can tell you when it is time to place a profitable trade. To learn about how to do this in-depth, see my article on Candlestick Patterns.
Conclusion: Candlesticks Make it Easy to Read Your Charts and Plan Your Trades
If you are not currently setting up your binary options charts to display candlesticks, you are missing out on a chance to make your trading a lot easier. Candlesticks are far more informative than line charts, and provide you with a wealth of information at a glance. They also facilitate price action trading, which is something that you cannot do with a single line representing price.
So log onto your binary options platform and click on the icon which shows the candlesticks to display them on your chart. If you have downloaded MetaTrader 4 or another charting platform to help you plan your trades, set up candlesticks there too. No matter what trading method you are currently using or plan to use, you should find that they help you make smarter, more profitable trades.