Common Candlestick Patterns
If you want to trade binary options successfully, one thing you will have to do is find a trading method which can help you achieve results. If you have been searching for a strategy which is simple and straightforward and which can work for you over the long term, consider candlestick patterns. In this candlestick patterns tutorial, I will tell you exactly what binary options candlesticks are and how you can use them to trade profitably.
What Are Candlestick Patterns?
First of all, if you are not familiar with candlesticks, read How to Use Candlesticks in Binary Options Trading. Candlesticks are simply a format for displaying price on your binary options charts (other formatting options include line charts and bar charts).
Candlesticks make it easy to visualize what price is doing. You can color the bullish candlesticks green, and the bearish ones red. The shape of each candlestick allows you to see the open, high, low, and close of price for that period.
Again, if you are not familiar with the anatomy of candlesticks and the basics of reading them, you should start with the article linked above.
If you are all caught up, let’s talk about candlestick patterns. Basically, when price is consolidating and about to break out or reverse, and in some cases, when it is going to continue along its current path, certain patterns are common. If you can learn to identify these patterns as they are forming, you can get an understanding of what is going on with price right now—which helps you to figure out what it is likely to do in the future.
“With candlestick trading, you are letting price itself speak to you. This makes it an incredibly powerful method for identifying trade setups.”
Note that you can use bars for candlestick trading as well. Both work equally well. You can play with both formats and figure out what visually is easier for you.
One more thing which is useful to know is that trading with candlestick patterns is sometimes referred to as “price action,” usually in Forex circles. It is the exact same thing. So if you are looking for additional resources, you might try looking up “price action” as well—especially since some of the best info out there has been circulated under this name.
How Candlestick Patterns Work
With candlestick trading, the steps are pretty simple:
- Open your charts and set them to display as either candlesticks or bars. It is up to you which you prefer.
- Add some moving averages if you want (more on this in a bit).
- Keep an eye on price and start looking for meaningful patterns.
- If you spot such a pattern, look for confluence and check to make sure the context makes sense.
- If you do determine you have an excellent setup, then go ahead and trade accordingly. Just make sure that that the entry and expiry times make sense.
- During a trade, be on the lookout for new information. Sometimes you will see an opposing price pattern form. If you do, it may indicate that it is time to get out with a partial profit.
Pros of Candlestick Patterns Trading
There are quite a few reasons why I love candlestick patterns, and why I think you will too:
- The basic principles are easy to grasp. Think how absolutely convoluted some forms of fundamental and technical analysis can be. You can feel totally lost learning a lot of trading strategies. But candlestick patterns are very simple and straightforward. There is nothing overly “technical” about learning to recognize familiar shapes like consolidating triangles. So if other types of analysis are intimidating to you, you probably will find candlestick patterns more approachable.
- You can keep your charts clean. In theory, you actually do not need to have any indicators on your charts in order to use candlestick patterns to spot trade setups. Indeed, those with a purist mindset often insist on this. Personally, I recommend you do use a few moving averages and other tools for confluence. But the bottom line here is that you are not going to be cluttering up your charts with dozens of indicators. And that can make it a lot easier to see what is going on. There are fewer conflicting signals, and your mind will probably feel less cluttered too.
- Price itself is telling you what to do. Technical indicators are of course charted based on the information conveyed by price, but with candlestick patterns, you are literally taking your cues from price itself. There is something satisfying about this; it is more direct.
- This strategy is tried and true. There are people who have been using price action for decades to trade reliably across numerous different markets. This is particularly great where binary options trading is concerned since you can trade so many different assets. You will find the same patterns across a wide range of financial instruments.
Cons of Candlestick Patterns Trading
- Great setups do not show up constantly. In fact, you may go days between trade opportunities, and may have a relatively small number of winners every month. This really is not a big problem if you are patient. You can consistently grow your account through these methods. But not every trader has this kind of patience, so price action is not a fit for everyone.
- There are some weird inconsistencies between timeframes. If you see what looks like a perfectly formed candlestick on one timeframe, and then you try zooming in or out, suddenly it may not look like a setup at all.
With the first potential drawback I have mentioned, the only real solution is patience. Develop it if you can. If you cannot, another trading strategy may work better for you.
For the second issue, I suggest you do not look for confirmation across multiple timeframes. Instead, focus on one timeframe, and then check for confluence on the same chart. I will explain more about confluence in a little bit.
Examples of Candlestick Patterns You Can Use In Your Trading
By now, you are probably wondering what kinds of candlestick patterns you can look for and how they can help you make a profit. Here are some examples!
- Pinbars: Sometimes called “hammers” or “shooting stars,” pinbars are candles with flat bodies. To be a pinbar, a candle must have a long protruding high or low, and should be located at a price extreme. The “pin” comes from Pinocchio. The protruding high or low is the “nose.” The nose is lying to you, pointing in the opposite direction that price is likely to go. If you see a pinbar at a swing high and the nose is pointing up, it means to sell. If you see a pinbar at a swing low and the nose is pointing down, it means to buy. This is a reversal signal.
- Outside bars: If you have a large bar or candlestick which entirely envelopes the previous one, it is an “outside bar” or “outside candlestick.” These are continuation signals. If an outside bar is bullish, buy. If it is bearish, sell.
- DHLC and DLHC: These stand for “double high lower close” and “double low higher close” respectively—an apt description of what they look like. Look for them at swing highs and swing lows. Like pinbars, they are reversal patterns where support or resistance has been tested and has held. Triple versions may occur as well.
- Inside bars: These are the opposite of outside bars. An inside bar or candlestick fits entirely inside its predecessor. If you have four or more of these in a row, you have a really strong pattern. Oftentimes when this happens, the appearance is that of a triangle focusing to a point. This is a breakout pattern. Price could head in either direction (good for a Double Touch trade).
There are other candlestick patterns, too. If you research, you can discover them. You do not need to learn a ton of different types of patterns to trade successfully however. Becoming really good at just a couple can be enough to make you rich.
Context and Confluence
Now I want to tell you the #1 reason why a lot of traders struggle with price patterns. This is an issue which hits most traders sooner or later, even if in the beginning they seem to pick up on price action quickly.
Basically, you can be an expert at spotting perfectly formed candlesticks, and still end up losing money. The reason is generally that you are oblivious to the context of your trades.
This has to do with a broader understanding of what is going on with the market. A price pattern gives you one indication that price is consolidating, breaking out, reversing, or continuing, but on its own, that data is not always meaningful.
“A beautiful pinbar in the wrong spot may not be telling you anything—like in the middle of a strong trend, rather than at a swing high or swing low. So location is very important.”
Of course, this leaves the problem of identifying when you are at a swing high or swing low. For that, I recommend looking to other indicators to provide confluence. “Confluence” simply refers to confirmation from other sources.
You can use anything you want, but a few common choices among price action traders include:
- Moving averages. These help you visualize support and resistance, and the crossovers can alert you to possible reversals.
- Fibonacci retracement levels. These are support and resistance levels, and often good to keep an eye on.
- Trend lines and pivot points. You can draw these yourself to mark zones of support and resistance.
Resist the urge to add too much to your charts. Keep them simple and clean. 1-3 indicators is all you need.
Action Tips for Success
You now should have a strong understanding of what candlestick patterns are and how you can learn to trade them. So to close this candlestick patterns tutorial, here are some useful action tips:
- Wait for perfectly formed candlesticks. Not all price patterns are equally well-formed. Look for those which are close to optimal. Do not force an inferior trade. Be patient and await the best setups.
- Always look for confluence. You do not need confluence to justify a trade, but it certainly helps.
- Go through old data and circle lots of examples of ideal setups. Do this with one type of setup at a time (just pinbars the first time through, just inside bars the next time through, and so on), and check out charts shared online by experts too. This is how you learn what ideal setups really look like.
- Stay away from choppy markets. Lots of whipsaws on your charts? You are going to get false signals, so hold off until things smooth out a bit.
- Wait for the retracement. Price often retraces before a new trend is established. Hold off until this happens before you enter. This will prevent avoidable losses and also provide you with additional confirmation for your trade.
- You will get the best results if you avoid fast timeframes. Candlestick patterns can be used for 60 second trades, but they are more suitable for trades which last a few hours or longer.
- Test before trading live! Perform backtesting and demo testing before you risk real money. As with any trading method, it takes practice before you can confidently and profitably go live with candlestick patterns.
Conclusion: Candlestick Patterns are a Powerful, Elegant Method for Identifying Trade Setups
If you value simplicity, clutter-free charts, and a powerful, direct method for trading, it is hard to beat candlestick patterns. It takes patience to wait for the best trades to come to you, but it is worth it. If you become an expert at candlestick trading, you will have a profitable strategy on your side which can serve you across many different markets.