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Hammer is usually a bullish pattern which means it is a very important signal when looking to buy call options. This is mainly because the outcome of this pattern is that the market prices are usually expected to move upwards and thus a trader should feel free to buy call options with the expectations of the prices moving to higher values.
Since a hammer is a bullish pattern, it means it forms after a previous downward trend and this should always be considered when a trader is trading after the formation of a hammer. Also the trader should also note that the formation of a hammer is followed by bear candlesticks which are usually trying to take the lows of the hammer and in the process provide the trader with the point to enter buy call options.
Identifying a Hammer
The hammer is a type of a candlestick and the most central item to look at is the fact that for a candlestick to be referred to as a hammer the candlestick analyze the candlestick, measure the length of its body and also measure and compare the body to the tail which is also commonly referred to as the shadow of the candlestick.
For a candlestick to be referred to as a hammer, the tail should have a minimum length of twice the actual length of the body of the candlestick, irrespective of whether it is a bull or bear candle. As a trader even if the tail appears to be longer than the body of the candle, you should seek to find out if the tail is twice or more as long as well the body before making a conclusion that it is a hammer.
The hammer is a powerful signal for a reversal. Therefore traders should be careful to identify them in the market so as make informed trading decisions.
Hammer as a Simple Bullish Pattern
Sometimes in the financial markets, there may be opposing forces between the factors pushing the prices up and the factors pushing the prices down. The market at such times seems to be undecided since it makes a huge move in one direction and then retraces back to the other side leaving very long tails therefore resulting to the formation of a type of candlestick known as a hammer.
In actual sense, a hammer shows a battle between a bullish trend and a bearish trend, as the bears try to dominate and bulls are also doing their best to outdo the bears.
Therefore, after the formation of a hammer, the trader should not anticipate to witness a rapid movement in prices since the bears are usually not ready to give up their bearish trend and they are eager to push the market prices below the already established lows in the hammer candle.
Squaring of a Short Position
It is also worth noting that in trading currency Markets, a trader should understand that the market is normally dominated by traders who are usually pushed to take certain actions. For instance, a trader may decide to trade short for a whole week and on Friday he or she wants to find a good point to exit the market. For the trader to close the short position, he or she will have to buy and a squaring of a short position is normally seen as a strong upward candlestick that might look like a reversal candlestick.
This simply implies that trades should avoid trading hammers which are normally formed on Friday, but instead wait for the coming Monday so that they can open a trade. If the trader surely eels that the prices are great for placing a trade, the he or she should ensure that the expiration date is well set so o avoid the losses that can be attached to the hammer being a fake one and especially on Fridays.
The trader should keep in mind that the larger the timeframe that the he or she is using, the better it is for the purposes of analysing the implications of a pattern as well as a reversal.
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Bulls vs Bears – Waiting for a Retracement
In the currency markets, it is usually a battle of bullish candlesticks and bearish candlesticks. When bearish candlesticks form over a long time,the trader should look for a retracement so as to buy a call option. In short, the trader should wait for a hammer to form; retracement comes a short time after the formation of the hammer is completed.
For example, if a trader is trading on a daily chart and a hammer is formed, then the trader should wait for the retracement to come in the early hours of the following day. The retracement does not come on the same day the hammer is formed.
If a trader is trading a call option and the market prices breaks the lows that were established by a previously formed hammer, then the trader should look at reversing the trade so that he or she can trade on a put option. This is because the previous pattern becomes invalid and the reasons that had caused the trader to place a call option are no longer valid. But in such cases the trader should split his or her investments into options with short term expiration periods since the market is still very much volatile and it is dominated by short bull and bear candlesticks. From the results obtained from the short term expiration options, the trader can then make up his or her mind on which type of option to place.
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Part 16: Technical Analysis – Candlesticks Formations II.
In the previous episode of technical analysis (Part 10: Technical Analysis – Candle Formations), we described candlesticks formations, for example pin bar, and three line strike. Now it’s time to show you other candle formations. But first we need a bit of theory.
Trading candle formations
Trading candle formations is a type of trading using price action. That means trading strictly according to the price chart, i.e. without indicators. In this case we are using only price changes, candle shapes and candle positions – candle formations . When trading candle formations we also usually use trend lines – support and resistance lines.
Traders of price action consider that this is all that is needed for trading. According to them there is no need to use any indicators or other instruments, because they always just reflect what happened in the market in the past. Therefore they are useless and they only distract you from the real price and are unable to predict the future.
As a signal to open a trade position, we can use different candle formations from a chart (pattern and formations). We can map the actual situation on the market by price action analysis and by identifying quality patterns. Such pattern may provide us with a signal to open a position. If at the same time there are also other factors of the market which are in our favor, we can be sure that it is a very good quality signal.
Various candle formations
A few of formations that are formed during downtrend
There are dozens, maybe even hundreds of various candlesticks formations. I would even say that most of them are nonsense that people invented just to make something up. See the picture above, which summarizes a little what everything you can find in a chart. However, we will focus on the candle formations that make some sense.
Morning Star and Evening Star formation
One of the formations which I love, is called Morning star. The morning star formation is formed during a downtrend. Its exact opposite – Evening star – is formed during an uptrend. Whether it’s one or the other formation, it is always a signal that the price is going to turn.
How can you recognize these formations?
- For the Morning Star:
- 1. The downtrend is obvious.
- 2. The body of the first candle is declining and it is relatively long. It is a continuation of the current downtrend.
- 3. The third candle shows whether the price started to rise. This candle should close over the half of the first candle.
- For the Evening Star:
- 1. The uptrend is obvious.
- 2. The body of the first candle is rising and it is continuation of the current uptrend.
- 3- The third candle shows whether the price turned. This candle should close under the half of the first candle.
I’m not going to describe it too much, we can directly check out some examples in the charts and in the real world of trading. BTW if you want a cool article about it, check out candle formations strategies.
Morning Star and Evening Star candle formations
In both examples above you can see lines that help to distinguish when the trend reversal could happen. These lines are of course part of out successful strategy BERSI Scalp.
Do you want to know more about that strategy? Go to: http://bersistrategy.com.
Piercing Pattern formation
This formation can be used for the confirmation of the rotation. Although this is initially the downtrend reversal pattern, it is possible to use this candle formation also vice versa. Piercing pattern formation is very well shown in the video below, but for any case I am also going to describe it.
A video by IQ Option
- After a series of several (at least 5) consecutive candles going in the same direction we will focus on a series of candles going in the opposite direction. If in the second series we find at least three candles going in the opposite direction, we can invest on the rotation.
- This formation is even stronger when the price bounces back from, for example, a supporting line. On the other side you have to be careful that it is not just a throwback.
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I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author
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Candlestick Patterns – Popular Chart Indicator Explained
Trading simple candlestick formations with binary options is a simple yet effective trading strategy everyone can execute. We explain the strategy and how you can use it to make money with binary options.
In this article, you will learn:
- What Are Candlesticks?
- What Are Simple Candlestick Formations?
- Candlestick Strategy
With this information, you will immediately be able to start trading simple candlestick formations with binary options.
What Are Candlesticks?
Candlesticks are a way of displaying market movements. They are an improvement over the line charts that you see on TV and in the newspaper. To understand the purpose of candlesticks, let’s look at why they were developed.
Line charts display and asset’s price movement in a simple line, which has significant downsides. When you look at a chart that displays the price movements of an entire year, for example, a line chart is unable to include a dot for every single price during that year.
When you look at a price chart that is half the size of your hand, you are not seeing the millions of prices for which this asset traded during the year, you see 50 prices, if you are lucky. Maybe the chart selects one price for each week and connects them, or maybe it uses two prices for each week or only one for each month. In any case, you only see a fraction of what was going on.
Even on shorter time frames, you only see part of the picture. The price of most assets changes every second, and no line chart can display this information. Even in a chart that displays the price movements of the last hour, you only see a fraction of what was going on.
When you miss out on a lot of information, you can make bad decisions. To understand why, assume that an asset was in an upwards movement. Now the movement has stalled. During the last period, the price still began to rise, but eventually turned around and entered a fast decline. Now, at the end of the period, it has fallen to roughly the same level as in the beginning.
In a line chart, this period would be displayed as a simple sideways line. It would be indistinguishable from a period during which nothing happened, and the market has moved sideways. Similarly, a period that started with falling prices and ended with a strong upwards movement that took it back to its opening price would look the same, too. This is problematic because the implications of both periods are fundamentally different.
- In a period where the market moved upwards and then turned around, the market is now strongly moving downwards. It is likely that this movement will continue and that the next period will feature falling prices, too.
- In a period where nothing has happened, the market could have gathered new momentum. Such a period provides little reason to discard your previous predictions.
- In a period where the market started to fall but then turned around, the market is now strongly moving upwards. It is likely that this movement will continue and that the next period will feature rising prices, too.
The bottom line is: in a line chart, very different periods can look the same. This vagueness can lead to bad trading decisions, lost trades, and lost money.
Candlestick Patterns Show Extra Data
Candlesticks solve the vagueness problem by displaying every price of a period in a simple way. A candlestick consists of a thick body and two thin wicks to the top and the bottom.
- The body represents the price range from opening to closing price.
- The wicks represent the high and the low of each period.
- Candlesticks with rising prices are coloured differently than candlesticks with falling prices.
This simple system tells you everything you need to know about a period. The wicks represent the extremes that the market was unable to hold; the body represents the effective movement of each period.
Candlestick charts consist of hundreds of candlesticks, each of which aggregating the market movements of a specific period.
Typical periods range from 30 seconds (each candlestick aggregates the market movements of 30 seconds) to 1 day (each candlestick aggregates the market movements of an entire day). By changing the period, you can zoom in and out and discover the layers of the market.
What Are Simple Candlestick Formations?
Simple candlestick formations are special candlesticks that allow you to predict future market movements.
Think of our earlier example: where a line chart would have shown you the same sideways for all three movements, candlesticks paint a clearer picture:
- When a candlestick has almost no body but a long wick to the top, you know that the market has moved upwards but then turned around. Currently, prices must be on the decline.
- When a candlestick has almost no body but a long wick to the bottom, you know that the market has moved downwards but then turned around. Currently, prices must be on the rise.
With these simple conclusions, you know what is happening and what will happen next. Take a look at the picture above, for example. At first, the market was falling. In 1980, we had a candlestick with a long wick to the bottom but an upwards body. Even if you look for nothing else, you can immediately conclude that the market fell significantly but turned around and rose again.
This momentum is likely to carry over to the next candlesticks. This is exactly what happened. Whenever you see a similar candlestick after a strong movement, you can conclude that the market will turn around with the next candlestick.
The candlestick in this example is called the hammer. There is also the inverted hammer, which is a sign of downwards momentum.
Here are more simple candlesticks you can use for your trading:
The big candle
The big candle has a large body than its surrounding candlesticks and a small or non-existent wick. It indicates that the market has strongly moved in one direction with little hesitation or doubt. This strong momentum is likely to carry over to the next candlestick. An upwards big candle is a sign of strong upwards momentum, a downwards big candle is a sign of a strong downwards momentum.
Dragonfly doji & gravestone doji
In a dragonfly doji, the opening and closing prices are at the top of the trading day and there is a long wick to the bottom. The gravestone doji is an inverted dragonfly doji with the opening and closing prices at the bottom and a long wick to the top. This candlestick is similar to the hammer: the market has obviously turned around during the period and is now pushing in the direction of the opening and closing prices, but it failed to push far enough to create a hammer.
Consequently, the dragonfly doji indicates an upwards momentum and the gravestone doji a downwards momentum, but these indications are weaker than a hammer.
Doji & long legged doji
A doji is a candlestick with almost no body but a wick to the top and the bottom. Dojis indicate that the market is currently unsure where it wants to go. Dojis often happen near the end of the trading day, when most traders have stopped trading and volume is low. While a doji is a sign of a slow market, long legged dojis are signs of strong forces in balance. You can expect that one force will soon win over the other, pushing the market strongly in one direction.
Other simple candlestick formations
There are hundreds, if not thousands of simple candlestick formations – even the smallest variations have their own names. Instead of learning them all by heart, we recommend understanding the system behind them:
- Body: A long body indicates a strong momentum in the direction of the candlestick. A short body indicates a market with no clear direction.
- Wick: A long wick to one side indicates that the market has turned around. Long wicks to both sides indicate indecisiveness.
Combine these two indications, and you can interpret every single candlestick you see without having to learn any formation by heart. Try to understand the market’s direction and momentum, and you will immediately know what is going on.
Binary options traders can trade simple candlesticks in three ways:
- Trade single candlesticks.
- Paint a larger picture.
- Combine candlesticks with other indicators.
Let’s look at these strategies one by one.
How to trade single candlesticks
Single candlesticks allow for short-term predictions. Since they are based on only one candlestick, they only apply for the next one or two candlesticks. A big candle, for example, predicts that the next candlestick will feature rising prices, but after that, it lacks the ability to paint a clear picture.
If you want to trade a single candlestick, you have a few options:
- High/low options, short expiry: When you trade a single candlestick, you can invest in a high/low option in the direction of the candlestick’s momentum. Search for candlesticks with a clear momentum indication, for example a big candle, and keep your expiry short. You expiry should be no longer than the length of one period. In a 30 minute chart, keep your expiry at or under 30 minutes.
- One touch options: After simple candlestick formations that indicate a strong movement, for example a big candle, you can invest in a one touch option, predicting that the strong momentum will push the market far enough to trigger the target price. Ideally, you would use a target price that is less than one-third of the big candle’s size away from the current market price. Use the longest expiry that offers a target price within this distance.
- Boundary options: For binary options traders, dojis and long legged dojis offer the opportunity to win a trade. During these formations, the market was in the balance, unsure about where to go. This insecurity can’t last long. The market will soon break out of the doji. If you can find a boundary option, you can profit from this prediction. Search for a boundary option that offers target prices within the doji’s price range and use the longest expiry that you can get.
You can focus on a single of these strategies or combine them and pick the one that suits your current market environment.
How to trade the big picture with digital options
Instead of trading single candlesticks, you can also trade the sum of all candlesticks that you see. Typical prices charts have dozens of candlesticks, and their combination can tell you a lot about what is going on.
For example, assume that you see these candlesticks in a row: downwards big candle, upwards hammer, upwards big candle.
These three candlesticks create a vivid picture of what is going on: the market fell in the first period, then turned around in the second period, and continued to rise strongly in the third period.
Compare to trading just the big candle alone; this widened scope increases your ability to predict what will happen. You know that there has been a significant shift in market sentiment, making it likely that the new movement will continue for quite some time.
With this knowledge, you gain more investment possibilities. Since you can predict a longer movement than with a big candle alone, you can invest in a high/low option with a longer expiry. You can also use a one touch option with a target price up two times as far from the current market price as the size of the big candle. If your broker offers ladder options, you might even find a profitable opportunity to get a very high payout.
Of course, you can also combine this strategy with trading single candlesticks. The key is always to be honest about what you know.
- If you can only interpret the last candlestick, limit yourself to a short time investment.
- If the last three or four candlesticks all tell the same story, you can additionally invest in an option with a longer expiry or a higher payout.
- If you have already invested in a movement, won the option, and the next candlestick confirmed your prediction, you can invest again. In this way, a single movement can easily offer four or five chances to win a binary option.
Combine candlesticks with other indicators
Candlesticks can be a great way of finding the right way for trading other indicators. When you are trading trends, swings, or technical indicators, you often know that the market will change direction soon, but you might be unsure when. Candlesticks can be the tool to get your timing right.
When you expect than an upwards movement will soon weaken and turn around, for example, you can monitor the market for an inverted hammer. As soon as you find it, you invest in falling prices. In this way, you maximize your chances of winning a high/low option and even open the door to the possibility of trading a one touch option.
Conclusions On Candlesticks
Simple candlestick formations can help binary options traders find short-term trading opportunities in any market environment. Even newcomers can quickly learn the skills to interpret simple candlestick formations and invest based on their predictions. We recommend understanding the logic behind candlesticks, most importantly the relationship between body size to wick size and placement, and either trading single candlesticks with short expiries or a combination of candlesticks with a longer expiry.
Trading Candlestick Formations
By far in binary options trading, candlestick formations are regarded as the most effective ways to carry out the technical analysis. To give you an insight into the swings of price action in the market, these candlesticks are used by the experts. It actually represents the instincts related to the price action of a particular trading entity and how it can affect the overall pricing. Its use helps one to determine the current strength and direction of the trend enabling him to frame his strategy accordingly.
Sample candlesticks formations sometimes used for trading
The price action, thus measured, is shown in the numerous candlestick patterns while not altering its basic format. If you are a novice, then it may be quite difficult for you to get the useful information as you will have no idea what data has to be used. For that, you have to know very well what candlesticks are and how can you use its functionality to the optimum. Candlestick is an effective unit to see the various changes that the price of a certain trading entity undergoes during a specific period. In a close rectangular-shaped box, the price action is represented. The pattern is comprised of opening, highs and lows, which is ultimately followed by closing.
You should also consider the backdrop colour of the box. An empty and white-coloured box stands for a bullish session which means that the trade is closed with a price higher than the opening price. On the other hand, a bearish session is represented by a black-coloured box and short horizontal lines. A session is said to be bearish when the closing price is almost same as that of the opening price.
Advantages of Using Candlestick Formations
- Market Turns can be Predicted: As compared to traditional indicators, candlestick charts facilitates the investors to predict the market turns more effectively. As such, he can hit the market whenever he wants.
- Deep Insights to Forex Market Condition: Unlike the traditional bar charts, candlestick patterns also enable the investor to know the underlying force that is causing the move.
- Improves Analysis of Western Charts: If you wish, then you can also use western technical tools on candlestick patterns. By combining the Eastern and Western analysis in this way, you will be able to perform better in the trading than a person who uses only the bar charts.
- Can be Understood Easily: Anyone, from an experienced trader to a novice, can derive immense benefits by using these patterns as they are easy to understand.
TIP: Three White Soldiers and Three Black Crows Trading Strategy
Normally, the Three Black Crows Pattern in an uptrend signals the bearish reversal of the trend. And, in a downtrend, it signals the continuation of the trend in the same direction. In this way, the traders are able to identify …
Undoubtedly, these patterns play an indomitable role in revealing myth and riskiness associated with the market of Forex trading. As such, the novice traders gain self-confidence to go on trading on the entities they like. After all, the clarity and the accuracy level that these formations have given to the enthusiasts are far beyond comparison.
How to read the Candlestick Chart? – (Analysis for trader)
Table of Contents
You want to know how the Candlestick Chart works and how to analyze it correctly? – Then you have come to the right place. We will explain the structure of the candlesticks and show you how to read the chart formation correctly. With more than 7 years of experience in this field, we will give you additional tips & tricks.
Candlesticks are the most popular method of traders to analyze the market because this chart presentation offers much more information than the normal line chart in online trading. The formations are adaptable to any market (asset) and to any timeframe (time unit). Read through our article to get a better insight.
What is a Candlestick and where it comes from?
A candlestick is a chart representation in the form of a candle. It is a special representation in contrast to the well-known line chart. These candles can be used to analyze the price development of an asset in more detail using several pieces of information.
The candlestick chart originally comes from Japan and since the 18th century has been a method for traders to better analyze the markets. This representation has only advantages for a trader. In the following sections and pictures, we explain the exact structure. In addition, you can find more general information on the Wikipedia article for Candlesticks.
Trading with candlesticks is one of the most accurate methods in the market because these candles make it very easy to find out exact price brands and levels in the market. In the picture below, you can see the typical candlesticks:
Typical Candlestick Chart
The properties of the candle chart
Candlesticks can be applied to any asset. Furthermore, the candlesticks are provided with an expiration time. It always takes a certain period of time until a new candle is formed or the old candle has expired. Of course, there are also a variety of settings. You can watch a candle in each time period.
- Applicable to any asset (Stocks, Forex, CFDs, ETFs etc.)
- The candles always have a certain expiration time. After this, a new candlestick is building.
- Candlesticks are available in various time units
The meaning of candlesticks:
The structure of a candlestick is always the same. In the pictures below, you will find a detailed explanation of the structure. The candle always has a candle body. The candle can be either bullish or bearish.
- Bullish: upward candle, which shows a price increase
- Bearish: downward candle, which shows a price drop
- Doji: The opening and closing price is the same (no price change)
The candlestick also displays the high and low of the entire period of the candle. The closing price can be below the high or above the low. Look at the following illustration.
A candle can only contain various information. It is important to note that a candle always has a certain expiration time. There is always a fixed period in which the formation develops. The timeframe can be set in the trading platform of your Online Broker.
Just like an upward candle, there is also a downward candle. These candles differ only in the opening and closing price. Most trading platforms display this difference graphically in different colors. Personal adjustments are of course also possible.
An important formation of a candlestick is the Doji (picture below). It indicates that the course has the same opening as the closing price. You the high and low we see that there was a price change but the price has returned to the starting point. With the right strategy, this candle can produce a reversal signal in the chart.
With the candle view you can read a lot of information from the market. The high and low are displayed in a certain time frame and you can see the opening and closing price. This information can be used for your own trading strategy.
- Candlesticks have a certain expiration time
- The expiration times can be set variably in the trading platform.
- The candle view provides a lot of information for trading.
Which trading platform is suitable for beginners?
Since online trading, every broker has offered trading platforms with candlestick charts. Many promising strategies are based on this representation. In addition to this representation, other settings are usually offered, such as line chart, Heikinashi and more. Log in to any trading platform and start the analysis yourself with the candlesticks.
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The most important Candlestick Formations: Very effective
Now you should know how a candlestick works. These chart representations give interesting interpretation possibilities to a trader, which we will deal with within the following sections. It is especially important for many traders to see a trend reversal. This is not easy in most cases and requires a lot of practice.
The following candle formation can help a trader to recognize the trend reversal in the market faster:
Hammer/Pincandle: Candle with long wick and small body
The hammer (Pincandle) has a long wick and a small candle body. We can see that in a certain period of time the price rose extremely and then immediately fell again. Thereupon this wick and a high or low form. This is the possible sign of a trend reversal.
Additional interpretations say that many market participants have been absorbed in this candle. All buyers (bearish pin candle) that have been set long in this candle are in minus after the end of the candle and may have to close the position. This may accelerate the trend reversal.
As an experienced trader one knows that this candle formation represents a so-called “V” in the market. The market shot exactly in one direction and immediately reversed. This candle often occurs where stop losses (risk limits) were triggered by other traders. Many traders use this knowledge to enter the market directly.
- Long wick
- Small candle body
- Trend change directly in the candle
- Buyers or sellers are surprised and may have to close positions
Candlestick Pattern recognition by using the candlestick chart
Candle formations can be combined with various trading strategies. Whether indicators or just the chart, a trader can customize his trading style. In the picture below we see the function of a pincandle in connection with a resistance point in the market. Candle formations can act as an entry signal.
At certain prices in the market, resistances or support form. This comes about because the majority considers certain prices to be particularly expensive or cheap. The market moves supply and demand. If such a place is identified, one can look for the optional entrance with the Hammer (Pincandle). These patterns often occur at the edges of a sideways phase.
Restistance is a price point where the market has already been several times and has managed in vain to break through it. Very often you see the hammer as a reversal signal. With the right analysis this candlestick formation can also be used in a trend.
Personally, it is enough for us to trade only a certain candle formation at market levels. This prevents false signals for us and we can focus completely on a simple strategy.
- Hammer or Pincandle is very well suited for a trend reversal.
- Pay attention to this candle formation at striking levels in the market
- Simplicity is better in the end
Our conclusion on the Candlestick Chart and the Analysis
On this page, we have given you a detailed explanation to the known candle formations. Now you should be able to read them correctly. From our experience, you need some practice as a beginner until you are completely familiar with the presentation.
The candlesticks offer more information to a trader than a normal line chart, which is why it is advisable to switch to candle form. Worldwide, there are infinite formations and strategies on this topic.
Our personal tip is to create your own trading style and refine it bit by bit. Carry out your own back tests with candle formations or use them actively in the trade.
Good luck with trading.
The Candlestick Analysis is the best way to develop and adapt trading strategies. You get more information than by other chart types.
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