How to use candlestick winning strategies in binary options

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Trading Binary Options with Candlesticks

Candlestick indicators are one of the most utilised tools in a trader’s chest.

They allow the trader to form a view on how the option is likely to expire, up or down.

When it comes to Binary Options, when the expiry time is set to the timeframe examined with the Candlesticks, trading becomes that much more profitable.

If you are slightly unfamiliar with the technicalities, you can read our refresher on Binary Option Basics.

If you are considering trading Binary Options with Candlesticks, then our candlestick strategies below are your best starting point.

What are Candlesticks?

Japanese Candlesticks (or just CandleSticks) are a graphical representation of key levels within a defined time period. These are the open, close, high and low. They are particularly helpful for traders who want to get an idea of volatility in a particular range.

From the image on the right, you can see that there is quite a bit of information that you can gather from the CandleStick. The candlesticks also differ in color and can either be green (white) and black (red).

Taking a look at the image, there are a number of characteristics of each candle. The difference between the open and the close is termed the “body” of the candle. If the candle closed higher (close above open) then the body is green. The opposite can be said for the candle that closes lower with the red body.

The short lines that are above and below the candle represent the range which the price traded throughout the period and are the difference between the high / low and the open / close levels.

When trading binary options with candlesticks, the trader tries to identify unique individual candles as well as formations of a range of different candles.

In general, large green candles are bullish indicators and large red ones are bearish. This is based on the principle of momentum in trading.

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However, the binary options trader will not only examine the individual candle but will take a look at candlestick formations.

Candlestick Formations

Before the binary options trader can use a number of different strategies with CandleSticks, he has to become aware of the various formations that apply to candle sticks. These give a lot of information about where the asset is going and hence how the next candle will perform.

Formations are usually a collection of more than two candles. They are usually also used in conjunction with other technical indicators such as trends, volume and other trading signals. What is also important to note is that the formations can be viewed over any time period from a minute up to a number of days. When trading binary options with candlesticks, formations are an essential part to any strategy We will look at some of the most well known CandleStick formations.

Engulfing CandleSticks

When a candlestick formation is engulfing, the one candle is completely “engulfed” by the proceeding candlestick. The candle is usually engulfed by a candle that is a different color than the original candle.

When a small red candle is engulfed by a much larger green candle then this is a bullish engulfing candle. This is given on the left of the image. On the other hand, a Bearish engulfing pattern occurs when a small green candle is completely engulfed by a large red candle. This is on the right of the image.

Taking a look at the Bullish engulfing pattern, this indicates that the price has attempted to move down but has found some support and buying volume. Depending where it is on the trend, it could either be an indication of a continuation or a reversal.

The opposite can be said for the Bearish Engulfing Candle. It is an indication that either an uptrend is about to reverse or the downtrend is likely to continue.

Morning and Evening Stars

Morning / Evening stars are usually only presented in times of market illiquidity and hence “gapping” in the price. This is usually at times like overnight or over the weekend.

In the image, the morning star is on the left. The way that the trader can interpret the morning star is that initially, the sellers are in control of the market. However, the second candle gives a slight indication of a reversal to a bullish trend. Indeed, the large green candle confirms this.

The evening star has the same explanation. Initially, the buyers are in control. However, it appears as if the market is turning bearish. This is confirmed by the last candle.

Harami

Harami looks like the opposite candle to an engulfing one. In this, we have a large candle (either red or green) that is followed by a much smaller candle in body that is overshadowed by the initial candle.

In the image on the left is the bullish Harami. Although the Harami is not as convincing as the engulfing pattern, it is still a good indication of any possible reversal in the preceding trend. The Bearish Harami is seen on the right of the image and should also be monitored as a possible example of a reversal from an uptrend.

Three Method Formations

Comprised of 5 candles, a three method formation can either be bullish or bearish. The three method formation is usually identified by the three smaller candles of a different color that are within the range of the bigger candles.

In the image, on the left, we have the Bullish three method formation. The interpretation of this formation is that initially the buyers were in control and pushed the price up. However, the sellers are trying to take over the bullish trend. However, the buyers eventually overwhelm the sellers and the trend continues up.

The same interpretation on the downside can be gleaned from the Bearish Three Method formation that is on the right of the image.

Falling / Rising Windows

Similar to the Morning and Evening stars, falling and rising windows usually occur in times of market illiquidity. This is because there is a large gap down or up between the candles.

However, with the falling and rising windows the gap is way more pronounced as the candle opens far away from the open / close of the previous candle.

In the image we have the falling window on the left. It can be a sign of a Bearish Continuation pattern. The Rising Window on the right is a strong bullish indicator and should be a bullish sign of a potential rising trend.

Using CandleSticks with Binary Options

When trading Binary Options with Candlestick analysis, you will usually look to use expiry times that correspond to the timeframe of the candlestick. The trader will then enter either a CALL or a PUT option at the beginning of the next candle. Hence, if the trader is of the view that the candle will end up down (red) he will enter a PUT and vice versa for CALL.

Hence, given the candle stick pattern that the trader has observed, they have a fairly good idea about where the next candle will end up. We will go over a few examples of trading binary options with candlesticks.

Example 1: Spot Gold Candlesticks

In the image on the right, we have the Spot price of gold plotted on five minute candles. Hence, the trader should have a five minute binary option expiry selected.

As the trader can observe, there is a large red candle that is followed by a smaller green candle. This green candle is completely within the bounds of the larger red candle.

This is a Bullish Harami and it is a bullish indicator. The trader can therefore enter a 5 minute CALL option at the start of the next candle. This would have resulted in a profit on the expiry of the option.

Example 2: GBPJPY Candlesticks

Taking a look at the 5 minute candles of the Yen and GBP cross, we can see that there was a large gap down during the weekend as the GBP depreciated.

This is a falling window as the price has opened considerably lower and has also closed much lower. This is a Bearish indicator and the trader should enter a PUT option on the open of the new candle.

On the expiry of the option, the close was lower than the open and the trader would have made a profit.

Example 3: FTSE 100 Candlesticks

Candlestick analysis done with equity indexes can be equally effective. Taking a look at the 5 minute candlestick chart of the FTSE 100, we can see a large red candle that is followed by three increasing green candles and another large red candle.

This is a Bearish three method formation. On the open on the next candle, the trader should look to enter a 5 minute PUT option on the FTSE 100.

Given that the formation is a bearish indicator, the trader will likely have a trade that will end up closing lower and hence in the money. The trader can then profit from the fall.

Example 4: USDCAD Candlesticks

Sometimes, a candlestick formation can be a combination of more than one. Taking a look at the chart with the Canadian and US dollar cross, we can see that there is the tell-tale sign of Three White Knights.

However, the third white knight is considerably higher than the second one. This is a rising window and is also a bullish indicator.

Hence, the trader can be more certain of a positive outcome in the next candle. The trader will therefore enter a 10 minute CALL option on GBPJPY.

As the momentum from the three white knights and rising window takes hold, the option will expire in the money and the trader will profit.

Doji Candlestick Technical Analysis

Updated on: 6 January 2020

Candlesticks are one of the most useful indicators for technical analysis in binary options trading. We have devoted a full guide to the most common candlestick strategy available in binary options which is the pinbar candlestick binary options trading strategy.

However, the pinbar candlestick strategy is not the only strategy of this kind available in binary options. Another strategy that involves candlesticks is the doji candlestick binary options strategy. Like the pinbar candlestick strategy, this strategy also helps traders to predict the future movement of the assets offered.

The doji candlestick binary options trading strategy is used in order to predict a trend change or trend reversal regarding the value of an asset. This strategy is not that popular as the pinbar candlestick strategy, however, it’s as much as effective.

The more strategies of this kind you know, the more patterns you will be able to discover while trading. And the more patterns you will be able to discover, the larger your winning ratio and profitability rate will be.

If you want to lean how the doji candlestick binary options strategy works then read the article below.

What is the Doji Candlestick Strategy?

As explained above, the doji candlestick binary options strategy is a method of predicting the development of a new trend regarding the movement of an asset. By trend we mean the increase or decrease of the value of an asset.

Let’s give a concrete example in order for you to understand what a trend is if you are new to options trading:

– Imagine that the value of an asset was continually increasing for more than 10 hour now.

The above scenario is an example for an up-trend, as in the value of the asset was continually increasing.

Now, if you notice a doji candlestick pattern forming then you will be able to know with large accuracy that the trend is expected to reverse at any moment. By trend reversal we mean that the value of the asset would stop to increase and would begin to decrease shortly.

So, in this case all you need to do is to purchase a binary options contract that predicts that the value of the underlying asset will be lower after a certain amount of time expires than the current value of the asset.

However, in order to do this, you will have to be able to spot a doji candlestick pattern first. Below you’ll find the description of the doji candlestick pattern.

What are doji candlesticks?

A doji candlestick is a candlestick formation where the real body of the candlestick is very small or even represented by just a line, while the two shadows are very long (or of medium length) and of equal size.

If you see a candlestick formation of this kind, then usually the following will happen:

– The value of an asset will stabilize and remain relatively on the same level as on which the doji pattern was formed.

– The movement of the value of the asset will reverse and move into the opposite direction than the direction it was moving in before the formation of the doji pattern.

So, basically two things can happen. Now you might be asking how to tell which one of the just mentioned two scenarios would happen. – This depends on the length of the two shadows.

If the two shadows are only of medium length, then the value of the asset is expected to remain on the same level as during the moment of the formation of the doji. This is because the medium length shadows indicate that not many traders are interested in the asset at hand, so their influence of the movement of the asset’s value is not very strong.

On the other hand, if the two shadows are very long, it means that a very large number of traders have suddenly decided to get involved. In these cases it’s usually those traders that will finally “win” and influence the movement of the asset that will move the asset into the opposite direction. – This is why the value movement of the asset will reverse.

So, after spotting these developments you will be able to purchase the appropriate contracts and make the most accurate predictions.

If you are confused of the above and don’t fully understand yet what a candlestick is and how it’s components function (real body, shadows, etc.) then please read the segments below.

The real body

A candlestick is a financial trading indicator that displays the number of traders and amount of trades who either buy or sell a given asset during a given time frame. It also displays the movement of the asset into a particular direction.

The real body of a candlestick is the rectangular area that’s either red or green. If the real body is green, then it denotes the increase in the value of the asset. If it’s red, then it denotes the decrease in the value of the asset.

If the body is very long, it means that the value of an asset has decreased or increased substantially during a given time frame. If it’s short, it means that the value of the asset barely changed during the given time.

The shadows

The shadows are the “sticks” above and below the real body. The upper stick denotes the traders and the trades that have bought the asset. The lower stick denotes the traders and trades that have sold the asset.

A large stick means that a large number of traders have either bought or sold an asset. The short stick means that a low number of traders have sold or bought the asset at hand. If both sticks are of the same size it means that the same amount of traders are buying the asset as the ones selling them.

Making Predictions with Doji Candlesticks

So, now you know how a candlestick looks like and how you can detect a doji candlestick pattern in binary options trading. We have already hinted above regarding what kind of predictions you will be able to make when you discover a pattern of this kind.

First, you will have to understand that a doji candlestick can only be used if it’s positioned on the top or the bottom of a trend. What we mean is that this strategy is only working and you would only use a doji candlestick if the candlestick pattern is preceded by either a consistent increase or consistent decrease in the value of an asset.

If, before the formation of a doji the value of the asset was fluctuating a lot anyway, then you cannot accurately use this strategy.

So, imagine the following scenario:

– The value of an underlying-asset was continually increasing for 5 hours. You notice a doji candlestick that has medium sized shadows.

In this case you know that the value of the asset will most likely stop to increase in the future as well as that it might not necessarily start to decrease but to stagnate at the value on which the doji is positioned.

In this situation you can purchase a binary options contract that predicts that the value of the asset will increase in the future. Naturally, you will be betting against this prediction because you know that the value of the asset will in fact not increase.

Now, imagine this scenario as well:

– The value of an asset is increasing for 5 hours. You notice a doji with very long shadows.

This means that the value of the asset will stop increasing soon and will most likely start to decrease instead. You have two recommended choices in this case:

Buy a binary options contract that says that the value of the asset will increase. You will obviously bet against this prediction. You can also buy a contract that predicts that the value of the asset will decrease and bet for this prediction.

And it’s this easy to use the doji candlestick binary options strategy.

Final words

Before you use this strategy in binary options you will have to understand that it won’t work 100% of the time. It however is expected to work most of the time.

And this is all for this article. If you want to learn more about candlesticks in binary options and about other binary options winning strategies then check out our additional strategy articles and pages.

A Simple 15 Minute Binary Option Candlestick Trading Strategy

Article last Updated on August 25, 2020

This article discusses why candlestick trading is an ideal way to trade binary options.

Viewing price action in the form of Japanese candlesticks was popularised by Steve Nison. Candlesticks are now the default view in most trading software and glancing at a chart shows why.

The use of colours to distinguish bull and bear bars makes them easy to identify. The charts make a clear contrast between the real body (between the open and close) and wicks (between the high and low)

Automated Trading using Candlestick Charts

Candlesticks are not only useful for viewing the markets and getting a quick understanding of price action, they also are easy to incorporate into automated trading systems. Automatic trading relies on the designer being able to replicate what is happening on the screen into a series of logical steps.

Candlestick charts are constructed using open, high, low, close price data and many patterns will use only a few bars of data. They are therefore much easier to program compared to systems that rely on data from many bars.

Candlestick Trading for Binary Options

Options were developed to allow investors to hedge risks in a portfolio. Purchasers of an option have the right to buy or sell the underlying instrument at a certain price before a certain time. For investors, options act as a form of portfolio insurance.

Traders buy and sell options to make a profit from market moves and market volatility. Options allow traders to take advantage of margin to make bigger profits and losses they would do by trading the underlying instrument.

Binary options look similar to traditional bets. Trading a binary option risks a set amount of capital and wins a set amount. With an 80% payout a binary option trade of $100 risks $100 and wins $80.

The most popular type of binary option trade is the Higher-Lower trade. To win the trader must correctly guess whether the market will be higher or lower than the current price at a set time. This type of bet often has a payout around 80% and so the trader must be correct more than 55.5% of the time in order to be profitable.

In normal trading, a winning percentage of more than 55.5% would be easily attainable, however, for binary options the problem is that the trade will expire at a fixed time. Therefore any trading strategy must take account of the time element.

Candlestick trading is one way to address the issue of timing.

A Candlestick Trading Strategy

I have come up with a trading strategy that is simple to use and deals with the issue of timing by trading one bar ahead. Therefore the strategy will enter at the close of a bar and exit at the close of the following bar.

As you will see when you watch the video below, the trading strategy has been profitable over the past 4 years on the EUR/USD 15 minute timeframe. The trading strategy is a reversal strategy.

Trading Rules

  • Long trades require 3 consecutive lower bars. Short trades require 3 consecutive higher bars. All of them with a minimum body size that can be varied.
  • 4th candle must be a Doji with a small body. Doji body to be a minimum size that can be varied.

Video Describing the Trading Strategy and how it can be Backtested

Using Excel to Backtest the Binary Option Strategy

Microsoft Excel is a very useful tool for backtesting trading strategies. Binary options are comparatively simple way of trading and are ideal to be backtested using Excel. Excel can handle quite a lot of data, in the video above I am testing 100,000 15 minute periods.

Formulas:

In the video I showed how the rules for this simple candlestick strategy can be programmed into Excel. I did this using an IF statement

The long trades were opened using the following:

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