What are Candlesticks in Binary Options?
Candlesticks are indicators in financial trading including binary options that will reveal the movement of certain assets based on the actions performed by traders during a particular moment in time. Imagine the following example:
- The value of an asset is at $100 during a given moment.
- 1,000 people decide to sell the asset bringing the price down to $90
- 10,000 people decide to buy the asset increasing the final price to $92 after a few minutes
- After further 30 minutes, the value of the asset becomes $110 because of the high number of buys
Using normal charts, in the initial few minutes you would have only been able to notice that the value of the asset has decreased dramatically. Seeing this, you would have most likely bet on the outcome that the value of the asset would continue to decrease even further.
As such, you would have lost money in the example above since the value actually recovered and reached an even higher value than the initial value.
What if there would be a method that would reveal you the ratio of people selling and the ratio of people buying the mentioned asset? – If this would be possible, then you would have been able to see that a huge number of people decided to buy after the price dropped, meaning that the price was expected to increase in the future.
This way after the drop from $100 to $90 you would have been able to tell that the price would have INCREASED from here on rather than continued to decrease. You would have been able to purchase the right binary options contract in this case.
Well, doing EXACTLY the thing mentioned in the above paragraph is actually possible using candlesticks in binary options.
In order to understand how this works, first you will have to know what a candlestick is made of. Below you will find the elements that make up a candlestick.
The real body
The real body or body of the candlestick is the rectangle in the middle of the candlestick. The length of this rectangle represents the size of the movement caused by trader action. For example, if the body is short, it means that the value of the asset has only increased/decreased slightly. A long body denotes a large charge in the value of the asset.
The shadows are the lines on top or on the bottom of the real body. The length of the line denoted the number of traders and trades that were necessary in order to determine the movement of an asset.
For example, a very long line on top means that a very large number of traders have decided to buy the given asset. A long line on the bottom means that a large number of people have decided to sell the asset.
Red vs. green
Each real body also has a color, most commonly either red or green. A red color means that the value of the asset was decreasing. A green real body means that the value of an asset has been increasing.
Some binary options brokers do not use the colors red or green in order to represent the direction of candlesticks. The most common alternative is white and black where white represents an increase while black represents a decrease.
The length of the real body
As hinted above, the length of a real body denoted the size of the increase or decrease in the value of the asset. A long red real body means that the value of the asset has decreased a lot in a very short time frame. A very long green real body means the opposite of this.
The length of the shadow
The length of the shadows denotes the number of traders and number of trades that were executed for a particular position. A very log shadow on top of the real body means that a lot of traders have bought the asset in question.
A very long shadow on the bottom of the real body indicates that a of of traders have suddenly decided to sell the asset in question.
Predicting the Movement of Assets with Candlesticks
Now that you know what candlesticks actually are in binary options and how to read them, we will reveal you how you can use them in order to predict the future movement of an asset. There are basically two main strategies that work best.
The shooting star strategy
The first strategy is called the shooting star strategy. This strategy can be used both in binary options and traditional forex or stock trading as well. However, it’s most efficient in binary options trading.
The shooting star binary options strategy uses candlesticks in order to predict the decreasing of the value of the asset in short term. In order to use this strategy you will have to look after a very short green or red read body as well as a very large lower shadow.
Let us explain what this means.
Imagine that the value of an asset is continually increasing. Now, you suddenly notice a very small decrease (represented by a small red real body) or a drastically lower increase (represented by a very small green real body).
You also notice that the real body has a very (!) small or even non-existing upper shadow but a very long lower shadow.
This means the following:
- A very large number of traders (almost every trader trading at that moment) decided to sell the asset in question.
This will lead to the following:
- The value of the asset is expected to decrease and continue to decrease in the upcoming 30 minutes – 1+ hour.
What you should do:
- Buy a binary options contract and invest a lot of money (or as much as you want) on the outcome that the value of the asset will decrease in the next 5 minutes to 30 minutes.
The hanging man strategy
The hanging man strategy is basically the opposite of the shooting start strategy in binary options trading. This strategy is used to predict the sudden upward change in the movement of assets.
However, this strategy is less accurate than the shooting star strategy. If you are a newcomer, then you should initially focus on the shooting star strategy only.
You will be able to use the hanging man binary options strategy during a session of trading when the value of an asset is continually decreasing. In this case, if you notice a very short red or green real body and a very long upper shadow you can guess that the value of an asset will begin to increase shortly.
Take this example:
The value of an asset is continually decreasing. At some point you notice a very short real body and a very short or non-existing lower shadow as well as a very long upper shadow.
This means the following:
- A very large number of traders have decided to buy the asset in question.
This will lead to the following:
- The value of the asset will highly likely increase.
What you should do:
- Invest in a binary options contract that predicts that the value of the underlying asset will increase during the next 5 to 30 minutes.
And it’s this is how these binary options candlestick strategies work. Pretty simple, isn’t it?
General Tips and Considerations
As you could have noticed above, using this binary options winning strategy is not that complicated after all. It’s all about spotting patterns and acting accordingly. A very important part of learning to use this strategy is to remember the designs of the candlesticks mentioned above.
You will have to exercise a little bit trading with a demo account before you will be able to spot these trend developments hinted by the candlesticks all the time. However, after a few rounds of practice you’re set to go.
Likewise, you can use the information you learned here in order to make all kinds of other predictions as well. Such as, for example, if the real body is very short and both the upper and the lower shadow are of equal length and are very large, then in this case, the value of an asset is expected to remain constant.
There are also two considerations you will have to remember. The first is that binary options candlesticks won’t always get it right. In other words, it’s also likely than in the case you see a pattern like the ones mentioned above, the opposite of the expected outcome will happen.
However, most of the time these patterns are indeed capable of predicting the correct outcome. We’d say they are accurate around 75%-90% of the time. This is more than enough to generate a constant positive winning ratio.
The second consideration is that you can only use these strategies in order to predict the movement of an asset on a short-term basis. By short term we mean anything between 5 minutes to 1 hour. These strategies will not be accurate for long positions.
And this is all for this strategy guide. However, you are welcome to check out our additional guides and articles in order to learn more binary options winning tips and tricks. Have fun trading.