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 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.
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.