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Candlestick Analysis Tip

When trading binary options, there are many interesting mechanisms and tools a trader can use to help predict what direction the price is going to move towards. One of the more useful of the tools are candlestick charts. Candlestick charts are a style of bar charts that measures price movement in blocks of 1 minute to 1 month periods and includes details on the opening price of the asset, the highest price the asset reached, the lowest price the asset reached, and the closing price within the block period. In this Tip, we will show you how to understand candlesticks on charts, and how to use them to predict the direction the price will go in. For simplicity, all of our examples in this lesson will be based on 1 day periods.

Candlesticks are short term analysis tools that help traders see activity that's happening for that moment. These activities help traders identify reversals, or continuations inside of one day periods. That's what makes candlestick analysis really useful for binary options trading. Candlestick analysis, however, does not show traders support—a term used to represent that buyers and sellers in the market support the current price, or resistance—a term used to describe that the market is putting pressure on the current price eventually leading it lower. Support and resistance are things that are identified over longer periods of time. Instead candlestick analysis gives you information specific to that day, and therefore needs to be combined with additional market analysis to be effective.

Below is an example of a candlestick chart:

 

Body – The candlestick has two kinds of bodies, a color filled body, and a transparent body. When the body is transparent, it means the price of the asset closed higher than its opening price for that day. The bottom line of a transparent body marks the opening price, and the top line of a transparent body marks the closing price for the day. When the body is filled, it means the asset price closed lower than its opening price for that day.The top line of a color filled body marks the opening price, and the bottom line marks the closing price of the asset for the day.

Here is an example of the two bodies:

 

As you can see from the example above, the price of the asset increased higher than its opening price. This is the reason the candlestick body is transparent for the day.

 

 

As you can see from the example above, the price of the asset dropped a lot lower than its opening price. This is the reason the candlestick body is filled for the day.

Wick – The wick is the green line extending above or below the body. The wick indicates the highs and lows for the day. The end of the wick at the top of the body shows the highest point the price reached for the day. The wick at the bottom of the body shows the lowest point the price reached for the day.

Tip

When reading candlestick analysis, always pay attention to the wick. If the wick below the body is really long, it means there are buyers in the market, and they've managed to out buy the sellers, pushing the price much higher than the low for the day. The chances of the price closing higher for the day are very likely. The exact opposite would be the case if the wick is really long above the body. This indicates that the sellers managed to out sell the buyers in the market pushing the price much lower than the high for the day. The likelihood of the price closing lower for the day is high.

You can download candlestick analysis charts from Forex, or buy opening a demo account with a broker. Take a look at our brokers section for details. 

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