Candlestick charts are used by the vast majority of serious traders to display market movements. Among the most important benefits of candlesticks is that they form price formations. By looking at these price formations, experienced traders can quickly infer a lot of important information that would not be visible in a line chart.
The big benefit of price formations compared with technical indicators is that they are much faster. Whereas indicators rely on averaging price movements over a number of periods, price formations identify market changes very quickly, at best immediately. This is an obvious plus, seeing as the quicker you can identify where the market is headed – and make the corresponding trades – the better your chances of making money.
There are many different kinds of price formations. Here we present some of the most important ones:
This is the undisputed king of price formations. “The trend is your friend,” is a familiar truism among traders, and with good reason. Trends are quite simply the best, most useful price formations that exist.
When studying a price chart you will see that prices do not move up and down along straight lines. Rather, they move in zigzag movements that follow certain patterns. Such patterns are what we call trends. Identifying trends is a crucial skill you need in order to attain success as a binary trader. That is true irrespective of whether you are a trend follower or a swing trader.
Trends can help you get a big picture understanding of what’s going on in the market. Candlesticks, on the other hand, give you a close up of what’s going on right now. All kinds of candlesticks will be able to reveal something about what is happening with the market. The one that that is most important is the simple candlestick pattern.
While trends help you to understand what the market is doing on large scale, candlestick formations let you know what is happening right now. More complex candlestick formations that contain two, three, or more candlesticks can help you make even more sophisticated predictions.
As a binary trader you can rely on candlestick formations to give you the vital information you require about what is happening in the market right now: is the ongoing movement gaining momentum or getting weaker? Is the market about to turn sometime soon? Is the current trend to be trusted? Candlestick formations have the answers.
Quite simply, candlestick formations help you stay on top of what is happening in the market right now. This makes them invaluable tools for all binary traders.
Continuation patterns are large scale candlestick formations that can consist of 50 or more individual candlesticks. Within a continuation pattern you can find a range of different price formations that point towards the trend undergoing a period of consolidation. They include the flag, the pennant, and the triangle. The conclusion you can draw on all of them is that the trend soon will gain new momentum and carry on in its original direction.
A reversal pattern is also a large price formation, but it indicates the opposite state of affairs: that the ongoing trend is ending. Soon a trend heading in the other direction will most likely occur and replace the current trend. Among prominent reversal patterns we can mention the Head and Shoulder formation and the double top.
Gaps are important because they represent opportunities to make money on binary options. They occur when a price moves from one level to another, making a gap between the prices.
A gap can point towards the occurrence of four events:
a) A major piece of news has influenced the market and enlivened a hitherto slow day of trading. This type of gap frequently gives rise to trends that move in the direction of the gap. Identifying such a gap gives you a great chance to make a winning binary trade.
b) A major piece of news enforces an ongoing movement. This usually results in the movement moving more quickly, with greater force for a considerable time period after the gap.
c) A trend has run out of steam. In such an event, the gap could suggest that a reversal is about to occur.
d) Coincidence. It happens that gaps simply occur by chance. This is more common during periods of low trading volume. Seeing as such gaps are not indicative of any change in market sentiment, the large jump in price that produced the gap is not valid. As a result, this sort of gap is highly likely to simply close. This is also a real opportunity to make a correct prediction regarding the following price movement. This, of course, is all you need in order to win a binary option trade.
In order to establish what sort of a gap you are dealing with, you can read our article on the subject here on the site.