We have already covered candlesticks in other articles on the site. We have talked about how they are formed and how to use them in your trading. In this current article, we examine some of the lessons you can learn from candlesticks when it comes to market phases and the psychology of the market. By taking these lessons on board, you will no longer rely on guesswork. Instead, you will learn to understand not only where the price is heading, but also why it is behaving the way it is. Based on this valuable insight, you can make more advanced predictions about coming market movements, thereby becoming a more sophisticated binary trader.
A candlestick contains a lot of information. Importantly, it gives you an indication of how much momentum the price is moving with. In order to gauge how much momentum a candlestick has, there are three criteria to keep in mind: the length of the wick, the length of the body, and how long the candlestick is.
If you are presented with a long candlestick that also has a long body but a wick that is short, this wold indicate that there is a lot of momentum in one direction. If, on the other hand, a candlestick is small and has a long wick compared to the length of the body, it will have little momentum.
This knowledge can turn an apparently random sequence of candlestick formations into a lot of worthwhile data you can benefit from when completing binary options trades.
Let’s illustrate this by using an example. Let’s say the price of an asset has previously been rising with elongated candlesticks with short wicks. Now shorter candlesticks with longer wicks appear, moving in the other direction. You can conclude that this indicated that there is greater potential for a bullish movement than a bearish development. If you were planning to invest in a High/Low option this is highly useful information. The falling prices are probably nothing more than a short break in the upwards movement. Soon the bullish momentum will in all likelihood drive the prices back up.
When market conditions are like this, it can be tempting to wonder how come the downward movement occurred in the first place, considering the greater momentum for increasing prices. In order to explain this apparent paradox, we simply have to point out that an asset’s price is determined by two factors, and two factors only: supply and demand. When there’s more demand than supply, the price goes up. When supply outstrips demand, the price heads in the opposite direction. In a situation with a lot of bullish momentum, as is suggested by long candlesticks with short wicks, more traders want to buy than there are traders wanting to sell.
At some time, though, all the traders who wanted to buy will have done so. Simultaneously, no other traders have shown an interest in buying either. This can be because they have not seen the opportunity, or because they are low on investment funds, or possibly because they need to sell other holdings before they can make new investments.
Regardless of the reason, some time needs to elapse before such traders are able to enter the market and buy. When this time passes, the traders make their buys and the price rises. This intervening time period is often typified by smaller candlesticks that can move in either direction. This is a typical consolidation period. Once it is over, the prices will in all likelihood continue to move in the preceding direction.
You, as a trader, can make a safe investment by trusting the market to continue to move according to the strongest momentum. Strong momentum makes the price direction more readily foreseeable, and you can cash in.
On the other hand, when momentum weakens unpredictability can take hold. This makes it harder to make successful binary options trades. In order to steer clear of this sort of a situation, you might want to look for candlesticks with greater momentum over a range of time frames for multiple assets at the same time.