Japanese candlestick patterns are one of the most commonly used market analysis charts. These patterns are widely appropriated by Binary Options traders across the globe for their advantageous features. Historically speaking, Candlestick charts are almost 300 years old chart systems which were initially used by the Japanese people. It has weathered the test of time and is highly relevant today. It is, in fact, as effective as it used to be a century ago.
The candlestick charts are mostly developed using the price action. The information pertaining to price actions and the changing dynamics of demand and supply are represented through these candlestick patterns to give a broader perspective. As an excellent visual method of analysing the market, candlestick charts enable users to speculate or study the present market condition for a comprehensive analysis. Japanese candlesticks are so lucidly represented that even an amateur can make out the essential information.
Formation of Candlestick Patterns
Candlesticks are graphical representations of important price movements at a particular point in time. They are mostly generated by the opening, high, low, and closing prices of financial assets. Before analysing the price movements, users must be conversant with the components that are integral to these candlestick patterns.
- If the opening price is located above the closing price, then a red/black candlestick is used.
- When the closing price is situated above the opening price, either a green candlestick or a hollow candlestick is drawn.
- The hollow part of the candle, also known as the body, has a number of variants – long, normal, or short – depending on its length.
- The lines which are etched above and below the body are called shadows, tails, or wicks. They usually represent the high and low price ranges at a given point in time. But, all candlesticks patterns do not use these components.
Some Commonly Formed Candlestick Patterns
Since candlestick charts are flexible and are suitable for different time frames, they make an outstanding solution for all types of traders, beginners and professionals. To begin with, a variety of candle patterns are found. To read the charts appropriately, traders must be well-acquainted with the essential concepts and the popular types of candlestick patterns. This article attempts to give an insight into some common candlestick patterns that will allow Binary Options traders to trade efficiently.
The Doji Pattern:
The Doji candlestick is generally found in a trendless market. A Doji candlestick is considered insignificant when it features in a sideways market. But when a single Doji is found at the peak of a trend, it signifies a sign of reversal. Doji candlesticks, when combined with Bollinger bands, turn highly effective, signalling a massive change in the trend. Doji patterns can provide powerful insights into a trend change in a bullish or bearish market.
The Hammer Pattern:
In the Hammer candlestick pattern, candles have a really small body with long shadows. These lower shadows are almost twice the length of the real body. This pattern mostly emerges in a scene where there is a downward trend in the market. The pattern owes its name to its structure; since there is no upper shadow as such, the candle takes the shape of a hammer.
The Gravestone Pattern:
The Gravestone has a very peculiar structure with a small real body and an exceptionally long upper shadow. This candle mostly represents a bearish sentiment in the market. The unique appearance of the gravestone candle highlights the fact that a price of an asset opens at a high point but is unable to retain the high price and ricochets back to the opening point. Such patterns also indicate that the investors have failed to reach the higher price. However, if the gravestone formation makes a contact with the Bollinger bands, resistance lines or Fibonacci levels, a reversal is indicated.
The Hanging Man Pattern:
The Hanging Man candlestick closely resembles the Hammer pattern. It appears at the end of an uptrend. The price usually moves lower than the opening price but they trail close to the high. It usually indicates a bearish sentiment and forms when there is a considerable sell-off at the opening point, but investors are able to drag the stock up, allowing it to close at the opening price.
The Harami Pattern:
The Harami Candlestick pattern can be either bullish or bearish. These candles are comprised of two candles that have real bodies of different colours. The opening price of the second candle overlaps with the closing price of the first candle. Although the two candles of this candlestick are closing in the opposite direction, there is no distinct engulfing action. If there is no upper shadow in a downtrend or a lower shadow is absent in an uptrend, a stronger trend is indicated.
Candlestick patterns are an extremely potent market analysis tool for the Binary Options trading. Binary Options traders can stay updated with the essential details by analysing these charts. These charts offer an incisive overview of the daily and hourly market updates.