Candlestick charts are used to track price movements. These charts are used to predict the movement of the stocks. The patterns are easy to read. The simplest way to understand them is to know what to look for.
There are several candlestick chart patterns and each signifies something different. However, their popularity and usefulness may vary.
Doji – This pattern appears when the closing price of an asset is the same or nearly the same as its opening price. The bar is represented by a horizontal line. The candle’s wick, which runs vertically, creates a cross – upright or inverted – or plus sign with the bar. A doji pattern indicates uncertainty and indecision on the part of the market.
Hammer – A hammer pattern can emerge when the price of an asset has been declining. The asset’s price drops after opening, which indicates strong selling pressure. By the close of the trading session, however, the price rallies and buying pressure builds to the point that the asset’s price is pushed above its opening price. This activity forms a candle that looks like a hammer with the wick extending downward from the bottom of the bar. A hammer pattern suggests that investors and traders are becoming bullish.
Morning Star – This pattern surfaces after three days. On the first day, a long red (or filled) bar is created as the asset’s price closes far below its opening price. On the second day, a much smaller red/filled bar is created as the price closes below the previous day’s closing price. On the third day, a long green/unfilled bar emerges as the asset’s price rises after opening, and closes above the middle of the first day’s bar. A lot of traders take this to mean the bearish sentiment behind an asset is reversing.
Shooting Star – A shooting star pattern develops the day following a strong rise in an asset’s price. The price opens above the previous day’s close, and continues to rise. However, it falls during intraday trading and eventually closes near the opening price. This causes the day’s candle to appear like an inverted hammer.
Engulfing – This pattern can surface in two ways, one indicating bullish sentiment and the other indicating bearish sentiment. Both involve a small bar followed by a long bar, where the range of the latter extends beyond that of the former on both ends. A bullish engulfing pattern develops when the first day results in a price decline (red bar) and the second day results in a price rise (green bar). A bearish engulfing pattern develops when the opposite occurs: the first day produces a price rise and the second day produces a price decline.
Piercing – A piercing line pattern develops over two days. On the first day, selling pressure pushes the asset’s closing price far below its opening price. On the second day, the price rallies as buying pressure pushes it upward, past the middle of the previous day’s open-close range. This is a bullish indicator.
Spinning Top – This pattern is created when intraday trading causes the price of the asset to drop far below, and rise far above, the day’s open-close range. The candle appears similar to a top, with a short bar and a long wick that extends from both ends. Like a doji pattern, the spinning top is a sign of market indecision.
Harami – A harami pattern emerges over a two-day period. In appearance, it is the opposite of an engulfing pattern. That is, the second day’s open-close range is eclipsed by the previous day’s open-close range. This pattern can be either bullish or bearish, depending on the activity that occurs over a three-day period. Two days of downward price movement followed by a price rise on the third day is a bullish sign. One or two days of upward price momentum followed by a price decline is a bearish indicator.
The ability to recognize common candlestick chart patterns when trading binary options will help you to choose more profitable trades. We recommend starting with the eight patterns described above. Then, with those under your belt, learn to identify the less common ones. You’ll find they can be surprisingly accurate in predicting future price movements in the assets you trade