It is known that analysis of the situation on the binary options market using Japanese candlestick patterns produces analytical forecasts with high reliability. The graphical representation of price fluctuations in the form of candles is more than 3 centuries old.
The Japanese believe that the high and low prices are not as important as the opening and closing prices. The “body” of the candle is drawn between the opening price and the closing price. If the opening price is lower than the closing price, then the “body” is white, which characterizes the “bullish” mood of the market.
When the opening price is higher than the closing price, the body of the candlestick is black, which means the market is bearish.
The lines coming out of the “body” up and down are called “shadows”. Shadows indicate the maximum and minimum prices for the period for which the candle is being built. When trading binary options, candlestick analysis is often used by traders, which proves the reliability and effectiveness of this method. The binary options market is perhaps more sensitive to changes in trading sentiment than the stock market or Forex. Therefore, Japanese candlesticks for binary options are sometimes preferable to other mathematical and graphical indicators. After all, Japanese candlesticks were created not only as an element of graphical construction of prices for the current period, but also as an indicator of stock market sentiment. It is not for nothing that some candles and their combinations have emotional names: “Evening Star”, “Tombstone”, “Three Crows”, “Soaring Dragon”, etc.
It would seem that Japanese candlesticks are not much different from a bar: opening price, minimum, maximum and closing price. But it is precisely the way of depicting “candlesticks” that forms a “bridge” between the analytical process of the mind and the intuitive component of consciousness, where imagination, abstraction and emotion play a role.
This is why Japanese candlesticks are loved by many traders who use them for successful trading.
More about trading strategy
The Three Candles strategy was created before options trading platforms existed. It was first used in the Forex market and the futures market. Even there, in those distant times, the strategy gained popularity and success.
With the advent of binary options, traders began to try to use it on new platforms. The result exceeded all expectations. Here the strategy revealed its full potential. It is most effectively used on short-term transactions. In addition, earnings on options do not directly depend on how far the chart has gone; what is important is the direction of the trend.
Important! The strategy is only suitable when working with trend reversals. With minute fluctuations, there is a high chance of making a losing trade.
The essence of the strategy is to receive the most accurate signals when a trend reverses and make money on it. To do this, you need to wait for a specific chart signal before buying or selling an option.
The strategy works exclusively on a candlestick chart. You need to carefully monitor the market situation, paying special attention to the position of 3 candles of different colors. The position of two candles of different colors next to each other gives the first signal that the trend will soon change its movement. After waiting for confirmation of the third one (it must have the same colors and direction as the previous one), the deal is concluded.
The strategy is characterized by:
- ease of use;
- high efficiency when concluding transactions with the trend and against the trend;
- universality of trading – the strategy is applied to all currency pairs.
Even a novice trader can easily cope with this strategy. The main thing is to have a cool head and take your time.
pros
The strategy has both pros and cons. Among the undeniable advantages it is worth highlighting:
- high performance indicators;
- development of observation and deep understanding of the market;
- gaining patience when working on a strategy;
- different expiration times to make a profit.
These are the main advantages, in fact there are many more.
Minuses
The strategy also has quite a few disadvantages. Some of them become critical to the deal. If you do not follow the strategy, there is a high chance that the deposit will be lost.
Read more: Should you trade with the trend in binary options?
The disadvantages include:
- long wait for a clear signal;
- quick response to the market situation;
- Instant switching from a bullish to a bearish trend.
Without showing proper patience, there is a high probability that the concluded transaction will become unprofitable. The same applies to switching from one trend direction to another. Experienced traders have been honing this skill for years, which is why a beginner will not be too comfortable using the Three Candles strategy.
Candlestick combinations
Candlestick combinations are more reliable than signals from single candles in terms of forecast reliability. But they cannot be an absolute guarantee for a successful transaction. Candlestick analysis was self-sufficient in those ancient times when quotes were learned from newspapers or by telegraph.
Today's pace of market price movement and the development of technical means require additional knowledge and indicators from the trader. Candlestick combinations work well in conjunction with oscillators - mathematical indicators that are present in almost every trading platform. When signals from two or more indicators are received, the chances of a successful trade increase.
Tweezers
Interesting candle combination. The remarkable thing about the combination is its frequent appearance on the chart, and the reliability of the forecast is considerable.
- Description: a pair of candles at the peak of the trend have two shadows of equal length, after which the trend breaks.
- Action: As soon as the second candle closes, an option is bought, taking into account that the previous trend will change direction.
Absorption
This combination occurs frequently, but requires confirmatory signals from other indicators.
- Description: A pair of candles is being considered. The second candle “absorbs” the previous one with its body: the body of the “bullish” candle overlaps the body of the “bearish” one, or the body of the “bearish” candle completely overlaps the body of the “bullish” one.
- Action: This reversal combination serves as a signal to buy an option with the expectation that the previous trend has been broken and the price movement is changing the trend.
Evening Star
A combination of three candles that has a high forecast reliability.
- Description: The first candle is bullish with a long body, the second is a “spinning top” or “Doji”, the third is bearish with a long body.
- Actions: Reversal combination. It signals that the upward trend is ending and is turning into a downward trend.
Veil of dark clouds
A combination of a pair of candles, often found at the beginning of a new trading week.
- Description: the first candle is bullish with a long body, the second candle (bearish) has an opening price higher than the closing price of the first candle. And the body of the right candle reaches the level of half (or lower) of the left one.
- Action: This combination is often the top of the peak of an uptrend; buying a Put has a great chance of profit.
Clearance in the clouds
The combination is the opposite of the previous description: a pair of candles. Downtrend, beginning of the day or trading week.
- Description: The first candle is bearish with a long body, the other (bullish) has an opening price lower than the closing price of the first candle. The body of the right candle reaches the level of half (or higher) of the left one.
- Actions: Buy Call.
Profit maximization
To maximize your profits, you must strictly follow the rules of the strategy. Even minor deviations from them become the reason for concluding a losing trade.
A trader must have patience. Excessive ardor can nullify a trader’s efforts and drain the deposit to zero. You need to wait for a clear signal from the chart about a change in trend and only then buy or sell an option.
As an additional assistant, you can resort to stochastics. Its presence or absence on the chart changes little, but to be sure of the concluded deal, the stochastic will not be superfluous.
Important! Stochastic will help to avoid erroneous judgments about trend changes and reduce the percentage of unprofitable transactions.
Following the simplest rules of the strategy, the trader can increase the percentage of prisoners to 75 and even more.
Platforms
To successfully apply the strategy, you need to choose a platform that has the ability to install a candlestick chart. Unfortunately, not all platforms have such an option.
The most common platforms with candlestick chart options are:
- 24option;
- Binomo;
- Verum Option.
Each trader chooses the platform that suits him. The difference in these platforms is small, but it is worth considering that opening a real account on each of them requires injecting a certain amount. As a rule, a novice trader’s capital is small, so it’s worth paying attention to the Binomo platform, where $10 is enough to open a real account. In comparison, 24optoin requires $200.
Indicators
The most important indicator in the strategy was the candlestick chart itself. It is simple because it does not require the installation of additional assistants to determine the trend.
Some traders still resort to additional indicators to establish a more accurate trend direction. These include the Stochastic indicator with a time period equivalent to calculating the candlestick timeframe. It helps to filter out unnecessary signals, which significantly increases the effectiveness of the strategy.
Read more: How to use a scalping strategy for binary options?
The image clearly shows that thanks to the stochastic signal line, the trader will be able to ensure that the trend direction is changing.
Currency pairs
The Three Candlesticks strategy allows you to trade any currency pair, but only if its trend changes frequently.
As already mentioned, 3 candles is a strategy developed for trading when the trend changes. The high volatility of some currency pairs allows for frequent use of this strategy.
If you choose the time to use it, then it shows the maximum result during the trading session, when the currency pair chosen by the trader is used. For example, if a trader has chosen the EUR|USD currency pair for trading, then it is better to trade them during the European or American trading session.
Frequent release of macroeconomic news guarantees that the currency pair has high volatility and will often change the direction of the trend. All that remains for the trader is to notice the signals for a change in trend in time and enter into winning trades.
Binary Options And Japanese Candlestick Strategy
Let's conduct a candlestick analysis of the dollar and yen currency pair. Open the live chart of the USD/JPY pair and watch the Japanese candlesticks on the chart.
In order for the chart to be displayed as a candle, you need to make some adjustments. To do this, go to the top menu in the chart type selection window and click on the image of the chart in the form of Japanese candlesticks.
The result is a schedule that we need. It is recommended to carry out candlestick analysis of binary options using a diagram with a selected time period of one day; this is considered the most effective method.
The chart shows two colors - green (bullish heads) and red (bearish heads), generally candles of various sizes and types. The candle contains:
- Opening and closing costs.
- Body - the distance between two specified objects from above.
- Upper shadow.
- Lower shadow.
- Minimum and maximum costs.
Each of these components is an important component of candlestick analysis. It is important to remember that one candle will not fully provide information about further price actions.
Rules
There are several rules for applying the strategy. By adhering to them, the trader will always receive income.
The first and most important rule is patience. Experienced traders have repeatedly made losing trades due to their impatience. It is necessary to wait for a clear market signal in order to secure the deposit as much as possible.
To make a winning trade to buy an option you need:
- Wait for two adjacent candles of different colors and directions to appear. A purchase is characterized by the appearance of a white or green candle, depending on the appearance of the platform.
- Wait for confirmation of the trend change by the appearance of a third candle of the same color as the previous one.
- Buy an option for a time no longer than the candle's time frame.
When using the Three Candles strategy, the most optimal time for drawing up a candlestick chart will be 5 minutes. It is also possible to place a lower value, but in this case there is a high probability of making unprofitable trades. You should not set the candlestick chart time to 60 seconds, this will result in the generation of false signals and, as a result, loss of the deposit.
For selling an option, the same rules apply as for buying, the difference is in the direction of the candle. In some platforms the candle color is black, but the most common color is red.
Strategies for candlestick combinations
The strategy provides for a set of measures to make a trading decision. The strategy is based on one or another candlestick model, but it is accompanied by several more signals from other indicators and an algorithm of actions in case of success or failure of the forecast.
Strategy “Candles + Oscillator”
This strategy combines signals coming from candlestick combinations and mathematical indicators - oscillators.
The essence of the strategy: When the oscillator shows divergence (the movements of the indicator and price charts diverge in directions), then the candlestick combination (any reversal) will help determine the time to buy the option (the appearance of a reversal pattern on the chart).
Strategy “Candlesticks + Bollinger Bands”
Although Bollinger Bands are considered a trend indicator, in tandem with Japanese candlesticks they can open up as an additional signal at the time of entering the market.
The essence of the strategy: When the price chart reaches the extreme lines of the Bollinger Bands and at this moment a reliable combination of candlesticks for a trend reversal is formed, then when the upper line of the Bollinger Bands touches, a Put option is bought, and when the price touches the lower line, a Call option is bought.
Strategy “Candles + Fibonacci levels”
A strategy that gives a reliable forecast. Fibonacci levels and Elliott waves are the only methods that are based not on price history (according to the principle of “history repeats itself”), but on the laws of cyclical numbers that take place not only on stock charts, but also in nature, technology and society.
The essence of the strategy: approaching the price to the next Fibonacci level signals: “get ready!”, and a combination of candles gives an affirmative signal to buy an option. Even with a strong trend at Fibonacci levels, with a high percentage of probability there will be, if not a trend reversal, then a correction, at which a successful transaction can also be carried out.
Despite the fact that the analysis of Japanese candlesticks already has a solid history, the time for discoveries in this field has not yet passed. Candlesticks and graphical analysis show the emotional state of market events. Two emotional components of stock trading - fear and greed - will always be present, and they, as periods of global crises have shown, are much more effective than data based on a simple study of the history of stock charts.
Perfect Pin Bar Strategy
The name of the strategy speaks for itself. Trading is based on the simplest reversal pattern; you need to wait for the formation of a pin bar, preferably as close as possible to the ideal one, and buy an option in anticipation of a reversal. Expiration period - 1...5 candles , usually the reaction to a reversal candle appears immediately.
For additional insurance, you can use horizontal levels. If the pattern is supported by strong support or resistance, the strength of the signal increases.
You need to take into work only those pin bars that correspond to significant extremes. If the chart is flat and something resembling this pattern appears, ignore it.
Compared to Forex trading, a trader working with BO is in a more advantageous position. To make a profit, he does not need a full-fledged reversal; a small movement after the pin bar is enough.
It is not recommended to use pin bars with abnormal shadow sizes . Such movements indicate the emotional nature of the market movement; trading at such moments turns into a lottery.
Trading Rules
To effectively trade in the binary options market using this strategy, you must follow the following rules. First, CALL trades should be opened exclusively during an uptrend. It is advisable to enter short positions (PUT) only during a downward trend. Countertrend trading using the patterns described above is associated with high risks.
Secondly, when three black crows or three white soldiers candlestick patterns appear, carefully study all the price bars from which the patterns are formed. In particular, pay attention to their closing and opening prices. If each bearish bar opens with a downward gap (gap) in relation to the previous one, the signal can be used to buy binary options with an expiration period of 60 seconds (see the first, third and fourth signal in the figure - there are gaps between the candles). If there are upward gaps between bearish bars (see figure, the signal is highlighted in red), it is better to skip such a signal. The same is true for bullish candles. But the most optimal entry points appear when patterns are formed, between the candles of which there are no gaps at all.
Trading signals
The best solution would be to trade during the day, when the largest American and European exchanges are open. It is better to choose an underlying asset where there is a pronounced trend during the trader’s work, and moderate volatility is also noted. In fact, this trading system can work successfully on any time frame except the second one.
Professional traders recommend choosing the most suitable timeframe in the “trading risks/dynamics” ratio, namely the M1 interval. First, you need to determine the trend in the current market, for which you can use the chart scaling capabilities.
Signal to increase
- In a downtrend, the asset quote moves.
- 2 growing green candles are formed.
- When the 3rd green candle opens, you should immediately buy a contract to increase quotes.
Increase
Down signal
- In an uptrend, the asset price moves.
- 2 falling red candles are formed.
- When the 3rd red candle opens, you should immediately buy a contract to reduce prices.
Increase
By drawing up binary contracts every time, working on corrective pullbacks, the trader has the opportunity to complete 87% of open positions successfully. Quotes naturally begin to adjust when a one-sided trend is built. It follows that by concluding a binary transaction on a corrective movement, a trader is almost guaranteed to be able to close the contract with a profit.
In this trading mode, it is recommended to strictly adhere to the principles of risk management, which involve opening transactions for an amount that does not exceed 3% of the total available deposit. If a trader has a small amount of funds in his account, then it is necessary to reduce risks and trade in minimum lots.
“Three candles” forex strategy with simple signals
When making purchase transactions, you need to focus on the following indicators:
- It is necessary to open purchase transactions during an upward trend, that is, when candles appear on the chart whose extreme values are higher than the values of the previous candles.
- You need to focus your attention on the third candle, then the market will have optimal conditions for concluding a deal.
When making sales transactions, you need to pay attention to the following:
- Selling is possible if, after a long downward trend, a bearish candle is formed with extreme points that are lower than the extreme points of previous candles.
- Similar to sell trades, the strongest signal is formed when the third candle appears on the chart, confirming the trend.
Do not forget about the rules of risk management - the use of stop losses and take profits.
To place brake lights you need to follow several rules:
- take profit is placed at the resistance or support level;
- take profit may be at a local round level ending in 00 or 50;
- and the minimum take profit value should be 35 points;
- The ideal place for a stop loss would be the support level.
Additional tools
You can include various tools in your strategy to make trading more efficient. Many traders prefer to work with Stochastic. You should focus on the following Stochastic indicators to conclude transactions:
- Buying is optimal if the moving average is above the central level and rushes up.
- Selling is possible if the moving average is lower and heading down.
In addition, you need to pay attention when Stochastic falls into the oversold or overbought zone. If the indicator readings do not coincide with the market picture, you should not trust the resulting pattern.
We also recommend studying the rules for searching for divergence in stochastics and trading based on this signal.
In addition to Stochastic, the “3rd candle” indicator is quite popular among traders, which makes it possible to find the “Three Candles” pattern on the chart. Navigating the chart using the “3rd candle” is quite easy. The indicator marks the pattern using up or down arrows, blue or red:
- When the blue arrow appears, you need to open a buy deal;
- When it's red, it's for sale.
Is the color of a stock candle important?
Psychologically, green color is perceived as approving, and red as a symbol of danger and prohibition. Therefore, it is not surprising that a beginner often tries to bet only on green candles - believing them to be the best choice.
In fact, the color only indicates in which direction the quote price has changed. You can trade with equal success on both bars if their alternation and shape fit into the strategy.
