Confirming Candlestick Analytics

Confirming Candlestick Analytics

Submitted by adil on Wed, 04/09/2014 - 13:01

As proven earlier in previous posts, candlesticks pack a lot of information that can enable a trader to enter profitable trades. Trader can identify bullish or bearish trend reversals analyzing the candlesticks for short-term durations. However, simply basing a trade entry on what candlesticks tell a trader might be a little risky. The trader should be able to complement the signals given off by the candlesticks with other supporting information and analysis.

In addition to candlestick analysis a trader should take help from other forms of technical analysis to increase the signals reliability.  Bullish candlestick reversals that occur at the support level are more reliable. The trader can identify the support level with the help of Fibonacci retracements, trend lines or reaction lows. In the chart below notice how a candlestick signal occurs at the support level and from thereon the price continues on an upward path.

In the like fashion, bearish candlestick reversals that occur at the resistance level have greater reliability. The trader can identify the resistance level using trend lines and other tools as used in the bearish signals. In the chart below, notice how the bearish engulfing pattern forms at the resistance level and how it is later confirmed by a smaller dark colored candlestick to dwell in a downtrend.

The other general tool that the binary options trader should take support from is momentum. Momentum shows the underlying inclination of the price. For this purpose the binary option trader must rely on various oscillators. In case of a bearish trend, the trader should look for negative divergences in MACD, Percentage Price Oscillator (PPO), Stochastic Oscillator, Relative Strength Index (RSI) or other likes of these instruments. On the contrary, when the trader is judging a bullish signal given off by the candlesticks, the trader should look for positive divergences in MACD, PPO, RSI, Stochastic Oscillators, StochRSI, etc.

Another important tool that a binary options trader should also consider is the money flow. Money flows indicators assess selling or buying pressure and provide confirmation on the reversals. They are price and volume based indicators. They measure how much an asset was bought for during a given period, that is, whether an asset was mostly bought when prices were higher or when they were lower. When an asset is mostly bought when prices are high, it shows that people are willing to pay a premium over it. On the other hand, if an asset is bought mostly when prices are down, it means that people are unwilling to pay a bigger price tag for the asset.

The typical indicators that are used to measure money flow from various perspectives include On-Balance Volume (OBV), Money Flow Index (MFI), Chaikin Money Flow or similar other indictors. If the divergences in these indicators are negative than a bearish reversal signal becomes a robust signal. In case, the signals given off by candlestick pattern are a bullish one, the trader than should look for positive divergences in above mentioned money flow indicators.