More About Bears & Candle Bars

More About Bears & Candle Bars

Submitted by adil on Tue, 04/08/2014 - 12:07

What goes up must come down. Where this quote of Isaac Newton is relevant to physicists or engineers, it is also relevant for the traders of financial instruments. Prices of various assets can never continue to go up, at some point they eventually come down. When they begin to come down, the trader must be capable to identify the reversal, and open profitable positions. Traders can use candlesticks patterns of the price action to identify bearish reversals occurring for smaller time duration.

One of the candlestick patterns that point towards a bearish trend is called Dark Cloud Cover. In this pattern a light colored candlestick is followed by a dark colored candlestick. This darker candlestick opens at a point above the light colored candlestick showing a strong opening influenced by buyers which is then reversed as sellers enforce their writ, who bring the price down to a point below the middle level of light colored candlestick. There is a gap between opening of the white and black candlestick. The pattern gets its name because the dark candlestick forms a cloud over prior light colored candlestick.

If another smaller black candlestick forms after the larger black candlestick, it is known as the confirmation for a bearish trend. The trader can comfortably enter short binary positions thereafter. In the chart and diagram below, notice the components of this formation, how the black candlestick forms a cloud over the other candlestick and the position of the confirmation bar.

Another bearish candlestick pattern worth noticing is the Shooting Star. It is a formation of candlesticks that occurs when an asset’s price rises above the opening price of the previous period or candlestick but closes below that opening price. For a formation to be considered a shooting star, it is necessary that formation occurs in an upward or bullish trend. Also, the distance between the opening price and the highest price of the period/candlestick must be at least two times larger than the shooting star’s size. Lastly the closing price of the asset must be very close to the lowest price of the day or be the lowest price itself.

Formation of a shooting star signals a tradable reversal to the binary option trader. Again, a quick in and out with a short trade is plausible. The chart below shows how a shooting star forms and what are its components.

There is one other tricky, elusive and unreliable formation that a binary option trader must look out for. It is Bearish Belt Hold. The BBH form when a small white candlestick is followed by a larger black candlestick whose opening price is very high compared to white candlestick and is also the day’s high. Furthermore the price continues to fall leaving a small lower shadow. Although bearish belt hold is thought to give wrong signals often, a binary option trader should consider reading it carefully because this formation is interpreted as a change in the market’s sentiment away from bulls to bears.