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Candlestick analysis. Part 1: basic concepts, reversal and trend continuation candles

Candlestick analysis. Part 1: basic concepts, reversal and trend continuation candles

High-frequency trading (HFT) is gaining a larger segment of stock operations. It seems that there is no place in the market for man and standard algorithms. This is not the case - even the most advanced binary option strategy is not without time tested methods, such as candlestick analysis.

The methodology was developed by the Japanese trade in rice Munehisa Homma in 1755 and has not changed significantly to date. He also found the basic candlestick patterns by which the reversal or continuation of the current price movement is determined.

In terms of the technical analysis, candlesticks confirm two basic principles:

  • Price (candle) includes all factors affecting it; no additional analysis is required (one of the principles of Dow theory).
  • History repeats itself and with the help of graphical patterns it is possible to predict the actions of most stock players (Eder's Chaos Theory, Elliott's wave model).

The volume of the article will not allow us to describe in detail all the candle patterns; we well only on the simplest and at the same time strong figures. They can be used immediately even in binary option for newbie’s.

Reversal candles

The main purpose of candlestick analysis is to open a position and, more importantly, close as close as possible to the end of the current trend. Reversal candles require special attention!

The term "reversal pattern (candle)" is not entirely accurate. It seems that the direction changes instantly, but this behavior of the market is rare. A reversal is primarily a change in the mood of the market crowd, for example, to rise after a fall. 

The process is gradual; the graph shows it as a period of consolidation in a narrow range. It is better to consider such candles only the first signal of change and open opposite trades only when the new trend receives a final confirmation.

«Hummer» and «Hanged»

Candles, depending on the current phase of market end - the top for an uptrend or the base for a downtrend. There is no contradiction, in technical analysis there are also "mirror "patterns, such as"Triple top/bottom".

The lower shadow should be twice the size of the body, the upper one short or without it at all. White "Hummer" more indicates an uptrend, and black "Hanged" respectively on a downtrend.

When the “Hanged” figure appears, we are waiting for the confirmation of the binary signal, as this indicates that the price cannot break through the local maximum, but the strength of the bulls is still high. Therefore, the candle at the top cannot be final signal of a downtrend reversal.

«Engulfing», «Cloud Cover» and «Piecing Pattern»

Previous patterns were single price bars, but most signals are a combination of candlesticks such as "Engulfing»:
  • Current strong uptrend or downtrend;
  • Body of the second candle is larger than the first and it’s “engulfing” (without shadows);
  • The second candle is inverse color. An exception is for very small first bodies similar to «Doji».

Additional factors that increase the likelihood of a trend change after engulfing:
  • A big difference between the bodies of the first and second candles - the end of trend;
  • The reliability of reversal candle increases on long-term or very fast trends. If the trend lasts a long time, big players increase the pending opposite positions and reverse the price. In the case of sharp impulses, as on fundamental events, a quick fixation of profit begins and an engulfing candle appears.
  • Engulfing several bodies at once.