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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.

"Dark Cloud Cover" is considered an incomplete version of Bearish engulfing; from this, its reliability is not reduced. We look at the place of the black candle - the more "closed" white candle, the stronger signal.

If the shape appears on the vertices, then the "Cloud Cover" model of the bases. The opposite condition applies: the higher the white candle in relation to the first black, the sooner the reversal.

If the second candles do not break through strong levels of support/resistance, this is a signal that the market is not ready for a reversal and remains outside the market.

«Harami» and  «Harami cross»

Candle reverses "Bulling/Bearish engulfing". Body the second candles is fully (including the shadows) within the first. If engulfing can be considered a "lever" trend reversal, here it is rather a "brake" at the time of stopping the movement. But this is a reversal binary options signals, especially at the top.

The smaller the body, the stronger a candle and we can assume that when the open/close prices coincide, the market will be in maximum uncertainty – «Harami Cross» pattern. The analysis does not say what value the candle body is considered to be a “cross", the trader must decide on timing and asset. It is not recommended to go beyond 2 or 3 points and watch shadows - if they are almost the same good signal.

Do not miss the "Harami Cross"! Statistics show that candles on tops often lead to a trend reversal than on the grounds. It is recommended to close purchase transactions regardless of current profit / loss.


One of the rare figures in which the analysis is used not the body of a candle, and its shadows. Visually, it looks like a few highs/minimums of candles at about the same level. If candles form a pattern at the same time, as shown in the picture, the "tweezers" will be an additional confirmation.

When several shadows are at the same level, it indicates unsuccessful retests of strong support / resistance, the breakdown of which is not necessary for market makers going against trend. Behind this level there may be a Stop Loss of their pending orders, and the reversal potential is not yet enough. 

Hold candles on one max/min and traders can fix profits before the final change in the trend or trying to continue the movement. To understand who is behind the "tweezers" in addition to graphical analysis, we look at the situation as a whole, especially fundamental events.

All reversal patterns must be supported by an increase or decrease in market volumes. They can give a signal before a reversal candle appears, and it can cancel even an explicit pattern.

Trend Continuation Candles

The Japanese say: "there is time to buy, sell and relax". The candlestick continuation patterns indicate precisely the stop of the price movement, after which the trend will continue more than the other way around. On the graph, this is seen as a gap between the candles or the “window”.

Periods in which there is no visual trade are well known to traders. In technical analysis, they are called "gap". Often appear at the opening of new trading sessions.

Before the trend continues, there will always be a pullback period that partially or completely “closes the window”. If the range is wide, you can open short-term counter-trend positions. You can add technical indicators and open from the borders of the “window” working as support / resistance.

“Tasuki Gap” is a more dynamic version of the “window” - the second candle can completely close it and resumes the trend. If the next 2-3 candles remain inside Tasuki, the signal is canceled.

«White gapping candles» and «Trade max/min gap»

Patterns are quite rare, especially the «White gapping candle». If on an uptrend it can be considered as a stronger version of the «Tasuki gap», on the downward trend it is not a bullish model, and buyers only close some PUT positions in the binary option trading platform.

By price maximum/minimum candle analysis does not mean a local extremum, but a period of brief consolidation on a strong trend, followed by a “window”. At the same time, candles can form “Tweezers” and a gap in the opposite direction confirms the continuation of the main trend.

«Three Method» and «Three White Soldiers»

The number three plays an important role not only in the patterns of Japanese candlesticks but also in Western technical analysis: "Triple tops", three phases of the market (accumulation, distribution and culmination) and so on. Practice confirms the reliability of triple designs-double very unstable, and the quarter appears when the trend is almost over and do not get a big profit.

In the "Tree Method", after a large candlestick along the trend, there should be at least three retractable ones that should not go beyond her body. A small exit is allowed, and if the next candlestick again goes in the direction of the trend, we can assume that the price could not be reversed.

Three white candles in a row (soldier) can appear both at the top and the bottom represents a signal of stable price growth.  If at the top of the second and third candle is very stretched about to the previous 5-7, it will soon be an overbought market. It is recommended to stay out of the market until the reversal pattern appears!

In the opposite situation, when 2-3 candle is smaller than the first one can talk about the resistance of sellers (advance block) and may appear "Harami".

In the second part, read about the strongest reversal signal "Doji" and recommendations for use of candlestick analysis in binary options strategy.

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