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Candlestick analysis. Part 2: strongest reversal signal «Doji» and recommendations

Candlestick analysis. Part 2: strongest reversal signal «Doji» and recommendations

The first part examined basic concepts of candlestick analysis, continuation and reversal figures. We move on to the strongest signal of trend change and how to avoid the errors of the use of candles in binary option strategy.

Doji candles

The strongest reversal signal and highlighted in a separate section of candle analysis. The basic rule - the less often there is a candle doji the more important it is and the most stable results are observed on timeframes from M30 and above. On shorter timeframes candles becomes too much, they stop working.

In the classic doji, the closing price is equal to the closing price +/- several ticks. But if the body of the candle, albeit small, but still clearly visible, the classic candle analysis works or not? There are no strict criteria, everything depends on the average volatility of the asset. Sometimes even 2-3 points can be a normal situation. Also look for additional confirmation, such as overbought/oversold or crossing the Moving Average.

In any case, such candles (even if false) require a binary option trader special attention; otherwise, you can get a big loss from a sharp trend change!

After a long white candle (on top)

The volume of purchases is almost exhausted, and it is important to understand that this candle does not mean that the balance of power is really starting to change in the direction of sellers. Rather, the market is in a state of uncertainty. For the correct analysis, you need at least three following candles confirming a reversal or the beginning of consolidation.

On a downtrend, the accuracy of the doji signals falls, as do other candlestick patterns. The reason is that more effort is needed to move the price down than to increase it. The problem is in psychology: for most small and medium players, it is easier to expect a correction or reversal to begin than to open new SELL positions, only market makers reduce the price. Even if there is a candle indicating the end of the movement, the asset may still fall to the levels of the pending large Take Profit.

Doji candles in bases need more confirmation than candles on top!

«Long-Legged», «Rickshaw Man» and «Gravestone»

These candles also show that the market is "tired" or as Japanese analysts say the trend has "lost its way".But here the situation is different. If a long white candle indicates weakness of buyers, then the long upper shadow on the “Long-Legged” or “Gravestone” Doji indicates the sellers are constantly trying to stop the uptrend.

The price continues to up but constantly runs into strong resistance, which returns it almost to the level of opening.

Binary option guide believes that the «Rickshaw Man» appears when an attempt to reverse the trend ends with a temporary balance between bulls and bears, as evidenced by almost identical shadows and a small body.

Professional traders believe that "Rickshaw Man" will be a reversal signal, only if it is next to at least one classic Doji, stay out of the market!

«Three stars»

This group has the strongest reversal pattern. Almost does not appear in the classic form, between the left and right Doji can be 2-3 divergent candles. It works well both on the tops and in the bases. 

Recommendations about use …

  • Not everyone can use candlestick analysis. You need to be able to identify the basic patterns at a glance. In the classic form, they almost do not happen; visual memory is heavily loaded, especially on small timeframes where there is little time for analysis.

Okay, it's not that bad: there are methods for memorizing visual information, choose the right one for you. Even if you choose a “non-graphical” strategy or binary option signals: to technical indicators, fundamental events or market volumes cannot be ignored candlestick analysis.

  • Candles cannot be the only decision making factor. Perhaps 200 years ago it was not so, it was possible to trade successfully only on candle combinations. There are many external technical and fundamental factors to consider now. Patterns indicate only the probability that the market will reverse or continue the current trend.

Newbie’s often trade on a template, forgetting that the market situation is never repeated 100%. Candlestick combinations that bring profit a year ago can now lead to losses. We need constant control of the correct development of patterns!

  • More trading tools. The article contains only the simplest combinations of candles, but there is a downside to their popularity. Such figures immediately attract attention, the trader can “pull” them to the classical form, although there are no prerequisites for this. Market makers also see them and can act against everyone. For example, with Doji at the top, open a large volume and continue the trend instead of a reversal.

You can choose a cautious strategy of gradually increasing the position as the signal is confirmed. Or trade rare, but also profitable patterns, such as "Three black crows" (reversal) or "Division" (continuation). Most traders do not know them, so their stability is higher (especially on higher timeframes).

  • Control the "life" of the figure. The probability of breakdown of a candle is directly proportional to the time of its existence on the chart. If there are no strong events, large players can begin to “pump” the market; periods of silence are not beneficial for them. And, it would seem, a reliable model quickly turns into a meaningless combination of candles. In any strategy for binary option, there should be criteria for a “bad” figure when to close a position without taking into account current profit / loss.

  • Try to act as normal as possible. If you cannot open a transaction at the beginning or at the strong point of the figure, do not look for an entry point where it does not actually exist. Wait for the correction and there look for the possibility of a reversal transaction. But remember, candlestick analysis involves only one correction or pullback. But make the final choice based on the current situation and information from other indicators.

  • Look for additional confirmation. Candlestick analysis should always be supported by technical instruments, especially support/resistance levels. See the price movement on multiple timeframes, the presence of divergences and sharp changes in volumes.

Let's summarize. Candlestick analysis will be relevant for at least another 10-20 years, despite the growth in the use of AI and HFT in trading. Most stock transactions are still made by people, which mean that its principles will continue to work and make a profit binary signal.

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