Candlestick analysis. Part 2: strongest reversal signal «Doji» and recommendations
- VFX Blog
- For beginners
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.
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!
- 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.
- 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.
- 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.
- 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.