Japanese Candlestick Charting For Binary Options
There are many ways to view financial charts. Point and Figure, High/Low bars and mountain are only a few. I get asked all the time what the best method of viewing charts for binary options trading is and I always say candlesticks. Candlesticks are the best way to trade binary options for several reasons. First and foremost it is because of how easy it is to see the market and market action. This is facilitated by how the candlesticks are formed and what they mean. At heart candlesticks are binary in nature, just like binary options. Candles are bullish or bearish, up or down black or white. Binary options trading is just the same, bullish or bearish up or down high or low black or white.
What Are Japanese Candlesticks
Japanese candlesticks are a method of plotting financial prices that began several centuries ago in feudal Japan. Candlestick charting originated in the same place as futures trading, the rice markets. There is not much difference between candlestick charts and standard high/low bar charts but that difference makes all the difference. A standard high/low bar chart displays prices in a way that each days openings, high, low and closing prices are easy to see. A candlestick chart displays those same daily features but in a way that is even easier to read than bar charts. Not only that, candlesticks are useful tools for trend identification and price patterns, can be used in any time frame successfully and can be applied to any trading strategy.
How Do You Read Japanese Candlesticks
Japanese candlesticks are read in the same way as a standard high/low bar. Each candles starts with the opening price and then traces a path that includes the daily high, the daily low and the closing price. The difference between high/low bars and candlesticks is that where high/low bars resemble a stick man candlesticks have more dimension and are color coded. A candlestick in which the closing price is higher than the opening price is white (usually) and a candlestick in which the closing price is lower than the opening price is black (usually). Most charting packages will allow you to customize the colors of the candles for maximum effect.
Basic Japanese Candlesticks For Binary Options Trading
There are four basic types of Japanese candlesticks for binary options traders to be aware of. Each of these basic types have variations and they can all be used by themselves or in conjunction with each other. The basic types are Long White Candle, Long Black Candle, Spinning Top and Doji.
- Long White Candle – The long white candle is one in which the market opens, moves higher and closes higher. This candle can form when the market is bullish and moves strongly upward, when the market hits support and then bounces or any time that buyers outweigh sellers. It forms the strongest signal when it comes at or near significant areas of support or resistance.
- Long Black Candle – The long black candle is the exact opposite of the long white candle. It forms when the market opens, moves lower and closes lower. It is a sign of bearishness. It can form when the market finds resistance or a top, in a downtrend when the market is moving steadily lower or any time when sellers out weigh buyers. Like the long white candle the long black candle creates the strongest signal when it forms near a previously identified area of support or resistance
- Spinning Tops – Spinning tops can be either white or black candles. They form when the market opens, move with a small range and closes near to where it opened. These candles are sign of indecision in the market and occur when neither bulls or bears are feeling strongly one way or the other. Spinning tops can form during up or down trends, above or below support/resistance and any other time when the markets are in or are nearly in balance.
- Doji Candle – Doji candles are one of the most unique candles. Dojis are a sign of balance in a strong market and often occur at major turning points. A doji forms when the market opens, moves strongly in one direction, then strongly in the other direction and then closes at or very near the previous day’s close. Doji’s are the one type of candlestick that are neither white or black. Like all candlesticks, doji’s give the strongest signal when they form at or near support and resistance levels.
How To Use Japanese Candlesticks In Binary Options Trading
Japanese candlesticks have many uses in binary options trading. They can be used to help determine trend, support and residence, price patterns, momentum and to generate long/short term trading signals. In fact, Japanese candlesticks may be the most useful tool in the technical analysis arsenal for binary options or any other kind of trading.
- Use them to draw trend lines and support/resistance lines just like you would use high/low bars. Experiment with using the top of the body and the top of the wick for drawing lines.
- You can also use candlesticks with Fibonacci Retracements, Fans or Arcs to look for or confirm potential areas of support and resistance or turning points in the market.
- Japanese candles can be used to identify price patterns. The easy to read format makes it much easier to see the patterns form than with high/low bars. Another bonus to candlesticks is that there are many more identifiable patterns and signals than with high/low bars.
- Candlesticks can be use to measure momentum. If the candles in a series get progressively shorter than momentum is declining, if the candles are getting longer then momentum is increasing.
- Candlesticks can give a wide variety of signals that can be used for long and short term trading signals. Rising three methods, three black crows, tombstone doji’s and dragonfly’s all have short and long term implications for binary options trading.
- Candlesticks can be used in any time frame and applied to any strategy. The best signals of any system come when they are confirmed in more than one time frame and that is true of Japanese candlesticks too.
Japanese Candle Chart Techniques For Binary Options Trading
A new candle forms every day the markets are open. Depending on the daily news, the state of the economy and the current trend these candles could be from any one of the four major groups. Just because a long white candle or a dragonfly doji forms does not necessarily mean the charts are signaling a trade. A doji that forms when an assets prices are near the middle of a trading range is not as important as one that forms when prices are testing a long term bottom. Likewise, a doji forming at a long term bottom is not as strong as a doji that forms at a long term bottom accompanied by 4 times average daily volume and a major economic announcement. Reading and interpreting Japanese candlesticks, though easy, still takes some time, experience and practice.
To find out more follow along with me, The Geek, and my Geek Account for social trading binary options.
Option Builder Tool Versus AnyOption
Many binary options brokers are offering a new tool called the Option Builder. This tool is found primarily on broker sites powered by SpotOption. SpotOption is a white label trading platform that is used by more than 80% of the binary options community. Even though it is white label most brokers using the platform resemble each other in many ways. Features, layouts and tools are nearly identical across the field. SpotOption is a CySEC regulated market maker but not an actual broker or bank, it functions as a kind of exchange for binary options brokers who choose to use the platform. Although new to SpotOption brokers the idea has been around for quite some time. AnyOption, which provides its own platform, has always allowed traders to choose from a list of risk/reward profiles. AnyOption also offers better profiles. The top end offered by SpotOption brokers is usually around 74%/0%, the top end offered by AnyOption is 80%/5%. Well known brokers using the SpotOption platform include Banc De Binary and TraderXP.
At first glance I was not impressed by the Option Builder tool. I did not think the tool gave the amount of flexibility it claims. I felt that it was just fluff meant to attract new traders. After examining it more closely and running some math equations I have come to the conclusion that the tool does indeed have something to offer. The tool is advertised as providing flexibility to traders, which it gives. It is also supposed to allow you to customize your trades to fit your style through custom expiry’s. This is true to some extent but expiry’s are limited to 24 hours from purchase. On AnyOption you can not custom fit your expiry’s but you can trade daily, weekly or monthly. Before I get into the nuances of trading with this too I will first go over what the Option Builder is.
The Option Builder is not as complicated as it may sound. There is actually very little difference between the tool and a standard binary trade. A standard trade has four steps, an Option Builder trade has five. A standard trade has expiry’s that may be 60 second, end of the hour, end of the day or end of the week (or others depending on the broker). An Option Builder expiry can be custom set to the hour and minute, up to 24 hours from purchase. Standard binary trades have one risk/reward profile, an Option Builder trade has several. The four steps of a standard binary option trade are 1) Pick an asset 2) Pick an expiry 3) Enter an amount to trade 4) Place the order. An Option Builder trade has the same steps but also includes one extra which is to pick a risk/reward profile.
I used Banc De Binary’s website to get some information on possible risk/reward profiles. This broker, and others using SpotOption, has four available profiles. The actual amounts may vary from broker to broker so be sure to check. BDB offered 74%/0%, 70%/10%, 62%/20% and 55%/30%. What this means is that trades with a 74%/0% profile will return 74% on a profitable trade and 0% on a loser, the 55%/30% returns 30% on losers and 55% on winners. At first I thought, why would you need to use this tool? It seemed as though if I wanted to risk less per trade I could just trade less, make sense? After running some numbers I found out that there is actually some advantage to using the OptionBuilder, depending on what you could expect to return from a standard binary option
Does The Option Builder Tool Reduce Risk?
Here is an example. I am bullish on a trade but don’t feel comfortable risking my usual $100. Instead of reducing my trade amount I decide to use the option builder and chose the 55% reward 30% refund profile. This means that I would be risking $70 ($100 cost of trading – $30 refund) for a potential return of $55. Assuming that the corresponding binary option trade returns 75% with a 0% refund I would have to trade and risk $73.33 to get the same payout. This makes the Option Builder trade better, it takes less risk to return the same profit. I got similar results with the 62% profile. In this scenario $100 risks $80 for a return of $62. In order to gain $62 with a 75% return I would have to risk $82.66. Once again this is a little more expensive than the Option Builder but the margin between the two has gotten a little smaller. In fact, I discovered this margin diminishes as you move up the ladder until you get to the 74% reward level. At this level to get a $74 return you only have to risk $98.66, less than the $100 it would take to get $74 with the Option Builder. So, based on these figures it looks like the Option Builder could save you some money. However, if you are really bullish on a trade it is cheaper to use the standard option.
The 75% return I assumed in the first examples is the high end of the profit range found on Banc De Binary. The low end is around 70%. Using that figure in the comparison the decision to use the Option Builder becomes a no brainer. To return $55 with a 70% payout you have to trade and risk $78.57, much more than the 70% risk using the Option Builder. This increase in risk continues all the way up to the top tier of 74%/0%. In order to return $74 with a standard trade you have to trade and risk $105.71.
Anyoption Has Offered Traders The Choice For Many Years
Now lets compare Option Builder to AnyOption. Using the bottom tier risk/reward profile and trading $100 with the Option Builder you risk $70 to get $55. Using Anyoption’s bottom tier you only have to trade $91.66 to return the same $55 and at the same time you are only risking $68.75. This is quite a bit of difference from the Option Builder tool and a new reason for me to like my favorite binary options broker even more.
My final thoughts on the Option Builder…I think it is a good tool but it takes some due diligence in order to use correctly. The ability to choose a risk/reward profile can save you money and enhance your returns, depending on what you might expect to get from your broker trading their standard binary option. The ability to pick expiry is another good feature, but again, you have to use it correctly. I rarely trade real money with a time frame less than one day, preferring to take signals on daily charts and using end of the week or end of the month expiry. However, I do see some real advantage for day traders and day to day traders. Expiry can be set to coincide with economic or earnings events or for trading overnight, which is not available with most binary options. The biggest disadvantage to the Option Builder is that you can’t always make a trade when you want to. If no one else is trading the time frame you want you will not be able to trade.
Click here for my full review of AnyOption
Click here for my full review of Banc De Binary