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Home > Deciphering the Candlestick Chart

Deciphering the Candlestick Chart

As you well know, the candlestick chart is one of the most important analytical tools available to any binary options trader. If you are looking to increase the accuracy with which you place trades, then this is a vital chart for you.

Unfortunately, it can appear to be quite overwhelming which may cause many traders to shy away from using such an aid. Deciphering the candlestick chart is not that difficult, however. If you are hoping to understand this invaluable tool, here are some of things that you should be aware of:

The Composition of the Candlestick Chart

Candlestick charts have earned this moniker because in many instances, they resemble candles. They consists of bars with a line appearing below and above the bar, much like the wick of a candle. The bar indicates the opening and closing price for a particular asset. The wick, on the other hand, tells you what the highest as well as the lowest values of the asset for that time period.

The wicks above and below the bars are also known as shadows. The wick of the top lets you know the highest value that the asset reached. The wick on the bottom tells you its lowest value for that time. If a wick is especially long it could mean that there was a change in trading behavior in the market.

The bars can either be hollow or filled in with color. In most charts, the bars are likely to be red and green, although depending on the provider, these colors may vary. The green bars indicate that the asset closed at a price that was higher than the opening value. Conversely, the red bars denote a value that was lower than the opening cost at closing time. The bars also differ in size. The overall length of the bar gives you some idea of the price movement during a set time period.

Using Candlestick Charts

Understanding the overall composition of candlestick charts is only part of the process, however. The true value of such a chart lies in what you can interpret from the bars and the wicks. This means that the most important aspect of candlestick charts is to be able to identify a particular pattern.

Now, these patterns can vary but each of them will tell you something different. A pattern can consist of just one bar and wick. Conversely, this pattern could be made up of several candlesticks over a longer time period.

There are too many patterns to count but it is important for you, as a trader, to understand them. Two of the most important patterns that you should understand, however, are knowing as the hammer and the hanging man.

The hammer, is quite like its name – there is a long bottom shadow with a small square on top of it. This appears when prices are in a strong downtrend. As a result, you can hope for bullish trading opportunities. You can expect this to occur when the open price, high price, and the close price are quite similar to one another.

The hanging man pattern is what occurs when there is a strong uptrend with the prices. This announces that bearish trading opportunities will be arising. An easy way to identify this pattern is to look for a wick that is at least twice as long as the bar.

Finding Candlestick Charts

There are many websites that provide you with candlestick charts as well as teach you how to understand them. The more reliable sites will also show the various patterns that can be created and what these could mean for your trading plan. It is important to only rely upon charts that you can verify as this is vital to the level of prediction accuracy.

This is what you need to know about deciphering the candlestick chart. It is a process and not something that can be mastered quickly. Although it requires effort, it will be well worth it.