Call or Put: How to Avoid False Candle Stick Signals in Binary Options Trading
Call or Put: How to Avoid False Candle Stick Signals in Binary Options TradingApril 9, 2013
Candlestick formations are probably the best or most effective way to reach insightful conclusions as to how market trends are behaving. Because certain elementary patterns are repetitive or common they often indicate a false or deceptive signal. Looking at more advanced patterns will give you a clearer and more precise picture of market movements, and when you add gaps you will also be able to implement your binary options strategy in a more efficient and profitable way.
Gaps are sections on a candle chart where the price of a certain asset fluctuates significantly up or down, with either very little trading or none at all in between them. If you have a keen eye and your’e able to spot the gap in time, you can exploit this to your benefit and make a killing. There are 4 basic gaps in technical trading and fundamental analysis.
I. Common Gaps: When they are not placed inside the price patterns. Their presence simply indicates to you that the aforementioned stock price has gapped.
II. Breakaway Gaps: When the end of the price pattern nears these gaps begin and they indicate a start of a different pattern.
III. Continuation Gaps: This happens smack right in the middle of a price pattern when a group or a large amount of stock sellers believe the it is going in a certain direction (up or down), and their movements influence other traders and so go the markets.
IV. Exhaustion Gaps: These occur towards the end of a certain price pattern and signal a last trial to achieve new low or high points.
The gaps are driven by the masses, however in behavioral economics we learn the people are prone to make mistakes in the form of “the gambler’s fallacy”. According to Shefrin, people have a very poor intuition about the behavior of random events. In trading this is translated to an incorrect reversal strategy or overly-aggressive corrective positions.
Moving forward, there are a variety of advanced patterns that give you a better picture of the markets. First are the Bullish and Bearish reversal islands.
Island reversal patters are strong short term trend reversal signals. They can be identified by the gap between a candlestick the is reversing and two additional candles on the left or right side of it. In screenshot A you can clearly see the hammer followed by a pattern of 3 “kicker type” candles. A Bearish Island Reversal is the flip side of the same scenario.
There is a whole range of candlestick formations you can investigate in order to gain a better understanding. Hook reversals, and San-Ku (THree Gaps) patterns are just two of them. The former factors in short to medium range reversal patterns, while the latter is an anticipatory trend reversal signal. Meaning, the formation is based on a projected likelihood of an event rather than a specific trigger.
However, if you are a patient person and want to wait for the best possible formation you need to be looking for Kicker Patterns.
Screenshot B represents the strongest and most reliable pattern. When you see this formation you can be pretty sure something big is happening. In this case it’s highly likely that a group of traders has trampled another. Optimally, what you need to be searching for are gaps between the second and first candle coupled with a high volume of trading.
To wrap up, correctly identifying bear and bull traps will always be the crucial first part of your ability to execute successful trades. This is doubly important when it comes to the already high risk nature of binary options. The second part involves your ability to avoid the false formations and recognize and take more viable money-making positions after you register a real money trading account and continue investing with your online broker.
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