The candlesticks help in trading. Continue reading to know how they can be used to generate trading signals.
Candlestick charts are very popular among technical traders as they are used to identify the trading patterns. These patterns help the analyst to set up trades. The patterns get formed when a few candles are grouped together. The algorithm in the binary options trading software also studies these patterns and then generates the trading signals.
There have been times when traders have been able to spot the pattern by using a single candle only. These patterns thus can be broken into two kinds. They are the single and the multiple patterns.
Marubozu, doji, spinning top, paper umbrella, and shooting star are some of the single candlesticks that generate trading signals.
Engulfing patterns, harami, piercing pattern, dark cloud cover, morning star and evening star are some of the multiple candlestick pattern formations.
These candlestick patterns let the trader get a better picture of the trade. The patterns have not been formed randomly but each has significance. They are also used for entry, exit and stop loss in each trade.
Technical analysts also have a few assumptions and these are set just for the candlesticks. It is important that you buy when there is strength and sell in weakness. When there is strength this is represented by a bullish candle and when the stock is weak then this gets reflected by a bearish candle. It is thus important that you buy only when the candle is bullish and sell only when the candle is bearish.
It is important that one is flexible with these candlestick patterns. The textbook says something about the candlestick pattern but it is important that you be open to some variations which could be because of the condition of the market. You thus need to be flexible in your trades and quantify the flexibility.
It is also important that the previous trend is looked closely at. Thus in case you are looking to go long and are finding a bullish pattern ensure then the trend prior to it was bearish. Similarly if you are looking to go short then make sure that the earlier trend was long.
Technical analysis is an interesting study and the best part about it is that it can be applied across the asset classes. Apart from knowing the candlestick patterns, it is also important to know the support and resistance levels to get profitable trades.