Reading candlestick charts is one of the most important skills which every trader should have. It reduces risks in trading and leads a trader into making more sound decisions. Regardless of whether you’re a beginner or an experienced trader, the importance of reading candlestick charts remains the same. If you want to identify opportunities on a chart, one of the best ways to do it is by simply reading candlesticks – here’s a comprehensive guide on reading and trading candlesticks on Pocket Option.
What are candlesticks?
To be able to understand fully how to read and trade with candlesticks, we must understand its fundamentals.
Candlesticks are visual representations of price behavior. Its use dates back to the 18th century in Japan, where it was used by rice traders and farmers to trade rice. It was in the early 1990s when this concept of trading was adopted in the Western financial market, and its impressive percentage for accuracy was quickly noticed by traders not only in the Western financial market but also in the world. Today, the candlestick chart is more preferred than other types of trading charts such as bar charts, line charts, market profile, and point and figure – because candlesticks simply tell a lot more about the market. In addition, while a single candlestick may already provide a great deal of information about the market, candlestick patterns can further improve assumptions and market analysis accuracy.
There are two types of candlesticks visible in a chart – one is bullish, and the other bearish. A bullish candle represents an uptrend and is colored green or white. The bearish candle on the other hand represents a downtrend and is colored red or black.
A candlestick is composed of a body and a wick, sometimes called ‘tail.’ The body is the thick part of the candle that represents the trading range between the opening and closing price in a particular time frame. The tailor wick of a candle is the thin part of the candle that represents the price high and price low at a particular time frame.
A bullish candle would have its opening price located at the base of the body, and the closing price located at the top of the body. On the other hand, bearish candles would have their opening at the top of the candle body, and the closing price at the base of the candle body.
Each candlestick will have different dimensions of body and tail which correspond to a particular interpretation or analysis. To understand these interpretations of the candlestick, a trader should have a good knowledge of the different candlestick patterns and their signals. We’ll be discussing these patterns in more detail in another article.
How to Trade with Candlesticks on Pocket Option
Now trading with candlesticks is not as easy as buying or selling at the appearance of bullish candles and bearish candles – there’s more to it than meets the eye. Every candlestick conveys a different message and a trader must understand the message. There’s a more definite and sure way of trading and interpreting candlesticks and we’ll break it down in these few simple steps.
Set up a trading chart
The first thing you’ll need to do when reading and interpreting candlesticks are to set up the chart. setting up a trading chart simply means that your chart is using a particular time frame that is particular to your trading style. If you’re looking to trade for the long term, you can choose a daily time frame. However, for binary options trading such as Pocket options, a 5-minute time frame or less would be the ideal setup.
To set up the time frame of each candle, go to the upper left corner of the trading dashboard on Pocket Option and click on the candlestick icon. Choose your preferred time frame – for this case, a 5-minute time frame would be ideal.
After set up, each candlestick on the chart will represent a 5-minute trading range.
Expiration of trading
As soon as you’ve established the time frame, the next would be to set your trade expiry to low time frames such as 5 minutes, 3 minutes, or 1 minute. The expiry for every trade can be changed by going to the right corner of the trading dashboard. Choose a low-time expiry from the list of options as shown in the image.
The expiration time would be the time limit for a particular trade. If you assume that a price would go higher, the price should remain higher within the setup time frame before the expiration. It would be considered a win only if the price remained higher after the expiration time.
After setting up both time frames, it is now time to place a trade. On Pocket Options, you can either place a ‘higher’ trade which means that the price is assumed to go higher or place a ‘lower’ which means that the price is assumed to go lower.
Now placing trades would depend on a couple of factors such as the candle color, size, market volume, candle pattern, and others. For markets that are assumed to go higher, simply click or choose higher, and choose lower if the market is assumed to go lower.
For this particular step, a trader needs to know the signals as well as patterns present in a candlestick chart, to have better accuracy of assuming the market direction.
Advantages of trading Candlestick Charts
Here are some of the top reasons why it is better to trade with candlestick charts when trading on Binary Options trading platforms like Pocket Options.
No worries about price fluctuations
Why is it more profitable to trade using candlestick charts instead of other charts? One of the most significant reasons is that there is not much disturbance from price fluctuations when using candlestick charts. As you evaluate candlesticks, you’ll mostly be relying on the color of the candle as you initiate trades.
As you lower the time interval from 5 minutes to 2 minutes, you’ll immediately see the price fluctuations on the chart. As you go lower with the time frame, say 30 seconds, you’ll see that the fluctuations will be all over the place. If you rely on price fluctuations for your trading decisions, you’ll just be left with confusion and stress over entering a trade at the right time. However, referring to candle colors enable much easier trading and often higher chances of success.
A candle will start with a particular color and has a chance to continue with the same color at the end of a trading range or time frame. If this happens, a trader only needs to trade on the color of the candle. The only thing to note here is that the color can go the other way if there is a strong signal for reversal. These reversals can be identified with a good knowledge of candlestick patterns.
Single trades at a time
Another advantage of trading with candlestick charts is that you only do one trade at a time. How is this beneficial?
Let’s consider trading using price movements. If we enter a trade using price movements, we will likely place multiple amounts of trades because we are drawn to the possible price movement, and we are in such a hurry to place a trade before the time runs out. While this can win you big time, the amount that can be lost will be much greater – seeing that you only get a percentage of your bid when you win a trade, but you lose all the amount when you lose trade in Pocket Options.
Whereas, trading with candlestick colors will relieve you of any distractions as well as emotions from the price fluctuations or movements. As you make a trade using candlestick colors, you place one trade at a time. While doing this leaves you with much lesser chances of making huge wins, it greatly eliminates huge losses. Also, by placing one trade at a time, you can maintain focus on the overall movement of the chart.
Less stressful trading
In addition, trading with candlestick charts and colors relieves your stress, disturbance, and even emotions when trading. If there is too much that’s happening on the chart such as price fluctuations, it can cause confusion and a trader may end up with unnecessary emotions when making trading decisions. Simply refer to the comparison of a chart that has too many indicators and a chart that simply relies on candlestick colors. Which among these two charts can confuse and which one is easy to trade.
Trading through candlestick colors simply puts you at ease as you decide a trade immediately depending on the color and signals from the candle.
Lastly, the good thing about losing trade when using candlestick charts and colors is that you get to learn from every mistake without having to lose much. As mentioned earlier, trading using candlestick colors keeps you from making multiple trades, therefore, limiting costly losses. Furthermore, this is also an effective way of learning through mistakes.
Disadvantages of Trading with Candlestick Charts
Although there are a lot of advantages in trading with candlestick charts on binary options trading, it also has a few drawbacks. These disadvantages of trading with candlestick charts are as follows:
Lower profit rate
One obvious drawback of trading with candlestick charts and colors is that you have a low-profit rate. As mentioned earlier, this method of trading requires a trader to place single bets every time. Also, a trader waits for strong signals from candles which may take some time depending on the assumed pattern of the candles. The good thing however with the slow and lower profit rate of this method is that it has higher win possibilities than other methods. And for a patient trader, all that matters is the win.
Since this method of trading requires a good knowledge about candles and candlestick patterns, a trader needs to invest a good amount of time and effort in learning these things. Before a trader can get into trading, he or she first needs to understand each purpose or function and the expected result of a particular candle or pattern. To learn all about candles, a trader needs to watch and read content about candlestick patterns, as well as practice on actual charts. Only by doing these things can a trader be equipped and prepared for effectively reading and interpreting candlesticks on a chart.
Not a strategy
Since this method of trading requires constant practice as well as learning, it becomes more of a skill than a strategy. Although it can be effective in trading with small time frames, it may not be as effective when trading in higher time frames such as daily, weekly, or monthly time frames. When trading for longer time frames, candlestick charts may require additional indicators and tools to further improve chart analysis.
Our final thoughts
Trading with candlesticks would require a good amount of time from the learning process, and patience as you place trades. The profits may also be not much and there isn’t much thrill involved in every trade. However, the results far outweigh these concerns. By trading with candlesticks, you’ll have much lesser risks involved in every trade. Furthermore, you don’t have to deal with much stress since you trade only by referring to color and by candlestick pattern. Lastly, the profits may not be significant however they are consistent. As you master trading with candles, you also refine your patience in trading.
If you want to master your skills in trading candlesticks, check out the demo account in Pocket Options. On the demo account, you get to trade in real-time without having to spend real money.
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