Candlestick Patterns for Binary Options
Introduction to Candlestick Patterns
Candlestick patterns are very important for every trader as knowledge of important candlestick patterns and what they do will make for easy pickings in the binary options market. One of the candlestick patterns in question is the engulfing pattern, which serve as reversal patterns on both ends of the trend. Being reversal patterns, they can therefore be used to trade the Call/Put trade type as well as the Touch/No Touch binary options .
The engulfing candlestick patterns are double-candlestick patterns that have a shorter candlestick with or without a shadow on one or both ends (Day 1 candle), and a longer candlestick (the Day 2 candle) with a higher high and a lower low than the Day 1 candle. In this situation, the Day 2 candle is said to “engulf” the Day 1 candle.
There are two types of engulfing candlestick patterns seen in the markets:
a) bullish engulfing
b) bearish engulfing
Bullish Engulfing Candlestick Patterns
The bullish engulfing pattern is made up of 2 candlesticks. The first candlestick is a bearish candlestick which may or may not have a shadow on both ends of the body. The second candlestick is longer and bullish in orientation. The bullish Day 2 candle has a higher high and a lower low than the bearish Day 1 candle. This pattern results because there is an initial downtrend, represented with the bearish Day 1 candle. This spills over into the Day 2 candle which has a lower open than the Day 1 close, but buyers have had enough and they surge into the asset and drive it upwards to close above the high of the Day 1 candle, reflecting a change in sentiment and a preparation for a further push.
The appearance of the bullish engulfing in a downtrend signifies a change in trend, so the binary options trader should prepare to trade the new trend with a CALL option, as well as set price targets for both the TOUCH and NO TOUCH trade.
Bearish Engulfing Candlestick Patterns
The bearish engulfing pattern is made up of 2 candlesticks. The first candlestick is a bullish candlestick which may or may not have a shadow on both ends of the body. The second candlestick is longer and bearish in orientation. The bearish Day 2 candle has a higher high and a lower low than the bullish Day 1 candle. This pattern results because there is an initial uptrend, represented with the bullish Day 1 candle. This spills over into the Day 2 candle which has a higher open than the Day 1 close, but sellers come into the picture and force the price of the asset downwards to close below the low of the Day 1 candle, reflecting a change in sentiment for a further downward push.
The appearance of the bearish engulfing pattern in an uptrend should prepare the trader to purchase a PUT option and set price targets for both the TOUCH and NO TOUCH trade.
Please note that it is only when these patterns occur at the extreme of the trend that the become useful for trading.
Bullish Engulfing Trade
a) For the CALL option. wait for bullish engulfing candlestick patterns to form at the bottom of a trend, then purchase a CALL option at the open of the next candle. The signal is reinforced if the bullish engulfing pattern occurs at a support level e. g. at any of the support pivots or at a price support.
b) For the TOUCH trade, select a strike price within a range of 20 pips above the bullish engulfing formation, and for the NO TOUCH, select a price target located below the bullish engulfing as shown in the snapshot below.
This is a simple trade to execute and should make the trader some money if the rules are adhered to.
Bearish Engulfing Trade
a) For the PUT option. wait for the bearish engulfing pattern to form at the top of the trend, then purchase a PUT option at the open of the next candle. If the signal is at a resistance level, the trade is reinforced
b) For the TOUCH trade, select a strike price in a 20-pip range below the bearish engulfing formation.
The NO TOUCH strike price should be set above the bearish engulfing as shown in the snapshot.