Consolidating with Candlesticks & Oscillators

Consolidating with Candlesticks & Oscillators

Submitted by adil on Tue, 04/22/2014 - 12:51

In many ways, the trading methods of a binary options trader are similar to Forex swing trader. The binary options trader has to specialize in using technical analysis to take benefit from short-term price movements, as a Forex swing trader does. The trader must develop a reasonable capability that helps him or her determine the direction and strength of trend. Apart from chart patterns, fractals or volume analysis, short-term price moves, or swings can be very successfully gauged through a combination use of price oscillators and candlestick analysis.

Every reversal is preceded by certain conditions and variables. They essentially set the tone for what is about to come. Therefore, the first thing a trader needs to do is look out for a potential reversal in an asset’s price action. The binary options trader achieves this through indecision candles from candlestick analysis and convergence/divergence signals from oscillators’ analysis.

The indecision candlesticks are ones that have a small body and long tails. These candlesticks have opening and closing price very close to each other, whereas the long tails suggest the period’s price movement but also the market’s indecision on which track to park the price. Such an instance is also called “volatility without movement”, that is, despite drastic fluctuation price stays almost unchanged. These candlesticks typically arise where a reversal is near. Doji candlesticks are an example of indecision candlestick.

When an asset’s price movement varies from its momentum indicator, convergence and divergence is said to have occurred. Before a bullish or bearish reversal takes a hold, the momentum of forgoing trend starts to slow down. There will be either smaller rises in candlesticks in case of a forgoing bullish trend or smaller declines in candlesticks in case of a forgoing bearish trend, depicting this fact.

After gaining the ability to identify the impending reversal, the binary options trader needs to identify the closest or exact point where reversal will occur. As soon as the momentum starts to slow down, the binary option trader should carefully watch the candlestick patterns. The trader should look for an engulfing candlestick or a harami cross. When a candlestick that engulfs the previous candlestick of the opposite trend with an opposite movement forms, the trader has a definite signal of reversal. Preferably, the candlestick engulfed should be the one with a short body and low volume that is an indication of market indecision followed by a definitive reversal.

When using a Harami cross, the binary option trader should watch the volume of the asset being traded. Before the candlestick becomes a harami cross, there should be high volume of trade which gradually slows down upon reaching the harami cross candlestick. This lowering of volume again suggests market indecision, to be followed by a definitive reversal.

In either of the case above, the trader must consult with oscillators such as RSI and MACD to corroborate his candlestick analysis. If the candlestick pattern shows a bearish engulfing or harami cross, the RSI and MACD at the same point, should also be slowing/ declining.