How to Predict the Next Candle in 5 Sec. with Candle Psychology

Candlestick patterns on a candlestick chart are essential for analyzing price action. These candle patterns, including basic candlestick patterns like doji and engulfing, reveal market sentiment in stock market candlestick analysis. For binary option trading, recognizing these formations helps traders predict trends accurately. Mastering candlestick patterns enhances decision-making across all financial markets by identifying potential reversals and continuations in price movements.

What is Candlestick Charts

Candlestick charts, also known as candlestick graphs, originated in Japan. Initially, they were used by the rice trader Munehisa Homma to record the price fluctuations of rice. Today, they have become a universal way to display prices in the global financial markets. Each candlestick represents the price information within a specific period (such as 5 minutes, 1 hour, 1 day, etc.), including the opening price, closing price, highest price, and lowest price.

The main body of the candlestick, that is, the real body, reflects the difference between the opening price and the closing price. If the closing price is higher than the opening price, the candlestick is usually shown in green (or white), representing that the bullish force is dominant and the market is in an uptrend. Conversely, if the closing price is lower than the opening price, the candlestick is shown in red (or black), indicating that the bearish force has the upper hand and the price is falling. The thin lines above and below the candlestick, called wicks (also known as shadows), respectively indicate the highest and lowest prices within that period. The lowest price within that period is represented by the lower wick, while the highest price is represented by the upper wick.

What are the Common Candlestick Patterns?

Candlestick patterns are important tools used to analyze price trends in the financial market. Different candlestick patterns convey different market signals. The following are some common candlestick patterns and signals:

Hammer

The hammer appears at the end of a downtrend. It has a short real body and a long lower shadow, with an extremely short or no upper shadow. Its pattern implies that during the downtrend, although the bears once dominated, the bulls actively entered the market at a low level, pushing the price up. This indicates that the downtrend may be about to reverse.

Hanging Man

The hanging man pattern is similar to the hammer, but it appears in an uptrend. It shows that the bullish force begins to weaken at a high level, and the bearish force gradually exerts its strength, suggesting that the uptrend may come to an end. For example, in the stock market, after a certain period of decline in a certain stock, a hammer appears, and the price continues to rise in the following trading days, verifying the reversal signal of the hammer. However, after a hanging man appears in an uptrend, the stock price often starts to correct.

Inverted Hammer (also known as Reverse Hammer)

The inverted hammer has a real body located at the bottom, with a long upper shadow and a short or no lower shadow. It appears to be in a downtrend. It indicates that during the downtrend, the bulls once tried to launch a counterattack. Although the final closing price is still low, it shows that the bullish force is starting to accumulate. If subsequent candlesticks can confirm that the bulls exert more force (such as closing as a bullish candlestick), it may start an uptrend. In the foreign exchange market, when a certain currency pair is in a downtrend, if an inverted hammer appears and the closing price of the subsequent candlestick is higher than the real body of the inverted hammer, it is often a buying signal. It should be noted that when the inverted hammer appears at the top, it is similar to the shooting star pattern, but the market environment and the implied meanings of the two are different.

Engulfing Pattern

The engulfing pattern is divided into a bullish engulfing pattern and a bearish engulfing pattern. The bullish engulfing pattern consists of a smaller bearish candlestick followed by a larger bullish candlestick, and the real body of the bullish candlestick completely covers the real body of the previous bearish candlestick. Appearing in a downtrend, it shows that the bullish force suddenly increases, successfully reversing the downtrend and indicating that the price will rise.

The bearish engulfing pattern is the opposite. It is composed of a bullish candlestick followed by a large bearish candlestick, and the real body of the bearish candlestick engulfs the real body of the bullish candlestick. Appearing in an uptrend, it indicates that the bears quickly gain the upper hand, and the price is likely to fall. In binary options trading, the engulfing pattern can be used to grasp trading opportunities at the beginning of a trend reversal. For example, when a bullish engulfing pattern appears, one can choose to buy a call option.

Morning Star

The morning star is composed of three candlesticks. The first one is a large bearish candlestick, continuing the downtrend; the second one is a small real body candlestick (either bearish or bullish), indicating market hesitation; the third one is a large bullish candlestick, and its closing price is significantly higher than that of the second candlestick, indicating that the bulls have successfully counterattacked and the downtrend is about to end. It is a strong bullish signal.

Evening Star

The evening star is the opposite pattern of the morning star. It appears in an uptrend and is composed of a large bullish candlestick, a small real body candlestick, and a large bearish candlestick, indicating that the uptrend is about to reverse and the price will fall. For example, on the weekly chart of the stock market, if a morning star pattern appears, it often means the reversal of a long-term downtrend, and investors can consider entering the market and making arrangements.

Doji

The opening price and closing price of a doji are almost equal, forming an extremely small real body, indicating that the bullish and bearish forces in the market temporarily reach a balance. When a doji appears in an uptrend, it means that after a short hesitation, the bulls may continue to push the price up; when it appears in a downtrend, it means that after a short pause, the bears may continue to push the price down. The appearance of a doji often indicates that the market trend may change, and it is necessary to further judge in combination with the subsequent candlestick patterns. In the cryptocurrency market, when the price of Bitcoin is in an uptrend, if a doji appears and the next candlestick closes as a large bullish candlestick, it shows that the bullish force is still strong and the uptrend continues.

Harami Pattern

The harami pattern is composed of two candlesticks. The first candlestick has a larger real body, and the second candlestick has a smaller real body and is completely contained within the real body of the first candlestick. When a harami pattern appears in an uptrend, it indicates that after a short adjustment, the bulls still have the momentum to attack; when it appears in a downtrend, it means that the bears are accumulating strength. For example, in the futures market, when the price of a certain commodity futures is in an uptrend, after a harami pattern appears, if the subsequent candlesticks continue to close bullishly, the price is likely to continue rising.

How to Make Trading Decisions Using Candlestick Patterns?

In the field of financial trading, when making trading decisions with the help of candlestick patterns, multiple key elements need to be comprehensively considered.

Precise Pattern Identification For example, a hammer candlestick should appear at the end of a downtrend, with a short real body and a long lower shadow, and the upper shadow is either absent or short; for a bullish engulfing pattern, the real body of the bullish candlestick is required to cover the real body of the previous bearish candlestick completely. Only by accurately recognizing the patterns can subsequent decisions be made based on the market information they contain.

Market Trend Integration

In an uptrend, the appearance of bullish patterns such as large bullish candlesticks and morning stars indicates that the trend is likely to continue or accelerate, and investors can buy in the direction of the trend. For instance, the appearance of a morning star is an opportunity to add positions or open new long positions. In a downtrend, bearish patterns such as large bearish candlesticks and evening stars indicate that the price will continue to decline, and at this time, investors should consider selling or holding short positions. If the market is in a sideways range or the trend is unclear, patterns such as doji and small real body K-lines indicate strong market indecision. It is risky to make trend-based trades rashly at this time, and investors should patiently wait for the market direction to become clear.

Strategic Position Analysis

Bullish patterns such as hammers and bullish engulfing patterns that appear near key support levels have high reliability as reversal signals and can be used as a reference for buying; bearish patterns such as shooting stars and bearish engulfing patterns that appear near resistance levels can be considered as signals for selling. When the price touches important moving averages such as the 20-day moving average and the 60-day moving average, the corresponding candlestick patterns can also provide a basis for trading decisions.

The fourth step is to combine candlestick patterns with technical indicators such as MACD, KDJ, and Bollinger Bands to improve the accuracy of trading decisions.

Technical Indicator Synergy

In addition, to control risks, it is necessary to reasonably set stop-loss and take-profit levels. Taking the hammer candlestick as an example, when buying, the stop-loss level can be set below its lower shadow; the take-profit level can be set in combination with previous resistance levels, round-number levels, etc. It should be noted that candlestick patterns are only part of trading decisions. In actual operation, it is also necessary to comprehensively consider market fundamental factors, market sentiment, etc., to make more reasonable trading decisions.

How to Predict the Next Candlestick in Binary Options Trading

In binary options trading, successfully predicting the candlestick trend requires the comprehensive application of various analysis methods. Technically, it is necessary to combine the identification of K-line patterns, trend judgment, and technical indicator analysis, while also paying attention to the influence of fundamental factors and market news, and examining the performance in different periods. These methods can verify each other, significantly improving the accuracy of predictions. However, the market is full of uncertainties, and any single signal may fail. Traders must maintain the flexibility of their strategies and adjust their trading plans promptly according to real-time market conditions. It is particularly important to note that the high-leverage nature of binary options trading amplifies both profits and risks, so risk management must be given top priority. It is recommended to set reasonable stop-loss levels, strictly control the position size, and avoid significant losses caused by emotional trading. Remember, the key to consistent profitability does not lie in pursuing perfect predictions for a single trade but in establishing a robust trading system and strict risk control mechanisms.

What are the Recommended Stop-loss and Take-profit Ratios?

The appropriate setting of stop loss and profit ratio should be carefully determined according to various factors, including investors ' risk tolerance, trading style, market conditions, and specific trading tools. These parameters should also be combined with technical analysis tools such as candle charts to achieve optimal risk management while maximizing profit potential. There is no universal standard—conservative traders may prefer tighter stops (e.g., 3-5%), while aggressive traders may allow greater price volatility (5-10%). Especially in leveraged markets such as foreign exchange, stricter stops (1-3%) are usually recommended due to increased volatility.

What are the Limitations of Using Candlestick Psychology to Predict Price Movements?

Although candlestick psychology can provide insight into market sentiment, it also has inherent limitations that traders must recognize. First, the candlestick model only reflects historical trading sentiment and cannot explain external macroeconomic factors or policy changes. Even the perfect bullish model may fail due to unexpected news events. Secondly, the model interpretation is still subjective; judging changes in hammer shape (e.g., entity ratio or wick length ) often leads to conflicting analyses among traders. More crucially, institutional participants may manipulate patterns (such as fabricating bullish engulfment patterns ) to lure retail traders.

In addition, evolving market structures and regulatory changes may render previously reliable models obsolete. For these reasons, candlestick psychology must not be used alone. Prudent traders will combine it with other technical indicators and fundamental analysis while being alert to market manipulation and black swan events to develop more robust trading strategies.

Conclusion

In short, although the concept of using candle psychology to predict the next candle and achieve a winning trade in any case is tempting, it is important to treat it with caution. Candle psychology provides valuable insights into market sentiment through the candle map model. However, the financial market is complex and affected by many unpredictable factors. No foolproof strategy can guarantee success. Traders should consider candle psychology as part of a comprehensive approach that combines it with other forms of analysis and appropriate risk management to enhance their trading decisions and chances of success.