Using Chart Patterns for Binary Options Trading – Flags and Pennants
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In some of my past articles I have pointed to the usefulness of chart patterns when it comes to binary options trading. Although new players will pretty much always fall for the ads which tell them they can make large amounts of money without any sort of effort involved trading binary options, forex etc, in the real world that is definitely not the case. In order to defeat the massive edge that the broker has over the trader, traders have to resort to all sorts of rather intricate tricks, like spotting chart patterns, properly interpreting them, drawing the right conclusions and then putting them to good use actually making the required trades.
Flag and pennant patterns are about as typical as they come when it comes to binary options trading through the use of chart patterns. Indeed, these patterns are rather frequent, but they’re rather difficult to indentify – quite impossible for beginner traders. With that in mind, we can say that the most essential component of the binary options trading strategy we’re about to discuss is the identification of these continuation patterns.
What exactly do these patterns mean for traders though? I said above they were “continuation” patterns, which basically means that their presence suggests the continuation of the trend before the pattern. There are bullish and bearish flag and pennant patterns, and they point to the continuation of a bullish or bearish trend respectively. The logic behind why these patterns foretell the continuation of an existing trend is that during these patterns, traders who took positions earlier are basically profit-taking. As soon as the profit-taking is over, the period of price-break expires and the previous trend resumes.
The difference between flag patterns and pennant ones is rather minute and technically insignificant, since both patterns carry the same meaning for the continuation of the trend.
The highs and lows of the signal-candlesticks which form the flag pattern create two parallel lines of support and resistance, while the support and resistance lines created by the highs and lows of the pennant pattern candlesticks are convergent.
In the picture above, the flag pattern is a bearish one (it foretells a bearish continuation of the signal) while the two pennant patterns are bullish ones.
Although in the above pictures, the flag and pennant patterns are on two different trading signals, it is not uncommon that they show up on the same signal, within the same time-frame even.
Hopefully, by now you fully understand what flag and pennant patterns are and what they mean. It is now time to move on to the most essential part of the strategy: the identification of these patterns.
Identifying the flag and pennant patterns is simple in theory, but in practice it’s a tad more difficult to accomplish. Traders should look for periods of up- or downtrends interrupted by short periods of retracement (these periods correspond to the profit-taking). The flagpole (or pennant-pole) will be the actual down- or uptrend, while the flag (pennant) itself is created by the above detailed support and resistance lines of the retracement. Once a flag or a pennant is found, the trader has to be on the lookout for an upward or downward breakout candlestick, which marks the resumption of the original trend.
Obviously, the easiest way to identify such patterns is through the use of specialized software, which – besides positively IDing the patterns – will offer an indication of the strength of the signal as well, another important component of this binary options trading strategy.
The actual trade
Once the patterns have been properly indentified, the actual trade is quite self-explanatory: as far the Touch/No Touch trade is concerned, the strike price should be placed 30 pips below the bearish flag/pennant for the Touch trade and above the flag/pennant for the No Touch trade. The example presented in this picture is a bearish flag. In the case of a bullish flag/pennant, the strike price should be 30 pips above the bullish flag/pennant for the Touch trade and below the bullish pennant/flag for the No Touch trade.
As every other such strategy, it is recommended that traders practice it on a demo account before diving into the deeper waters of real money trading.
Now then, if we consider an hourly chart, it becomes clear that it takes several candlesticks for the downward move to be firmly established. Assuming that a candlestick represents the market activity for an hour, it means that the trader should pick an expiry of at least 3-6 hours to allow the price to move firmly into the profit territory. Don’t be lulled into a false sense of secondary importance regarding this aspect of the strategy. Expiry always has to be estimated appropriately for the whole setup to work. The time-frames used by the chart ALWAYS have to be taken into consideration in this respect, even if that aspect isn’t quite visible in the above presented illustrations.
The bottom line: by properly using strategies such as the above discussed flags and pennants touch/no touch approach, traders will be able to overcome the relatively steep adverse odds of binary options trading. There are no other weapons to deploy in war of the odds and without understanding basic concepts such as this strategy, players will never be mathematically likely to turn a profit in the long-run.
Having traded binary options for 4 years, Steve Larson currently works for Intellitraders as an analyst.
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