Chart-pattern based binary options strategies are among the most efficient ways to profitability. Chart patterns occur all the time and some of them are easier to identify than others. Unfortunately, flag and pennant patterns, on which the strategy discussed in this article is based, are among the most difficult to spot. It is therefore safe to say that a major part of this strategy is the correct identification of the required flag and pennant chart patterns.
Let us not cut ahead of the chase though: let’s first see what flag and pennant patterns are and exactly what they mean.
Flags and pennants are continuation patterns, which means that they point to the continuation of the trend preceding them. If they are found on a bullish signal section, they mean a continuation of the up-trend after a slight pause. If they are on a bearing signal section, they point to a further dropping of the price. The logic behind why flags and pennants are formed is simple: they represent price-break periods, during which traders who took positions earlier in the trend are busy profit-taking. Once the profit taking is over, the previous trend resumes.
What is the difference between flags and pennants? The differences are only technical in nature and don’t really point to any differences in what the patterns predict. Flag patterns are formed by two parallel lines traced using the highs and the lows of the candlesticks which form the pattern. In the case of pennants, these two lines converge. The flagpoles are given by the signal-trend leading up to the pattern in both cases.
Now that we know what flags and patterns are and what they signify, it’s time to take a look at how they can be used in binary options trading. The flag strategy is suited for put/call contracts as well as for Touch/No Touch ones.
As said above, the first step of the strategy is to identify the correct patterns. Unlike in some of the example pics, these patterns don’t come highlighted, and they are indeed rather difficult to spot.
The first clue to the presence of a flag/pennant should be a period of sustained down- or uptrend. Whenever a short period of retracement occurs in such trends, a flag or a pennant will form. Once the actual pattern is identified, the trader needs to look for an upward or downward breakout (depending on whether we’re talking about bullish or bearish flags/pennants). This breakout candlestick will signify the resumption of the previous trend.
Of course, specialized software can also be used to identify these patterns.
Once the pattern is spotted and positively identified, traders can use the bearish flags/pennant to trade the PUT options and the bullish ones to trade the CALL contract. The breakout candle signals the moment when the trade should be made.
When it comes to the Touch/No Touch options, the trader should pick a price 30 pips above the bullish flag and 30 pips below the bearish one for the Touch option. Selecting any price below the bullish flag and above the bearish one is the way to go with the No Touch option.
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