Continuation patterns and pennants are key signs that traders use to inform their trading. It is important to be able to recognise these patterns forming in order to make a profit.
A type of price formation that occurs during a trend, continuation patterns tell the trader that the trend is likely to go through a period of consolidation so that it can build up a fresh moment, however it will, most likely, continue in its previous direction after the consolidation has finished. Continuation patterns give those who participate in binary options trading a selection of investment opportunities that can be used as the basis for an excellent trading strategy. If a trend has been continuing in the same direction for an extended period, it eventually begins to lose momentum. In a bullish trend, this occurs when all the investors who were interested in purchasing the asset have done so, and therefore demand is no longer strong enough to prompt a further price rise.
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Conversely, during bearish trends, this pattern occurs once all the investors who wanted to sell have achieved their aim. This leaves supply exhausted and therefore no longer adequate to allow prices to dip further. In both cases, there can be no momentum for opposite movement either. In bullish trends, the downward trend cannot appear as there are not enough traders who are willing to sell, whereas in a bearish trend, an uptrend cannot appear as there is a lack of willing buyers. This leaves the market locked in its current state, unable to rise or fall. The only direction available for movement is sideways and this appears between a resistance level on top and a support level on the bottom.
What is the Pennant Pattern?
The Pennant is a type of continuation pattern which appears in the short term as a cone-shaped pattern. It develops because of price consolidation and is similar to a flag pattern in that it indicates that the earlier trend may resume again. The pennant pattern starts development with the formation of a structure called the flag pole which reflects either a sharp decline or advance in price. Following this, a symmetrical triangle, or pennant, will be formed. The pennant pattern formed following an uptrend is a bullish pennant whereas a pennant pattern formed following a downtrend is a bearish pennant. Usually, this pattern can be seen close to the centre of a downtrend or uptrend in the asset’s price. Usually, a pennant pattern forms over the period of between 1 and 4 weeks. Sometimes, there will be price gaps in the downtrend or uptrend before the price consolidation.
The criteria that confirms the formation of a pennant pattern include:
- An abrupt fall or rise in price before the pennant’s formation.
- Considerable increase in volume during the pole formation.
- Decrease in volume once the prices moves into the congestion zone.
- Marked increase in volume as the price breaks out of the trend line.
The reaction lows and highs in the consolidation zone are separately connected through 2 trend lines. As the start of the consolidation pattern sees the deepest and tallest price points, there is a convergence of the trend lines forming a pennant shaped triangle. The reliability of this pattern will increase the longer it takes to form. It should also tilt in the opposite direction of a prevailing trend for it to produce the best results. In bullish pennant patterns, a resumption of a prior uptrend is indicated by a break above the resistance. Conversely, in bearish pennant patterns, the continuation of an earlier price decline is indicated when the price breaks below the support. The probably target price can be determined by measuring the distance between the ends of the plag pole and by drawing an extension of a similar magnitude above the resistance in the case of a bullish pennant or, in the case of a bearish pennant, below the support.
Trading the Pennant Pattern
Traders are able to purchase either one minute, 30 minute or 1 hour call options following the price break above the pattern’s downward sloping upper or lower trend line while volume is rising. Alternatively, a trader can buy one touch call options if the probable target price has been calculated to be either equal to or greater than the broker’s target price. If a high impact announcement is schedule, it is possible for a trader to purchase a double one touch options contract. One of the best options for trading a bullish pennant pattern is a no touch options contract, which can be bought as the price breaks above the upper trend line, however a double no touch options contract is a possibility if the price breaks above the upper trend line but there is weak momentum and no rise in volume and no high impact news announcement is expected.
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