Chart patterns are an essential part of technical analysis in binary options trading, but there are some patterns that are especially useful to the trader who wishes to maximise their success. Here is an outline of some of the best known and most effective chart patterns that you may observe on your technical charts and which can inform your executed trades.
The Cup and Handle
This popular pattern is a continuation pattern which suggests that the current market trend will continue. The special characteristic of this pattern is that it serves as a prediction that there will be a pause in the increase of the asset’s price, or possibly a short decrease. The upward trend will be followed by a short decrease before a new increase will form. This reveals the cup part of the pattern. The handle is then formed by a small movement of similar directions and then the price will shoot much higher. This is an easy pattern to identify and can be observed on longer term time frames from a couple of months up to longer than a year.
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Double Tops and Bottoms
Double tops and bottoms are one of the more reliable reversal patterns that you are likely to observe on your charts and indicates a trend which is about to reverse. This pattern will form following a stable trend, being formed when the movement of the asset’s price tests the resistance or support levels but fails to break through them. This is a dependable pattern and is often a sign of a mid to long term reversal in a trend.
In the case of a double top, the price will attempt to break through the resistance twice unsuccessfully. Following this second attempt, the price will take a dive, starting a new downtrend. A double bottom is the complete opposite to the top pattern, being preceded by a downtrend which will bounce up twice once it reaches the support level and then start on an obvious ascend, signalling a fresh uptrend.
There are 3 different varieties of triangle pattern to be seen on technical charts – descending, ascending and symmetrical. Each of the three types has different properties and signifies something different, however they all have their time frame in common which will general range from a couple of weeks up to a couple of months.
The symmetrical triangle is probably the easiest to understand. Being preceded by trend lines which approach each other slowly until there is a breakout in either a downward or upward direction, the symmetrical triangle is a sign of a stable trend in whichever direction the breakout heads, with resistance and support serving as the triangle’s sides.
The ascending triangle shows flat resistance with ascending support. Usually, there will be an upside breakout which confirms the trend.
The descending triangle forms the opposite of an ascending triangle, with flat support and descending resistance. The breakout will occur to the downside, confirming the new downtrend.
Triangles are very reliable patterns, virtually always confirming emerging trends. They are easy to spot and use to predict the short term momentum of the market.
Flag and Pennant
The flag and pennant continuation pattern forms because of sudden movement in prices followed with a stable period and then another price movement to the same direction as the initial one, indicating a trend emerging. A flag and pennant pattern will be very short term, usually lasting less than 3 weeks. The pennant looks very similar to the symmetrical triangle, however it is shorter term, with its diverging trend lines going towards each other before the price moves upwards. The flag pattern features parallel rather than diverging lines, but this pattern still produces the same end result.
A wedge pattern can be either a reversal or a continuation pattern and is quite similar in nature to the symmetrical triangle. There are, however a couple of differences, the first being that the wedge pattern follows a downward or upward direction, while a symmetrical triangle goes sideways. Secondly, the wedge appears on longer term charts, usually between 3 to 6 months.
The gap occurs in the event of a significant happening in an asset’s field. It is possible to spot a gap on either a candlestick or bar chart, but not on a line chart or point and figure chart. A gap shows a huge difference between prices across 2 consecutive periods of trading. It may be either a large dip or jump in asset prices. There are 3 varieties of gaps, with breakaway gaps forming at the start of a trend, runaway gaps forming in their middle and exhaustion gaps which appear at the trend’s end. All three are relatively easy to spot and can help a trader to place successful options.
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- “The predictive significance of five-point chart patterns.” Levy, Robert A. Journal of Business (1971): 316-323.
- “Automatic extraction and identification of chart patterns towards financial forecast.” Liu, James NK, and Raymond WM Kwong. Applied Soft Computing 7, no. 4 (2007): 1197-1208.