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Once traders know how to identify and use the flag pattern in binary options trading, they can benefit from some of the most exact prediction that can be found among all continuation patterns. Using the flag pattern enables traders to develop a strategy that results in a high chance of winning and a high payout, which means that it is a key pattern that every trader should learn to recognise.
What Does the Flag Pattern Indicate to Investors?
A flag pattern tends to occur following a strong price movement either up or down, when prices go through a consolidation period in order to generate new momentum. At this time, the market movements become limited to the corridor found between 2 parallel lines which are inclined to the opposite direction of the trend that precedes it.
In an upward trend, traders will see that the flag is completed when it breaks through the lower line on the chart, while in a downtrend, it will be completed when the prices break through the upper line.
Unlike in other continuation patterns, the flag pattern visibly creates a short-lived trend in the opposite direction. As this trend is not as steep as the trend that precedes it, it can easily trick a trader into believing that the main trend has ended and therefore tempt them into investing in the wrong type of assets.
In bullish trends, the flag includes a bearish direction trend, whereas in bearish trends, the flag includes a bullish direction trend. Once the flag has ended, prices usually continue to move in their prior direction.
Binary Trading Using the Flag Pattern
Many traders use the flag pattern as a signal to trade a touch option, as once a flag is complete, prices will generally move at about the same rate for around the same amount of distance as before the creation of the flag. This is a clear indication that a touch option should be traded as long as one can be found with a suitably long expiration time and an appropriate target price. Although this trading strategy may be considered to be somewhat risk as there are other factors that could influence movement following completion of the flag, a touch option results in a good payout, with the chance of winning an adequately high percentage of trades to ensure a good profit.
How to Trade the Flag Pattern Effectively
The flag can also be traded in the same way as other continuation patterns. Once the flag pattern is complete, traders can invest in a high/low option, using the momentum that has been generated by the breakout of the pattern.
It is also possible to use the lower and upper resistance levels of the flag in its early stages to trade no touch options with target prices outside the flag, using the prediction that prices will turn once resistance is reached. This is an especially useful strategy with the flag’s near side resistance as it does not usually get broken. In the case of an uptrend, lower resistance levels are on the near side, while in downward trends, the near side will be the upper resistance level.
It is important to note that a flag pattern is a rare finding, with limited opportunities for trading. To take advantage of it, traders need to monitor several time frames and assets in order to find the best trading opportunity.
As flags are formed following either a steep decline or incline in prices, they are more likely to be seen in short time frames and they will probably be spotted in either an hourly chart, or an even smaller one. Over larger time frames, prices tend to move quite smoothly which renders flags tricky to find.
Other educational articles
- Recognise And Use The Head And Shoulders Pattern For Binary Options Trading
- Bullish And Bearish Engulfing Patterns
- Gain Using Wedges In Binary Options
- Morning And Evening Stars Patterns
- Support/Resistance Levels Analysis
- Continuation Patterns And Pennants In Binary Options Trading
Recommended readings
- Technical Analysis in Finance (PDF)
- Economics Reading Lists (Economist – Free exchange Trade in the balance)
- Chart Patterns & Technical Analysis of Commodities (tradingcharts.com)
