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Any binary options trader who wants to maximise their profits would do well to learn about the different patterns that can develop in the market and thus inform their trading strategy. One of the patterns that can commonly form is a reversal pattern, and here we look at what this means and how to spot this type of pattern forming in an analytical chart.
What is a Reversal?
A reversal refers to a direction change of an existing price trend. On an analytical chart, the trader will be able to see a recognisable change when an uptrend changes to a downtrend as the series of higher lows and highs will become a series of lower lows and highs. On the other hand, should a downtrend become an uptrend, the investor will conversely see the lower highs and lows undergoing a change into higher highs and lows. This can sometimes be called a correction, a rally or even a trend reversal.
A reversal refers to either a negtive or positive change against the existing trend, and analysts wait for and observe these patterns as they are an indicator of the need to choose a different trading strategy. One example of this is, if a trader observes a reversal pattern taking place on their chart, they may want to close on a long-term position and take up a short-term position in order to capitalise on the probably downward trend in the asset’s market price.
What are Triangle Patterns?
There are a number of different patterns used in analytical charting to assist traders in making informed trading choices. There are three varieties of triangle pattern that commonly appear in charts, the ascending triangle, the descending triangle and the symmetrical triangle. Although most frequently triangle patterns are continuation patterns, sometimes they can indicate a reversal in the trend. When looking for a reversal triangle pattern, it is important to take into consideration the structure and price action before the triangle forms in the chart. Should this be corrective, it indicates that the triangle may be the end of a triple or double combination, and in these circumstances, this sort of triangle always breaks in the opposing direction.
How to Use a Reversal Triangle Pattern
When the market is consolidating, the triangle pattern is the most commonly observed. A triangle pattern may either be expanding or contracting, meaning that the b-d and a-c trend lines will either point towards a spot to the right of the chart or will never meet there as they are moving in different directions. When a triangle acts as a reversal pattern, it is found at the end of complex corrections, with a connective wave between the corrections, the last one of these usually being a triangle. Usually, the entire complex correction is able to be retraced, meaning that the expiry date should be adjusted according to every time frame being formed by the triangle. Investors should observe for a either a bullish or bearish trend and if this ends with a triangle, a reverse should be looked for. An investor can identify the perfect striking price by looking at the b-d line. Once it has been broken, it is likely the market will advance if the triangle comes at the end of bearish trends, or it should decline should the triangle be seen at the conclusion of a bullish trend. In the case of a triangle forming following a bearish trend, call options are the best choice, while put options is the best selection when a triangle at the end of a bullish trend is spotted.
Other educational articles
- What is the Dark Cover Candlestick Pattern?
- What is the Double Top and Double Bottom Pattern in Binary Options Trading?
- What are Japanese Candlesticks in Binary Options Trading?
- What is the Contracting Triangle Pattern in Binary Options Trading
- What are Impulsive Waves in Binary Options Trading?
Recommended readings
- Jang, Gia-Shuh, Feipei Lai, Bor-Wei Jiang, Tai-Ming Parng, and Li-Hua Chien. “Intelligent stock trading system with price trend prediction and reversal recognition using dual-module neural networks.” Applied Intelligence 3, no. 3 (1993): 225-248.
- Park, Cheol‐Ho, and Scott H. Irwin. “What do we know about the profitability of technical analysis?.” Journal of Economic Surveys 21, no. 4 (2007): 786-826.
