Strategy for binary options on the basis of “Head and Shoulders” pattern
The trend reversal pattern “Head and shoulders” is known to any experienced trader. No wonder that this pattern is considered the most reliable signal for a change in the trend direction. Given that it does not occur as often as we would like, this reversal pattern becomes even more valuable. Today we will review the trading strategy for binary options based on this pattern.
A reversal model “Head and Shoulders” indicates that the trend can no longer move in its direction and will soon reverse. This pattern looks like the head pressed into the shoulders on the chart, hence its name. It represents 3 highs in the chart, the two sides of which (shoulders) are about the same height, while the central one (head) is the highest. A support line can be drawn under those three highs, which was called “the neck line”. It will look like this in the Meta Trader 4 terminal.
In addition, an inverted “Head and Shoulders” is also singled out, which can be formed on the chart in the moments of the trend change from downward to upward. The pattern has all the same features, except being positioned upside down. Graphically, it looks something like this.
It is believed that the longer a reversal pattern is formed and the higher the timeframe of the chart on which this pattern is formed, the more accurate the signal of a trend reversal delivered by it. That is, “Head and shoulders” on the daily chart is much more reliable than on the 15-munite. Keep this in mind when you’re looking for it.
The hardest part of this strategy is to find the described pattern. Of course, experience is required to do this. Although experienced traders can also far not always see the figure in the terminal window. In addition, there is a large proportion of subjectivity in recognition of this pattern, because what one trader will take for the “Head and shoulders”, another will simply not notice.
But let’s say you have noticed the pattern “inverted Head and Shoulders” on the chart in the terminal, which meets all the conditions. To enter with the Call option, we need to wait until the price chart of the right shoulder crosses the neck line. Once this happened, we open the Call option.
Points of entry into the option to buy:
For the Put option, we need to find the almost formed “Head and shoulders” pattern on the chart. Thereafter, you need to monitor the price. If it goes down after completing to form the right shoulder, breaking through the neck level, it’s time to make the deal with the Put option.
The most common type of option used by traders when trading under the strategy we review is a classic binary option with a fixed profit margin. However, you can also use One Touch options or Out Range. In this case, the level for a price to reach is equal to the distance from the neck line to the high.
For example, in this last example, the neckline is located at approximately 1.6420, and the high of the head – at 1.6720, i.e. about 300 points. Hence, the price will take at least 300 points on the trend in the other direction. In this case, the level of One Touch may be safely put up to the level of 1.6120.
This is exactly what has happened, as we can see on the chart – the price pulled back for nearly 400 points, which means that the One Touch option would have brought us a profit.
It should be noted that this strategy suits the long-term options and those who like trading with low risk. That is, the term is long enough, and it also depends on the timeframe on which a reversal pattern has formed. If it is an H4 chart, the expiration should be 2-4 weeks. If the pattern is found on the 15-minute chart, the expiration time must be chosen in 3-5 trading days.
The strategy shows nearly 90% efficiency on the 5-year backtesting on H1 chart and with expiration time of two weeks. That is, the ratio of profitable trades to unprofitable is 9 to 1. The only drawback is a small number of signals and the long term of option expiration. Therefore, use of this strategy alone will not bring big profits. It can be more effectively used to hedge the risks and as an additional strategy with a high percentage of reliability.
Since the strategy provides a large number of reliable signals, it is quite reasonable to enter the deal with the possible loss of 5% of the deposit. Let’s examine an example. If your broker returns 15% of the rate of unprofitable option, and your deposit is $100, the maximum size of the lot for you to enter the market is about $6.
At the same time, we must remember that the two losing trades in a row on this strategy are extremely rare.
Therefore, if you are a big fan of risk, you can try the method of Martingale, which provides for a doubling of lots at the unprofitable option. However, we would not advise to do this, as it is at odds with the correct money management, which is fraught with enormous risks. The true trader must be able to accept the possible loss – it’s a part of their work. Go further, and profits will not take long to come.
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