“Pennant” strategy for binary options trading
Patterns of technical analysis have been helping the traders correctly predict the true price movement in the future for decades now. This versatile tool has found its application on virtually all financial markets. The binary options market is no exception. Today we will review a figure called “Pennant” and how its formation on the chart can help us in trading.
To begin with, it should be noted that the “Pennant” pattern is considered to be a pattern of continuation of the trend and is formed on the chart after a good trend movement, at the time of the short-term price consolidation. After the price consolidation or rollback ends, the price continues to move along the trend.
It is best to search for the “Pennant” pattern on intraday trend on the charts up to thirty-minutes. This does not mean that such a figure is not formed on longer timeframes, but if we want to profit from intraday trading, we should closely monitor the small timeframes.
As we can see, the pattern under review has formed on a five-minute chart of the GBP/USD pair. It may be noted that visually such a figure is similar to the “symmetrical triangle”. But the main difference from the pattern mentioned is that the “Pennant” is formed much faster. In addition, a mandatory component of such a trend continuation pattern is the “flagpole”, i.e. a sharp price movement on the trend, which is close to the vertical. If we see such a movement, we can get ready for the “Pennant” formation on the chart.
The formation rules for this pattern in the uptrend are the same, and we can see the following a picture on the chart.
Point of entry into the option to buy:
We are ready to buy a Call option after a sharp price movement in one of the sessions. It most often happens before lunch on the European session, as we can see from the chart, or before lunch on the American trading session, which is after lunch in Europe.
After a sharp price movement, small correction is seen for 2-3 hours, and the market gathers strength to continue the movement in the chosen direction. After the formation of the flagpole, we watch the emerging levels of support and resistance that should converge. After breaking through and fixing the price above the resistance level, we enter the market with the Call option.
Point of entry into the option to sell:
For Put option, we closely watch the market during the periods from 7am to 11am and from 1pm to 5pm GMT, the active period for the European marketplaces and the first half of the American session. If at this time a sharp downward movement forms the flagpole, we wait for the “Pennant” pattern and get ready to enter the market. We make a deal after breaking through the support level downward and fixing behind it (the candle must close below the line at the very least).
Often traders working under this strategy trade with the classic options, predicting the price moving in the direction of the breakthrough of the formed continuation pattern. One - Touch and Out – Range options also show good profitability, with the levels set above the lines of support at Call, or below the line of support at Put.
At the same time, the range for the Out Range option is reasonable to be set small: 15-20 points. But the One Touch option is not very profitable in application for this strategy due to the lack of the developed technique of how many points will the price take after breaking through the “Pennant”.
Given the fact that the strategy relates to intraday, the best option for option expiration to improve the reliability of the profit will be the end of the day – midnight GMT. However, the expiration time, which is equal to the timeframe where the graphic signal “Pennant” was detected, multiplied by four, justifies itself. That is, it’s 4 hours on an hour chart, an hour on 15-minute chart, and so on.
There is a method of establishing an expiration to the end of the next trading session, where the breakthrough of pattern occurred. That is, if it happened in the second half of the European trading session, the expiry date should be set at 5-6pm GMT.
If the breakthrough has occurred in the second half of the American trading session, then we go back again to midnight GMT, i.e. the closing of the day.
Since the “Pennant” pattern on the chart does not occur as often as the traders might want it to, the signals given by it are quite profitable. Backtesting on three currency pairs over the last six months has shown that the pattern accounts for about 75% of profitable signals, and this means that there is only one losing transaction per three profitable.
But since the strategy gives not many signals to enter the market, using it alone in trading won’t bring the big profits, and it is wiser to use it as one of several trading strategies.
Do not forget about reasonable money management. Entry into the market with the possible loss risk of 3-5% from the size of the account is fraught with heavy loads on the deposit, which can happen at a losing deal. Here you can also work under a financial strategy that assumes the conclusion of the deal with the classic binary option before it is closed, and then the conclusion of an additional No Touch or Out Range option under the rules described above with the same level of possible loss.
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