Trade Binary Options Using Trend Continuation Patterns

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Trend Continuation Patterns

A trend is underway and you’re looking for entry point. All of a sudden the trend pauses or pulls back, leaving you with the question: “Is this thing going to keep trending eventually, or is this a full reversal?” While there is no way to know for certain, being aware of continuation patterns can help. At minimum these patterns provide you with trade signals to get into potentially profitable trades. Continuation patterns occur during a trend, and signal that the trend will continue once the pattern completes. This doesn’t always happen though. Therefore, when using these patterns to trade, don’t assume the breakout direction of the pattern before it occurs. Wait for the price to break out of the pattern, and trade in the breakout direction.

Triangles come in three forms, descending, ascending and symmetric, but for trading purposes there’s no real difference except for how they look. All triangles are created by narrowing price action, so when you draw a border around it, it looks like a triangle.

Figure 1 shows a symmetric triangle, as the lines converge toward each other. With an ascending triangle, the upper line is horizontal, and the bottom line ascends toward it. With a descending triangle, the lower line is horizontal and the upper line descends toward it.

Figure 1. GBP/USD Daily Chart

Source: Oanada – MetaTrader

Go long or buy calls when the price passes above the upper border as it does in Figure 1. If the price would have broken below the lower border, you’d enter short or buy puts.

A daily chart is used in this example, the same concept can be applied to other time frames though, such as a 1, 5, 15 minute or hourly chart.

It is common (in my experience, it happens about 50%of the time) for the price to re-test the breakout area after the breakout. Notice how the price moves back toward the green breakout line–marked “Pullback” on the chart– after having broken out. Time options trades to accommodate for this. Alternatively, you can wait for this pullback to occur, and then enter a trade when the pullback “bounces” off the former triangle as it did in Figure 1.

Flags and Pennants

These formations get their name from a sharp price move, the pole, followed by either a small channel like correction which looks like a flag, or a small triangle which looks like a pennant. There’s little difference between the two patterns, except a slight difference in appearance. Pennants have converging price action similar to triangles discussed in the prior section. For trading purposes, the method for trading them is the same.

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Figure 2 shows a pennant occurring in a move higher, and two flags occurring during a decline. Go long or buy calls when the price breaks higher out of a flag/pennant and the pole is up. Sell or buy puts when the price breaks below a flag/pennant and the pole is down.

Whether these formations occur on a daily chart, or a 5 minute chart, it is typically explosive. Trades generally do not last very long. Trade the breakout and look for another set-up. You simply want to take advantage of any remaining momentum left after the sharp move and a pause. The flag/pennant portion of the formation is typically about 4 to 8 bars. Draw the pattern once 4 bars of price data are present (not including the pole). If you draw it before this, you are more likely to get false breakout signals.

Figure 2. GBP/USD 5 Minute Chart

Source: Oanda – MetaTrader

Spotting and drawing chart patterns will always be someone subjective. For example, if we were to compare trades, my breakout price may be a bit different than your breakout price just because there is a slight discrepancy in where we put our lines. Don’t be overly concerned about this. The real world rarely provides markets that move within exact confines. For this reason, I’ll usually wait till a currency moves a couple pips beyond my breakout point before making a trade. In the case of a stock, I’ll wait for the price to move a couple cents beyond the breakout point before making a binary option trade.

Continuation patterns which include triangles, flags and pennants occur quite often on all time frames. Triangles require some patience to allow the pattern to form, and ultimately for the price to breakout. Pennants and flags generally occur quickly and are seen in fast moving markets, so you’ll need to be on the ball to catch the breakouts. Chart patterns are always somewhat subjective. You may see a pattern someone else doesn’t, or draw a pattern slightly different than they would. Before you commit money to trading these patterns take some time to practice spotting, drawing and trading them in a demo account. You may also want to check out my recent article on Trading Trend Reversal Price Patterns.

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Marcio

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Triangles are usually continuation patterns which can expand and contract. The triangle’s trend lines are the ones that define the triangle itself. The triangle is contracting if the trend lines indicate that they will merge to form it at some point in the future, and when there is no merger in sight at the end of the chart on the right side, one knows they deal with an expanding triangle and trend lines which move in opposite directions.

A continuation pattern refers to a trend that is going to move or resume from the point it stopped before consolidation. Since we are dealing with a consolidation area in the form of a triangle, the trend that preceded the triangle will pick up where it stopped, as well as the price movement.

When dealing with this type of triangle, it is important to know that this triangle is also limiting, since after the triangle is broken, the price action will be limited. When the price breaks the pattern, the thrust of the triangle should be observed for confirmation of its reach. A total of 75% per cent falls onto the thrust if we compare it to the triangle’s longest leg.

To illustrate it on our triangle example from above; we can say that the triangle is likely to be forming a continuation pattern in the form of an x wave whereby the price is defined by the length of wave b, and all of them seem to appear in the form of a zigzag pattern, which indicates that it is time to buy call options (if the trend is moving upwards) or put options if the trend is moving downwards once the triangle is broken by the trend from b to d wave.

Triangles can also act as continuation patterns when there is a fourth wave which is formed due to an impulsive move. In this case, as well, we are dealing with a limited price action, since the price will be defined by the length of the upcoming fifth wave.

According to the renowned Elliot Waves theory, triangles not only appear at the end of complex corrections, but they can also appear independently. In that case, the triangle’s shape will depend on the independent structures which define the further action.

The most common waves that are formed by triangles as continuation patterns are the wave x, wave b, or wave 4. If the triangle forms the fourth wave, then the wave is also known as the connective or intervening wave. This simply refers to the fact that the fourth way is connecting two or more simple corrections which together form a complex correction.

Applying Triangular Continuation Patterns

A triangle as a continuation pattern can also be a pennant which is simply a short-term pattern, so it is not that common for pennants to actually form a fourth wave, but yet they rather take the form of the x wave. To identify such a pattern, two trend lines should be observed, namely the a-c and b-d trend lines in order to spot a difference between them. You will know you are dealing with a pennant structure if the a-c line is not clean, but the b-d trend is. If you have studied the rules discussed on our Binary Options Academy and behave according to them, you will be able to recognize a clear and an unclear line.

As we already emphasized in the pennant pattern project here at our Academy, the pennant can only be bullish, and the move we measure is only applicable to the upside, which indicates to place call options. Yet again, if the triangle is a continuation pattern, our focus should stay on the b-d trend line which will help us in identifying the ideal options striking price.

Limited Price Action and Triangles

If the triangle is going to be followed by limited price action, it is the trader’s job to look out for the b-d trend line, since it is the main indicator of future price action. This means that traders should place call or put options with different expiry periods, and which one they are going to place, will depend on the pattern’s timeframe.

When dealing with a five-wave structure, the trader has to observe the three impulsive waves and the two corrective looking for how the fourth wave will form. If the fourth wave forms a triangle, it is an indication that you can expect a limited price action.

Bearish Impulsive Trend

Traders should stay away from placing put options if the impulsive wave is bearish after breaking the b-d trend line, given that the price will not go up further significantly. Traders can opt for put options but only with short expiry periods when the timeframe of the triangle is right, which further requires hedging the first position with long-term trades if they want to do it right. Long-term trades have to have longer expiry periods than the hedged position.

Triangle patterns and continuation patterns can serve as an efficient strategy for binary options trading since it gives a trader a clear advantage in price movements and predictions. Traders should bear in mind that the waves of a triangular are always corrective which further leads to the conclusion that as sooner trader master corrective waves the sooner will they be able to apply strategies by observing triangles and continuation patterns. Trading in this way is less speculative and less risky giving you clear identifications of what will happen in the market.

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Binary Option Trading – Pennants and Continuation Patterns

Some articles we publish tell about how to pick patterns out from analytical charts in order to detect at what point a price will change its movement or if we believe it to remain the same. Continuation pattern is one of the most important to look for; one of the core indicators inside a continuation pattern which helps to indicate the price movement is a pennant. Let’s havea little more talk about those two things.

Before our talk about pennants we should clarify the difference between the two types of pennants, continuation and reversing ones and try to understand what outcome you will have after you follow each of them. A continuation pattern means that the price of an asset is breaking a consolidation area in the direction similar to the previous trend. And a reversal pattern is the one having a trend which is moving in a different direction after having broken out of the consolidation area.

Pennants are formed when we see a nearly vertical triangular patterns price movement, usually after some drastic up (the drastic move establishes the pennant pole and that nearly vertical move makes its flag). A continuation will indicate a bullish trend will be on. In this case it is advisable to buy call options only. It is worth doing after you see the pennant is forming. You should always keep in mind prices usually travel very fast after they brake a consolidation area of some continuation pattern.

The best thing about a pennant as an indicator is the fact you only have to measure the move in order to get the continuation pattern confirmation.

So, as soon as you get used to pennants, you will see they are a great tool which helps you spot continuation patterns. An as soon as they are spotted, get ready for buying call options.

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