Trading with Flag and Pennant Chart Patterns Binary Options 2020

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Pennant Patterns in Binary Trading

A binary options trader who is in the art of trading a bullish and bearish flag pattern will have no trouble in identifying and trading a pennant pattern. The reason is that both patterns share similar characteristics albeit a small difference in their structure.

Identifying a Pennant Pattern

A Pennant is a continuation pattern, which develops as a result of price consolidation. Similar to a flag pattern, a pennant indicates a possible resumption of the earlier trend. The pattern begins to develop with the formation of a flag pole structure reflecting a sharp advance or decline in the price. This is followed by the formation of a symmetrical triangle (pennant) structure. A pennant pattern seen after an uptrend and a downtrend are respectively called as a bullish and bearish pennant. A pennant pattern is usually seen near the center of an uptrend or downtrend in the price of an asset.

Normally, it takes between one and four weeks for the formation of a Pennant pattern. The uptrend or downtrend, before price consolidation, can sometimes contain price gaps.

The criteria which confirms a pennant pattern is as follows:

  • There should be an abrupt rise or fall in the price before the formation of a pennant.
  • The volume should increase considerably during the formation of a pole.
  • The volume should decrease when the price moves in the congestion zone.
  • The volume should increase remarkably when the price breaks out of the trend line.

The reaction highs and lows in the consolidation zone are connected separately through two trend lines. Since the beginning of the consolidation pattern has the tallest and deepest price points, the trend lines converge to form a triangle, which resembles a pennant. Thus, the resulting pennant pattern begins wider and converges in the final stage. The reliability of a pennant pattern increases with the time taken for its formation. Additionally, for better results, a pennant pattern should be tilted in the opposite direction of the prevailing trend.

In a bullish pennant pattern, a break above the resistance indicates the resumption of the prior uptrend. Likewise, in a bearish pennant pattern, a price below the support signals the continuation of the earlier price decline.

The distance between the two ends of a flag pole is initially measured and an extension of similar magnitude is drawn above the resistance (bullish pennant) or below the support (bearish pennant) to arrive at the probable target price.

Trading a Bullish Pennant Pattern

1min / 30min / 1hr trade

A binary options trader can purchase a 1min / 30min / 1hr call options contract once the price breaks above the downward sloping upper trend line of the conical pennant pattern. The volume should be rising when the break out happens. A trader should also monitor for a strong momentum during the price break out. The price would continue its uptrend as long as the volume and momentum compliments each other. A reversal is possible only when there is unexpected news. In such circumstances, the price would fall below the downward sloping upper trend line thereby making the options expire out of money. A sharp uptrend is expected as soon as the price breaks above the consolidation zone.

One touch call options

A trader can purchase one touch call options contract when the probable target price calculated based on the length of the pole is equal to or greater than the target price set by the broker. Before purchasing a contract, a trader must make sure that there is an appreciable increase in the volume, and the momentum supports further uptrend in the price of the underlying asset. Unexpected negative news can trigger a trend reversal thereby leading to a loss of trade (options expire out of money).

Double one touch options

When there is a scheduled high impact announcement, a trader can consider purchasing a double one touch options contract. If the news is positive then the price would continue its uptrend and breach the upper price boundary target put forth by the broker. On the other hand, unexpected negative news would result in a price reversal. This would result in hitting the lower price band target set by the broker.

If the news weakens the momentum (& subsequently slows down the price movement) then the options contract will expire out of money. Similar to other binary options contract, a trader should look for an increase in the volume during the above the downward sloping upper trend line. Additionally, the probable price target should be well above the upper boundary price target set by the broker.

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No touch options trade

A ‘no touch options contract’ is the best available solution for trading a bullish pennant pattern. When the price breaks above the downward sloping upper trend line, a no touch options contract can be bought. As long as the volume is encouraging and the momentum remains strong during the break out, the probability of a decline below the downward sloping upper trend line is negligible. The contract will expire out of money if there is unexpected negative news announcement. Since the contract does not demand the of price beyond any limit, the trader can give little importance to the probable target price calculated using the length of the flag pole.

Double no touch options

When the following conditions are satisfied, a double no touch options contract can be purchased:

  1. The price must break above the downward sloping upper trend line. However, the volume should not rise and the momentum should be weak.
  2. Before the expiry time of the contract, there should not be any high impact news announcement.

As long as there is no news to propel the price volatility, neither of the price bands, set forth by a broker, will be breached. Only unexpected developments (economic or geopolitical) would increase the price volatility thereby making the contract expire out of money.

Trading a Bearish Pennant

A bearish pennant shares all the similar qualities of its bullish counterpart. The only difference is that the price will break below the upward sloping lower trend line. After assessing other factors (volume, momentum, news etc.,), a trader can purchase a suitable binary options contract, which includes 1min / 30min / 1hr put options, one touch put options, double one touch options, no touch options and double no touch options.

Just because bullish and bearish pennants are commonly seen patterns, a trader cannot brush away its importance. The success percentage of a trader will increase noticeably as soon as he learns to identify and trade a continuation pattern, which includes a bullish and bearish pennant.

You may also be interested in learning about other chart patterns that can be used to trade binary options:

Flags and Pennants Chart Patterns

Trading Flags and Pennants Patterns

Flags and pennants chart patterns are primarily known for signaling a continuation of the previous trend. The flag or pennant chart pattern is formed right after a bullish or bearish price movement followed by a period of consolidation. This is where price tends to take a pause before continuing in the original direction of the trend.

Flags and pennants chart patterns are easy to identify and can be found just after an important news release such as the NFP/unemployment reports or other important economic news release. (read more about NFP here)

Trading the Flag Patterns

The flag pattern is identified by two main elements.

  • The flag post, which is basically the strong price action
  • The flag, which is a period of consolidation

A bullish flag is identified by a downward sloping flag, where as a bearish flag is identified by an upward sloping flag.

The following chart shows the bullish and bearish flag patterns along with how they are traded.

Figure 1: Bullish Flag Example

After price starts to consolidate and move gradually lower, look to buy on the break out of the flag. The price objective is expected to be the minimum previous distance of the flag post from the break out price level. The Figure 2 shows an example of a bullish flag trade example.

Figure 2: Bullish Flag Trade Example

Figure 2 above shows a bullish flag example. We notice how the price moved rapidly before entering a period of gradual exhaustion, shown by the number of candles within the flag. After breaking out of the flag pattern, price rallies to reach not only the minimum price objective but rallies to make higher highs. The stops for the bullish flag are placed just at the low prior to the break out from the bullish flag.

A bearish flag is characterized by a sharp drop in price followed a period of gradual price congestion moving higher within a channel. On break out of the bearish flag, price then travels a minimum distance of the flag post. The Figure 3 illustrates a typical bearish flag pattern.

Figure 3: Bearish Flag Example

The next chart below, Figure 4 shows an example of how the bearish flag is traded.

Figure 4: Bearish Flag Trade Example

An interesting point to bear in mind in the above bearish flag trade example is the retest of the break out level. This retest may or may not happen, but it does remind traders that trading on a retest of a break out price level is always a safe option. However, this is not always as the case as in most cases with flags, the break it sharp and quick.

In the case of the above bearish flag break out, despite the rally back to retest the break out level, price did manage to reach the minimum price objective.

Trading the Pennant Patterns

The pennant patterns are similar to flags, with the main difference being that the patterns are formed as converging trend lines into a triangle. The bullish and bearish pennant chart patterns work on the same principles of the flag patterns. The following chart shows a bearish pennant pattern.

Figure 5: Bearish Pennant Example

As seen by the above chart, the bearish pennant pattern is identified by converging trend lines forming a pennant that is sloping upwards at the bottom end. The pattern is somewhat similar to a symmetrical triangle formed within a smaller number of candles, but preceded by a sharp bearish drop.

Figure 6 illustrates a bearish pennant example. In this example, we also get to see a fake out that occurred out of the bearish pennant/symmetrical triangle. When taken in view of the larger chart pattern, the bearish pennant, the fakeout could have been easily avoided. Price eventually manages to break lower out of the pennant pattern eventually retesting the break out before dropping to reach the price objective.

Figure 6: Bearish Pennant Trade Example

The bullish pennant pattern is the opposite of the bearish pennant pattern and almost similar to a bullish flag pattern, with the exception that the pennant is formed by converging trend lines forming a symmetrical triangle. The chart below, Figure 7, shows a bullish pennant example and how it can be traded.

Figure 7: Bullish Pennant Example

Figure 8 represents a trade example of a bullish pennant pattern. Here we can see after a rapid rally, prices started to consolidate within a tight range forming a pennant. Upon break out from this pennant, price then subsequently rallied to reach the projected target.

Figure 8: Bullish Pennant Trade Example

The flags and pennant patterns can be a good way to trade chart patterns. Because they are continuation patterns, the chances of them failing a very low and therefore can offer a safer way to trade chart patterns, especially for those who are just getting started with this approach to trading.

Types of Chart Patterns for Binary Options Trading

Here you can find information about the different chart patterns that you can use to trade binary options trading: cup and handle, double tops and bottoms, triangles, flag and pennant, wedge, gaps.

Cup and Handle

Cup and handle is another one of the popular patterns chartists often look for. Unlike the head and shoulders, though, its a continuation pattern (meaning that it suggests the trend we were observing prior to the pattern will continue at the completion). What makes this pattern so special is that it predicts a pause in the price increase, or even a brief decrease. This is where many investors who are not familiar with the pattern are prone to making mistakes and faulty predictions. You can clearly see the “cup” and the “handle” in the example below.

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You can clearly see the upward trend on the example, followed by a brief decrease before another increase (which forms the “cup”), and then we have a smaller movement of similar directions before the price skyrockets. Cup and handle is a fairly simple pattern and is very easy to identify. The time frame it covers is usually from a few months to more than a year.

Double Tops and Bottoms

Keeping up with the most popular patterns youre likely to see in a chart, double tops and bottoms is another spectacularly reliable reversal pattern. Like heads and shoulders, it signals that trend is about to go in the opposite direction. The chief characteristic of this pattern is that it forms after a stable trend. The genesis of the pattern begins when the price movement tests (which means that it tries to go beyond them but isnt able to break through) either the support or resistance (for double bottom and double top respectively). The pattern is very dependable and usually hints of mid to long-term trend reversals.

For double top, we observe that the price attempts to break the resistance two times, and is both times unsuccessful (look at the example below). The resistance proves too strong for the price, so the upward movement stops at the resistance level two time in a row. After the second unsuccessful attempt, the price takes a dive and begins a new downtrend.

The double bottom pattern is the exact opposite of the double top pattern. Just like its polar opposite, it is preceded by a trend (in this case a downtrend) and upon reaching the support levels, it bounces up two time in a row and then begins an obvious ascend, which signals a new uptrend.

Triangles

All of the patterns weve examined so far are well-known and reliable, making them the perfect tools for technical analysis. Triangles are no exception. There are three main types of triangles – symmetrical, ascending and descending. Each type is characterized with different properties and carries different implications, but they have one thing in common – their timeframe, which usually ranges from a few weeks to a few months.

Symmetrical triangles are by far the simplest of the bunch. They are preceded by a couple of trend lines that gradually approach one another until a breakout point in either upward or downright direction. Wherever the breakout is headed, we know we have a stable trend in that direction. The support and resistance serve as the sides of the triangle. See example below.

In the ascending triangle pattern, the resistance is flat while the support is ascending (hence the name). There is usually an upside breakout after that confirming the trend. See example below.

Descending triangle is the polar opposite of the ascending triangle. The support is flat and the resistance is descending. The breakout is downside and confirms the emerging downtrend. See example below.

All of the triangle patterns are very reliable and almost always confirm the emerging trends. A competent analyst can easily spot them and predict the markets momentum for the near future. Its important to spot the patterns early and identify them because sometimes the emerging trends can be quite drastic. This is no cause for concern if you know what to look for, though.

Flag and Pennant

The basis of the flag and pennant chart patterns lies in the sudden price movement, which is then followed by a period of stability, only to be completed by another price movement is the same direction as the first one which signals of the emergence of a trend. Flag and pennant patterns are very short-term and rarely last most than three weeks. They are both continuation patterns.

As you can see in the example below, the pennant pattern resembles the symmetrical triangle one. However, this pattern is short-term, with the two diverging trend lines approaching each other before the movement of the price in an upward direction. See example below.

The flag pattern is different in the sense that the trend lines dont diverge. Instead, they are parallel in the case of the flag, but the same end result is expected from this pattern, as well. See example below.

Wedge

The wedge pattern is a bit more complicated than other patterns weve viewed so far in the sense that it can be either a continuation or a reversal pattern. It is very similar to the symmetrical triangle in nature, with two significant differences. The first difference is that the wedge patterns follow an upright or downright direction, whereas the symmetrical triangle follows a stable sideway direction. Another important difference between the two patterns is that the wedge tends to be observed over longer periods of time – in most cases between three and six months.

The dual nature of the wedges makes them a bit confusing. They are easy to miss for an initiate in the art of technical analysis, although an experienced analyst can always spot them. To make things easier for you to understand, we will give you general guidelines of how things usually play in regards to these patterns. Note that this might not always be the case. In time, though, if you are truly determined, you will be able to learn how to recognize them. Heres an example. Say we have a downward wedge (meaning the two trend lines are converging in a downward direction). In most cases, if price breaks upward, then we have a continuation pattern but if it breaks downward, we have a reversal pattern. See example below.

A gap is an interesting phenomenon that usually occurs when there is a significant event in the field or niche of an asset. Gaps can be spotted on bar charts and candlestick charts but wont be seen in line charts or point and figure charts. A gap is momentous difference between the prices in two consecutive trading periods. It can be a significant jump or dip in the price of an asset.

There are three types of gaps. Breakaway gaps form at the beginning of a trend; runaway gaps form in the middle of trends; and finally exhaustion gaps from at the end of a trend.

Triple Tops and Bottoms

Triple tops and bottoms act in a very familiar manner. They closely resemble the double tops and bottoms even though they are much rarer. Like double tops and bottoms, triple tops and bottoms test the resistance or support. Unlike the double tops and bottoms, they do it three times instead of two (as the name suggests). Once again the prices cant break through which means a reversal of the preceding trend.

The confusing aspect of triple tops and bottoms is that it can closely resemble double tops and bottoms. An inexperienced chartist or analyst might be led to believe that the pattern is double top or bottom in the genesis of the pattern and make hasty decisions. This is why patience is the name of the game when it comes to these types of patterns. Precision is a very important component and this is where the analysts abilities and intuition come into play. He is either going to realize that the emerging pattern is a triple top or bottom or he wont. However, fear not, as with with experience you will learn to recognize them. Of course, we all make mistakes but this is just the risk of the job.

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