Chart patterns play an essential role in the analysis of the market. They are a depiction of the actions taken by the traders and logged as price action. The price chart shows the present scenario and not the future.
These patterns indicate the buyers and the sellers about the current market trend. Although it is not certain with the record of the previous and current market, they help in predicting the upcoming results.
In binary trading, there are many different chart patterns, all of which represent different situations of the market. Their study is important to create a judgment that will help you to make a perfect trade.
The charts are ideal for different markets. Some are suitable for the volatile market, and others are for a bullish or bearish market.
What is Volatile, Bullish, and Bearish Market?
What you will read in this Post
In a volatile market, the chances of seeing major and unpredictable events are more. The prices are high-paced, and oppositely in the low volatile market, the price remains steady and has fewer price fluctuations.
Bullish or ‘Bull market’ is when the market has sustained an upward trajectory and is mounting.
Also called ‘Bear market’ is the opposite of the bull market. In this trend, the market will go down.
What are support and resistance levels and reason for their occurrence?
It is necessary to understand the meaning of the support and resistance level as they will further help you to comprehend the chart patterns.
- The level at which an asset’s market value stops falling and starts to go high is called the support level.
- The resistance level is said to be attained when the price of assets stops going upward and soon begins to fall.
The reason behind their appearance depends on the demand and supply of the market. When the buyers are more in number than the sellers, the price usually goes up because of the more demand.
On the other hand, the price will go down when the sellers are more than the buyers or when the supply is more than the demand.
For better understanding, let’s take an example:
Suppose the price of an asset is rising because the demand is more. After some time, the price will eventually touch the maximum limit, and not all buyers would be willing to pay. This will lead decrease in the demand at that price level, and buyers might decide to close their positions.
This further forms a resistance, and the price will fall toward a level of support as supply begins to surpass demand because the buyers are closing their positions evermore.
Once the price has dropped enough, buyers will start buying it again because now the price is more appropriate. This will again create a level of support where supply and demand are more equivalents.
The bullish and bearish chart
The bullish chart shows that the market has risen in economic value. It is indicated by a breakout in the resistance to a higher price, whereas the bearish pattern shows that the market is going down, which is characterized by the breakdown of the price below support to a lower price.
Types of chart patterns
The chart patterns come under the following three categories-
A continuation pattern shows that the current trend will continue.
Reversal chart patterns show that either the trend is about to change its direction or is nearing its end. It could be reversing as well.
Bilateral chart patterns indicate that the market is highly unstable or volatile, and the price could move in any direction.
Chart patterns in Binary Trading
There are many chart patterns that will guide you so that you can analyze the market trend and make the best decision.
Although these charts can’t be labeled as ‘best’ because of the huge types of market and all these patterns are essential, there are some patterns that are well-known than the others like –
- Head and shoulder
- Double top
- Double bottom
- Cup and handle
- Pennant or flags
- Ascending triangle
- Descending triangle
- Symmetrical triangle
To read these patterns, the use of trend lines is most common.
What is head and shoulder pattern?
Head and shoulders are among the most popular patterns in binary trading. They are reliable for technical analysis and are one of the most easily recognizable reversal patterns. The Reversal pattern arises when the value of the asset is going against the market trend.
In this pattern, there are three mounts, with the middle one being considerably higher than the other two peaks. This pattern helps the traders to forecast a bullish-to-bearish reversal.
How to pinpoint the Head and Shoulder pattern?
The Head and shoulder patterns are easy to identify and read. As the name suggests, it has three consecutive peaks, out of which one is higher than the other two.
The highest peak indicates the head, and the other two, which are approximately equal in size, indicate the shoulders. To see the neckline, make a trend line joining the two shoulders. Hence, the whole structure resembles the head and shoulder of a human.
The left shoulder can be noticed by looking for the price declines followed by a bottom and then a successive increase.
The head is formed when the value of the asset declines again a creating a lower bottom. The other shoulder is created when the price rises once more but then falls to form the bottom part.
In head and shoulder patterns, there is a high possibility that the existing uptrend will reverse, meaning thereby that the previous uptrend is probably on the verge of ending.
Understanding the pattern formation
For The Left Shoulder
When the price gets too high for the current market conditions, the bull steps back and makes a way to the bears so that they can pull the price down. If the price falls but then makes a way back upwards, the left shoulder of the pattern will form.
For The Head
The bulls then again make another effort to drive the price up. And hence, the head is formed.
For The Right Shoulder
Even though the price has weakened, the bulls make an attempt to force the price to a new high, forming the right shoulder, which is lower than the head.
At last, the Bears come out strong and take over. They draw the price down and break the neckline.
Once that happens, the trend will move in the downward direction for some time.
What does a Head and Shoulders pattern indicate?
It is believed that the head and shoulders chart indicates a trend reversal from bullish to bearish and indicates that an upward trend is about to finish. For investors, this pattern is one of the most dependable and steadfast trend reversal patterns.
How to use the pattern in Binary Options?
First, wait for the completion of the pattern in order to use the head and shoulder. In some cases, the partially formed pattern may not be complete. Do not execute any trade till the pattern breaks the neckline.
Therefore, before making any move, consider watching the pattern closely and waiting for the price to go lower than the neckline after forming the right shoulder.
Make the trade only after the pattern is completely formed. Check the stop points as well as entry points along with profit targets. Also, note any variations that will affect your stop or profit mark.
The entry points
There are two ways to join the entry point. The first and the most common entry point is the breakout point. Another entry point is when a breakout occurs, followed by a pullback to the neckline of the pattern.
The second entry point needs you to be patient, and it has the chance that you may miss the move altogether. This one is more speculative if the initial breakout direction starts again and the pullback comes to a halt. You might skip the trade if the price keeps flowing in the direction of the breakout.
Use in Binary Option
There are many methods in which the pattern is used in binary options, and the most used ways are-
Trading Touch Option
You can trade a touch option when the right shoulder is formed. At this juncture, you can make an objectively precise forecast that the market will get through the neckline in the coming time.
The chances of accomplishing the trade are high if you can seize the opportunity of finding a touch option within the range of the future movement.
Also, keep an eye on the movements of the second shoulder. If it significantly drops than that in the prior movements, you could attain some rewards.
Trading the High/Low Option
The chances that the market will cross over the neckline again one more time after the breakout has occurred are high. This is a predictable moment, and traders like to trade this pullback.
The probability of getting a high payout is great if you could find a touch option within reach of the movement of pullback while some wait for the pullback’s movement to over.
Once the pullback has finished, it is certain that the market will not cross the neckline in the coming future, making it the right time to trade the high/low option.
The inverse Head and Shoulder pattern
The inverse head and shoulder pattern is the same as the typical head and shoulder pattern but overturned. It is also known as the head and shoulders bottom or reverse head and shoulder.
It starts to form with a downtrend and has three main components-
- After long bearish trends, the price falls to a manger or trough and afterward rises to form amount. This forms the left inverted shoulder.
- Then again, to form the head, the price falls to form a second manger markedly below the original point and rises again.
- For a third time, the asset’s value falls, but only to the level of the first manger, before rising once more and reversing the trend, and eventually forming the right inverted shoulder.
A reverse head and shoulders pattern signals that a trend going down earlier will reverse and move towards an upward direction.
Are Head and Shoulders bullish or bearish in Binary Options?
The standard head and shoulders pattern is found when the uptrend is about to finish making it a bearish trend reversal signal.
For the bullish trend reversal, we have the inverted or reversed head and shoulders pattern. As stated, it is the same as the typical one but is mirrored and indicates that the bearish trend is about to reverse.
Here, when the price passes the neckline from below, it becomes a bullish trend signal.
Indicators for the Binary Options
The indicators provide extra information and data, like the direction of price, by doing mathematical estimations on the asset’s price and value.
There are four different types of indicators-
- The Trend Indicators
If there is any trend going on in the market, trend indicators will signal the direction in which the market is flowing. They are also sometimes called oscillators.
If you have a question on what is the best trend indicator for binary options then Parabolic SAR, Moving Average Convergence Divergence (MACD) are examples of best trend indicators.
- The Momentum Indicators
These indicators will indicate two things – first, the strength of the trend and second, if any reversal is going to happen.
Best momentum indicators include – Relative Strength Index (RSI) and Stochastic, Average Directional Index (ADX)
- The Volatility Indicators
These indicators are extremely important, and they will tell you the change in the price and value in a given time duration.
Bollinger Bands are the most used volatility indicators in the market.
- The Volume Indicators
As the name depicts, volume indicators will give you the idea of how volume is changing. During the change in price, these will tell you whether the move is strong or not.
For example- Chaikin Money Flow, Klinger Volume Oscillator, and On-Balance-Volume.
Why are indicators necessary?
Indicators are very important for you to judge the market. They indicate where the price will proceed to give you an upper hand in the market so that you can make your move towards a successful trade.
Following are the most common trend indicators
- Moving Average Convergence Divergence (MACD)
The MACD trend indicator has a histogram, a short line, and a slow line. It is the most used indicator in trend trading and the difference between the value of the 12-period exponential moving average (EMA) and the 26-period exponential moving average of the asset price.
- Parabolic Stop and Reverse or Parabolic SAR
Stop and Reverse means that when the signal appears, the trader leaves his previous position and starts a new one in the opposite direction.
It consists of dots that are located on the chart at the bottom or top of the price line, and they designate the possible flow of the price movement.
Also, the parabolic SARs must not be used in the ranging market because the price is moving sideways, which will cause the flicking of the dots giving you no clear suggestion.
Can Head and Shoulders be a continuation pattern?
The head and shoulders patterns are considered trend reversal chart patterns, but if you go deep to analyze it, you can see that it is a continuation pattern.
You can definitely execute some successful trades if you can find the difference between the reverse trend and the continuation pattern. You can buy your asset near the continuation pattern’s support level, as this will minimize the risk.
To check for the continuation trend, here are some features which are distinct from the primary reverse trend.
- Continuation patterns take place after a shrill change in the price. If you examine it from a more wide-ranging viewpoint, you can see that this makes the head and shoulders seem more like a union than a reversal pattern.
- If there is a possible continuation pattern taking place in an uptrend, the troughs of the continuation should get somewhat close to a similar level.
It is okay even if the last trough is higher than the others, but if the price goes considerably below the lowest locus of the pattern, then it is probably a reverse pattern.
- In the downtrend, if there is a potential continuation pattern then, the high points of the continuation pattern must extend up to the same level.
It is fine to have the last high lower than the others; however, if the price goes above the highs of the patterns, it would stop being a continuation pattern and become more like a reverse trend.
- It is highly anticipated that in the continuation pattern, the trend to continue to follow the pattern. Only if the pattern drops out of the uptrend, the price is likely to reverse.
Chart patterns are essential in order to analyze the market trend and the flow of the price. They are used in different time frames in almost every kind of market environment. Among them, head and shoulder patterns are widely popular.
The chart pattern of the head and shoulders are easy to recognize and read. On the completion of the pattern, you can see the entry points, the stop points, and the profit targets, which further helps in making a strategy to execute the trade.
All you have to do is find a suitable broker and secure rewards and profits by studying these patterns. The system is not always on point, but it does deliver a way of trading the markets based on analytical price movements.