In binary options trading, you must accurately predict the price movement of an asset for making a successful trade. But speculating the price change is not easy because the binary option is a volatile market, and price trend reversals are common.
The price pattern in binary options trading is of two types, i.e., continuation pattern and reversal pattern.
In a continuation pattern, the price of an asset continues to trend in the same direction after a brief pause. And in a reversal pattern, the price trend changes its direction.
When the price trend reverses, you need an excellent trading strategy to make winning trades. For this, you must understand what a trend reversal pattern means. And you should also know about different types of trend reversal patterns.
You will these answers in this guide.
What you will read in this Post
What is a trend reversal trading strategy?
As the name suggests, trend reversal means a change in the existing price trend. When there is a trend reversal, you can conclude that either bull or bear in the market has run out of steam.
A trend reversal also shows that the existing market trend will pause, and after that, it will move in a new direction as soon as a new energy emerges from either the bull or bear’s side.
It can happen to the downside or upside market. In an uptrend, a reversal will be at the downside. Similarly, in the downtrend, the reversal will be at the upside.
A large price change in the market brings trend reversal. Pullback and reversal look nearly the same, but small counter-moves against the trend results in a pullback.
For using a trend reversal, traders need to have enough experience. Otherwise, they might get confused and rush to make a trade, resulting in a considerable loss.
Different trend reversal patterns
If you want to use reversal trend patterns successfully, you need to know about the popular trend reversal patterns.
Head and shoulder
The head and shoulder pattern is considered a popular reversal trend because it shows a decline in the buying pressure in the market. This pattern in the trading chart represents two situations, i.e., ending downtrend and beginning uptrend; ending uptrend and beginning downtrend.
The head and shoulder pattern looks like a baseline with three peaks. Here, the two outside peaks are similar in height, and the middle one is the tallest. The three peaks symbolize the following things.
- The left shoulder indicates a price rise followed by a peak, also followed by a decline.
- The head shows a higher peak that is formed by a price rise.
- And the right shoulder symbolizes a decline in the price, followed by a rise.
When using the head and shoulder pattern for technical analysis, it represents bullish-to-bearish trend reversal. Out of all the trend reversal patterns, this one is the most reliable trend because it offers a better market understanding.
In the head and shoulder, traders place a neckline to determine strategic trading areas. To form a neckline, you can locate the left shoulder, head, and right shoulder.
Inverse head and shoulder
An inverse head and shoulder have the same characteristics as a regular head and shoulder pattern but in an inverted way. You can spot an inverse head and shoulder in the trading chart after the market has survived a trend lower.
This pattern helps to predict a reversal in the downtrend. Inverse head and shoulder also have three peaks with two of the same height and one highest. Here, the three peaks mean:
- Left Shoulder: It shows a price decline in the market followed by price bottom, followed by an increase.
- Head: The middle peak is the head and indicates price decline forming a lower bottom.
- Right Shoulder: The right shoulder signifies a price increase, and then it declines to form the right bottom.
While inverse head and shoulder pattern offers several trading opportunities, it also has certain limitations. Like sometimes, it offers false breakout results.
Triple top and triple bottom
This trading pattern is similar to the head and shoulder pattern. But here, the three peaks are of equal height. You can also use this chart for technical analysis of the market.
The triple top chart roughly translates that the assets in the market are no longer rallying. You can spot this reversal pattern in any time frame. But a successful triple top pattern is the one that occurs after an uptrend.
Just like the triple top, there is another similar reversal pattern, i.e., triple bottom. When a triple bottom trend is present, you can conclude that the price is not falling anymore, and it might rise.
In the triple top pattern, the area of peak is resistance. Also, the swing low is the pullback between two peaks. If you notice that the price drops after the third peak, it means the pattern is completed.
Depending on the trading strategy, a trader either exits long or enters short when a triple top trend is completed.
Double top and double bottom,
The double top and double bottom patterns seem like the triple top and triple bottom, but there are only two peaks in this pattern. Also, the market reverses only once during a double top and bottom pattern.
This pattern works just like triple top and triple bottom, but here the pattern changes after a while. In this pattern, the market forms second-bottom after a long time. During the formation of the second pattern, there is a significantly lower volume.
If you want to understand whether the market is forming a double top pattern or triple top pattern, you can check the movement of the second extreme. If there is a stutter in the second pattern, it is the double top or bottom.
Combining reversal pattern with indicators
You can use indicators for correctly analyzing the movement of the reversal patterns because indicators define the boundaries of trend.
Even when you are sure that the market will form reversals, it’s still necessary to use indicators to understand which revers the market will develop. You can also know whether the market will create three tops/bottoms or will it reverse. And lastly, you can understand whether the reversal will last long or not.
Without correctly understanding the reversal trend, you might make an early trade thinking that the market will form double top/bottom when forming triple top/bottom.
Additionally, you can make a late trade thinking that the market will form triple top/bottom when forming double top/bottom. Lastly, you might make wrong predictions thinking that the market will form triple top/bottom when forming head and shoulders.
When you combine a reversal pattern with a technical indicator, it benefits you in three ways.
Identify a reversal pattern
While you might think spotting a trend reversal pattern is easy, it’s not, especially when it comes to double top/bottom and triple top/bottom.
Powerful trading indicators show when a trend is running out of momentum. And thus, it helps you understand the first sign of trend reversal to make a profitable trade.
Without a technical indicator, you can still spot a trend, but you might get late in doing so. As a result, you will miss some excellent trading opportunities.
Find more trading opportunities
By using a technical indicator, you can easily find more trading opportunities. That’s because technical indicators help you identify the reversal trading pattern correctly.
With the help of indicators, you can also understand how long the reversal will last. Based on the information, you can develop a helpful trading strategy for different binary options.
Understand reversal pattern
Having a price bottom and a technical indicator on your side can easily conclude which trend reversal pattern you are dealing with. And when you know the reversal trend, you can make better trading decisions.
How to trade reversal patterns?
Once you know about different trading patterns and understand how helpful trading indicators can be, you should develop an excellent trading strategy. With the right kind of strategy, you can make profitable trades.
Here are three popular trend reversal trading strategies.
Combining reversal patterns with the MFI
MFI, also known as Money Flow Index, is simple to use and understand. This indicator multiples price movement and compares the result with rising period to falling period.
When you use the MFI, you must wait till it indicates a reversal. After that, you need to identify the pattern and make a trade.
Combining reversal pattern with Moving Averages
To make the most out of the trend reversal pattern, you can combine it with moving averages. By analyzing the moving average line, you can understand the market’s behavior.
Combining reversal pattern with Bollinger Bands
With the help of this indicator, you can learn about the market environment. And then accordingly, you can place a winning trade.
If you want to do trend reversal trading, you must use the right indicators to increase profitability and decrease loss.
Before you start reversal trading, you should also learn about different trend reversals to develop a quick trading strategy. Additionally, you should also select suitable brokers to make reversal trading successful.