FLAGS

Flags represent another pattern that indicates the continuation of a market’s prevailing price trend. They can occur during uptrends and downtrends, and though they slope in the opposite direction of the trend, they tend to indicate that the trend will continue. When a flag has formed, binary option traders should watch carefully for a breakout in the opposite direction of the slope of the flag. When this occurs, they should position themselves with appropriately.

Flags are very similar to, and often confused with, other continuation patterns like triangles and pennants. The differences among these patterns are in the subtleties of their shapes. A flag is formed when price begins trading in a counter-trend direction and the new price pattern stays within the boundaries of two parallel trendlines. Note that if the trendlines converge, the pattern is not a flag but a wedge, which is a reversal pattern.

A flag that forms during an uptrend will have a downward slope. The signal that the prevailing trend is reasserting itself occurs when the top trendline, or resistance line, of the flag is broken by price with an accompanying spike in volume. Astute binary option traders can take this as a signal to buy Call-style options that will be in the money at higher prices.

A flag that forms during a downtrend will have an upward slope. The signal that the prevailing trend is reasserting itself occurs when the bottom trendline, or support line, of the flag is broken by price with an accompanying spike in volume. This signal indicates that Put-style binary options can be profitably traded at this time.

Flags are one of the most common continuation patterns, and their breakout signals are considered to be quite dependable. Only rarely will the two trendlines of a flag be perfectly parallel, so traders will need to use their discretion when deciding if a pattern is a flag or a wedge. Experience will be the best teacher in this situation.