KEY REVERSALS

Binary option traders can benefit from any technical signal that helps them predict the direction of price. While trend analysis can tell traders to keep trading in the same direction, the concept of a key reversal tells traders when they can expect a trend to end and should therefore start making market decisions in the other direction. Key reversal patterns do not occur often, but are said to be reliable when they do.

A chart type that shows the high, low, open, and close prices of each time period, such as a bar or candle chart, is necessary to identify a key reversal pattern. Line or dot charts simply do not show enough information. Traders most often look for key reversals on daily charts, but the concept can be applied to shorter time frames as well.

There are two major types of key reversals to look for. They both occur in the midst of an uptrend or downtrend. Consider the first in the context of an uptrend: the key reversal occurs on a day where a new high in the trend is made, yet the close of the day is much lower–near where it opened and away from the high. This pattern indicates that a lot of buyers got caught in a sell-off, which will likely create the selling momentum needed to generate a downtrend.

The second pattern has a similar concept and is potentially even more powerful. The key reversal occurs after a candle where a new high in the uptrend is made, but that closes below the entire trading range of the previous day. This is known as an engulfing candle or bar and is considered to be a powerful indicator of trend reversal. Simply flip the logic of the definitions upside-down to use these concepts to find key reversals that signify the ends of downtrends.

CHANNELS

Binary option traders have many technical analysis tools at their disposal, one of which is the identification of price channels. Any asset’s price can travel in a channel, and this occurs when the price waves are neatly contained within two straight-line boundaries, just as the water of river is contained within its banks. Price channels can trend in a direction–up or down–or they can move horizontally on the chart, resulting in no net price change for a long period of time.

To identify and draw a price channel on a chart, look for a series of price waves that are all roughly the same size. Draw one trendline that connects all of the wave troughs together, and one trendline that connects all of the wave crests together. The two lines form the channel, or the ‘banks of the river’.

If the channel has an up or down slope on the chart, it has identified a price trend and binary options traders can use the channel by projecting the lines into the future to predict where price will be. Sloping channels are best combined with above/below binary options trades. If the channel has no slope and proceeds horizontally into the projected future, traders can surmise that price will not change significantly in the near future. Non-sloping channels are best combined with no-touch binary options that require price to stay in a specific range for the trader to receive her return.

Successful traders carefully watch for channel breakouts. When price breaks out of an upward sloping channel to the downside, this can signal the beginning of a downtrend. When price breaks out of a downward sloping channel to the upside, this can signify the beginning of an uptrend. When price breaks out of a neutral channel to either side, it can mean the beginning of a trend in either direction. Binary option traders should carefully examine price channels to determine the proper strategy to use.

HEAD AND SHOULDERS

A head and shoulders pattern is one of the most famous technical analysis patterns. Traders are particularly fond of it because it not only indicates a change in price direction, but can offer specific price targets for those familiar with its use. Binary option traders who enjoy employing the above/below type of options would do well to familiarize themselves with the head and shoulders pattern.

To identify a head and shoulders pattern on a price chart, traders look for what appears to be the silhouette of the head and shoulders of a person. A proper head and shoulders usually occurs in the context of an uptrend, and is characterized by three price waves. The first is a small-sized ‘shoulder’ wave, and it is followed immediately by the larger ‘head’ wave. The ‘head’ wave is in turn followed by another ‘shoulder’ wave identical in size to the first. The ideal head and shoulders is a horizontal pattern with the lowest points of the shoulders and head aligning perfectly.

At the end of the second shoulder, when the price of the asset lines up with the base of the ‘neck’ below the head, a trader should be ready to go short and do so as soon as price breaks below that neckline. The move down in price after a head and shoulders is said to be a measured move because it will fall a distance equal to the distance between the top of the ‘head’ and the base of the ‘neck’. This is invaluable information that binary option traders can use to incorporate into their above/below or one-touch option trading.

Reverse head and shoulders occur as well. These happen in the context of downtrends and look like the mirror images of standard head and shoulders patterns. All of the same principals apply.

DOUBLE AND TRIPLE TOPS AND BOTTOMS

Double and triple tops and bottoms are similar to the revered head and shoulders pattern. As a matter of fact, triple tops are essentially a variation of the head and shoulders pattern wherein the ‘shoulders’ are as big as the ‘head’. Not surprisingly, double and triple tops indicate the reversals of uptrends, whereas double and triple bottoms indicate the reversals of downtrends. Binary option traders can use these patterns for their directional trades just as effectively as they use the head and shoulders pattern.

A double top occurs when the price of an asset is uptrending, then creates two adjacent peaks at the same price level. A trend reversal is indicated when price breaks below the low of the valley between the two peaks. At that point a trader who starts trading to the downside has probability on his side. A double bottom is the mirror image of a double top. It reveals itself as two valleys at the end of a downtrend that have identical or near-identical low points. The downtrend is reversed when price breaks above the high of the peak between the two valleys.

Triple tops are said to be more powerful indicators than double tops. They are similar, just that instead of having only two peaks, triple tops have three peaks. When the lows of the valleys between the peaks are broken, the uptrend is likely at an end and traders should anticipate a downward move in price. Triple bottoms are the mirror images of triple tops; they contain three valleys, and when the highs between the valleys are broken, the downtrend is reversed. To idea that triple tops and bottoms are more powerful than their double cousins means that traders consider them to be more definitive indicators of trend reversals.

TRIANGLES

For their directional trading, binary option traders need to know when a trend is likely to continue in the same direction. Triangles are part of a group of chart patterns known as continuation patterns, which are thus called because they tend to indicate that the dominant trend is going to continue. Ascending triangles tend to occur during uptrends and are bullish signals that foretell the continuation of the uptrend. Descending triangles tend to occur during downtrends and are bearish signals that foretell the continuation of the downtrend.

Ascending triangles form when an essentially horizontal price pattern has a flat top and rising bottom. That is, the peaks of the price waves occur at the same price level every time, whereas the troughs occur at progressively higher price levels. Traders interpret this to mean that buyers are ‘closing in’ on the sellers, who are trying to hold price at the resistance level signified by the top of the triangle. Once the buyers have neared that resistance level, the pressure they apply often overcomes it, resulting in a breakout to the upside and the continuation of an uptrend. Binary option traders who see this breakout occur should put their money on above/below options with returns that reward a price increase.

Descending triangles are the mirror images of ascending triangles. A descending triangle is a horizontal price pattern wherein the price waves have subsequent troughs at identical price levels–representing a support line–and progressively lower peaks. Traders believe that this pattern indicates that sellers are ‘closing in’ on buyers, and that price will break out to the downside just before the triangle fully closes. Binary option traders who see the downside breakout of a descending triangle should count on the resumption of a downtrend and place their money into above/below options favoring the downside.

RECTANGLES

Binary option traders looking for continuation patterns should include rectangles in their searches. A rectangle, also known as a consolidation pattern, often occurs in the middle of a trend and is commonly believed to indicate the resumption of that trend upon the breaking of the pattern. The idea is that traders are resting during consolidation patterns, which often occur on low volume, and when they come back to their desks they will resume the buying–or selling–that was taking place before their break.

Technically, a rectangle occurs when price reaches a new high before pulling back to an intermediate support level. The pattern continues with the continual testing of both the new high and the intermediate support level. Each level must be tested at least twice for the pattern to be considered a genuine rectangle. As price bounces between these two levels, it trades sideways for a period of time and forms a horizontal price channel.

Traders can trade range-style or no-touch binary options while this pattern occurs, because the support and resistance levels will hold price in a predictable range for a little while. They can also use above/below options to profit from the likely breakout that will occur in the direction of the prevailing trend. Again, rectangles that form in the midst of an uptrend foretell the continuation of that uptrend, and ones that form in the midst of a downtrend foretell the continuation of that downtrend.

It is important to note that rectangles, as with all continuation patterns, do not predict with 100% accuracy that the prevailing trend will continue. Therefore, any breakout of a rectangle that occurs with substantial trading volume should be considered the direction that price will head, at least temporarily, even if it is in the opposite direction of the prevailing trend.

DIAMONDS

Binary option traders looking for signs of a trend reversal should keep their eyes open for diamond patterns. The diamond pattern is not as common or as powerful as some other reversal patterns, such as the head and shoulders or triple tops and bottoms, but they exist and should be included in any trader’s arsenal of technical analysis techniques. There are two types of diamond: the diamond top and the diamond bottom.

Diamond tops occur at the apex of uptrends. They can form when price in an uptrend stalls and trades horizontally for a while. The diamond takes shape if vertically short price waves at the beginning of the horizontal trading expand, becoming taller, before contracting once again to their shorter form. The overall effect of this expansion cycle is the shape of a diamond lying on its side. As the last, narrowing part of the diamond top is formed, traders should expect price to break out to the downside since a diamond is a reversal pattern and not a continuation pattern.

Diamond bottoms are the mirror images of diamond tops. A diamond bottom occurs at the lowest point in a downtrend and hails the beginning of an uptrend. Diamond bottoms show the same wave expansion/contraction pattern that diamond tops do, except that toward the end of the contraction phase, traders should expect price to break out to the upside of a diamond bottom. Again, this is the expected direction because diamond bottoms, like diamond tops, are reversal patterns.

Binary option traders can use diamond patterns to reverse the direction of their trading. If they have been making money all day buying Put options, a diamond bottom would signal that it’s time to start buying Calls. Likewise, a diamond top would be a signal to start buying Puts once again.