Use Flags as Patterns in Binary Options Trading
It depends on the market whether you get bullish or bearish flags which can be useful patterns. They represent continuation patterns, which means that a pattern moves where the prior trend moves, and after consolidation, they are supposed to be marked according to Elliot Waves Theory and structure. The consolidation area can predict future price movements with great precision, whereas some of the factors which need to be regarded include the following:
- The actual consolidation is indicated by zigzag patterns in double and triple patterns whereby it can represent a double or triple combination. There are no impulsive movements and the lower area displays almost steady corrections which stay more or less the same;
- Before the price actually breaks the range, up or down, one has enough time for a measured move which will indicate the future prices.
In order to calculate the measured move, one has to look at the distance that price had traveled before the consolidation area appeared, which is called the flag and it is revealed when the upper or lower trend move exceeds the range in any direction. It usually unfolds with the price breaking the consolidation area and following the measured move which takes less time than the flag formation and that serves as confirmation for the overall pattern.
Time is a Crucial Element when Trying to Catch a Flag
The time factor plays a great role in identifying flag patterns, and traders should always bear in mind that those patterns are continuation patterns, which means that if a price exceeds the flag on the upside, then traders should immediately buy call options, but if we have the opposite situation where the price exceeds the flag on the downside, put options would be recommended. Watch the video below for a detailed overview of how time should be perceived by traders and how can they make use of it.
The time frame that displays the flag also displays the expiry period, whereby a simple unofficial rule exists; the expiry period is consistent with the timeframe, and if one increases, the other one increases as well. This means that you can engage freely in long-term trades that last for a week or even month depending on when the price is forming the flag.
Continuation Patterns Equal Flags
It has already been mentioned in this review that flags are continuation patterns, but the important piece of information cannot be stressed enough. It represents the most important element when looking for a flag. Continuation patterns should usually be tracked down when traders want to add a new position or scale in a position with a better average.
Flags are characterized by different slopes, and that sometimes confuses traders, but it shouldn’t. After the flag finished, the measured move moves at a different pace in bullish and bearish flags. This is due bullish price movements rise at a different angle, and the two patterns are completely different, whereby the bearish price movement also causes panic since it indicates a drop in value.
The panic is associated with the selling-mania after a bearish flag proves to be stronger than a bullish flag. This is an indication that options trades placed on the basis of bearish flags should have shorter expiry periods than those which originate from bullish flags.
Consolidation and the Flag Pattern
Consolidation is also part of options trading given that the market is for 70% of the time in consolidation. By taking a peek into the Asian sessions in the Forex market, traders can notice that the market is standing still until the early3 London session is opened for trading.
The best time to find a consolidation area to form a flag is between important economic news since that is the period when the market does not move particularly, and prices have no reason to fluctuate. Besides the example with the Asian sessions, one can also rely on the end of the first week of the month, since the Non-Farm Payrolls (NFP) are announced and released which traders consider too risky, so the market usually stays consolidated during that period.
If you are already searching consolidation periods and areas, it is recommended to look for flags as well since they are known to pay off.
If your hourly chart displays a flag formation, traders should look for trading options by the time the trend line exceeds either the downside or upside.
Flags and their Relationship to Corrective Waves
According to Elliot Waves, the father of chart reading and pattern formations, and his theory, flags actually represent corrective waves in the form of b waves or x waves, whereby they are almost never in the form of legs of the contracting triangles. The optimal time to look for either call or put options is after the b wave retracted, no matter what direction it takes, it can be either below or above the range. Also, when you recognize a zigzag pattern that formed, the chances are high that the pattern represents a flag.
Remember that time, continuation pattern, the zigzag pattern, and consolidation are your friends when looking for a flag for accurate predictions. Flags represent a unique binary options strategy that was rewarding for many traders.
If you want to study more thoroughly trading bullish and bearish flags, read more articles attached to this educational session, where much more information is provided concerning various issues in the binary options industry.
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References and Further Reading:
- The Weekend Effect: Trading Patterns of Individual and Institutional Investors (JOSEF LAKONISHOK, EDWIN MABERLY)
- The Stability of Interregional Trading Patterns and Input-Output Analysis (Leon N. Moses)
- Trading Patterns and Prices in the Interbank Foreign Exchange Market (TIM BOLLERSLEV, IAN DOMOWITZ)
- Trading patterns, bid-ask spreads, and estimated security returns: The case of common stocks at calendar turning points (Donald B. Keim)
- Real trading patterns and prices in spot foreign exchange markets (J. Danı́elsson, R. Payne)