Continuation patterns are a type of price formations that form during trends. They tell us that the trend will endure a period of consolidation in order to build up fresh momentum, but will probably continue in the previous direction when the consolidation is over. In the world of binary options continuation patterns give us a range of investment opportunities that you can use as the basis for a good trading strategy.
In this article we will give you an introduction to continuation patterns, and show you how they help you become a successful binary options trader.
When a trend has been moving in the same direction for a long time, it can start to lose its momentum. This can occur in a bullish trend when all the investors who wished to buy the asset in question have done so, and so demand is no longer sufficiently strong to cause further price rises. Conversely, in a bearish trend all the investors who were willing to sell have done so. The supply is exhausted and no longer sufficient to allow the price to dip further.
With both these examples we see that there is no momentum for an opposite movement either. In the bullish trend, a downward trend will not appear because not enough traders wish to sell. In the bearish trend, no uptrend will appear because there aren’t enough willing buyers. For this reason, the market becomes locked in the current state. It cannot rise, it cannot fall. The only available direction is sideways. The sideways movement will appear between a support level at the bottom and a resistance level on top.
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Technical analysts can identify a number of differing continuation patterns, depending on how the resistance and support levels position themselves. These patterns will have varying features.
The triangle pattern occurs when the support level and the resistance level converge on each other with the market placed between them. After a while, the support and resistance levels will cross one another. This will mark the end of the triangle.
We have different types of triangles. In a symmetric triangle we have ascending and descending lines, in an ascending triangle we have an ascending support level and a parallel resistance level, and in a descending triangle we have a resistance level that descends and a support level that runs parallel.
It doesn’t matter in which way the triangle is pointing. This will not determine the future direction of the price. That depends on the direction in which the market breaks free from the triangle. If the price first goes through the upper resistance level, it will continue in an upwards movement. Should the price break through the lower resistance level, the market will carry on in a downwards movement.
In the vast majority of instances, the market will nonetheless break through in the same direction as the preceding trend was moving. This is why the triangle is deemed to be a continuation pattern.
The flag is a triangle with two parallel lines. Often most, these lines will be inclined in the opposite direction of the previous trend. In a bullish trend, the flag will in most cases point down, in a bearish trend, the flag will most often point up.
Hence, many flags contain a trend that is moving in the opposite direction of the previous trend. This should not confuse you. Once the flag is complete, the previous trend will nonetheless most likely carry on.
A pennant pattern is a minor triangle pattern. It is mostly created with 20 periods or even less.
A rectangle pattern is a specific type of flag pattern. Its lines both run parallel to the time axis of the price chart.
The most popular approach to trading a continuation pattern is to invest in an Up / Down option when the market breaks out of the pattern. In addition, the special attributes of binary options offer up some more, alluring opportunities to make money on continuation patterns.
You can invest in a No Touch option.
Check if your binary options broker has a No Touch option with a target price beyond the trading range of the continuation pattern. If it does, you can predict that the market will not touch the target price because it is contained within the pattern.
You can invest in a Boundary Option or a Touch Option.
Pennants, triangles and flags will in most cases be hanging at half-mast. As a consequence, once the formation has become complete, you can confidently predict how far the market will move and how much time will elapse before it gets there. In this case it is crucial that your option’s target price is within reaching distance of the market movement, and that you choose an appropriate expiry time.