The flag pattern is one of the most important chart formations every binary options broker should know. Allowing for exact predictions and numerous trading opportunities, the flag pattern can supply you with good investments for your entire trading career.
Flag patterns occur after the market went through a trend for a while. Strong trends, where the market moves especially quickly, make a flag pattern more likely.
Flag patterns are short interruptions in the form of a trend in the previous direction of the previous trend. Because highs and lows are in two straight, parallel lines, this trend looks like a flag, thereby giving the flag pattern its name. Almost always, flag patterns are significantly less steep than the preceding trend, which is one of the strongest indications that you are dealing with a flag pattern.
In an uptrend, the interrupting flag pattern will form a short downwards trend. In a downtrend, the interrupting flag pattern will form a short upwards trend.
After the flag pattern is complete, the market will continue in its main trend direction. Traders say that flags usually wave at half mast, which means that the market usually moves roughly the same distance after the flag pattern as it has moved before the flag pattern.
Flag patterns are the result of how demand and supply play out under real life market situations. To understand this relationship, imagine an asset that has gone through a strong trend for a while. After some time, everybody that wants and can invest in the trend, is invested in the the trend. Therefore, the trend has to go through a period of consolidation.
During this consolidation, there is less momentum in the direction of the previous trend. Realizing that the recent strong movement is over, however, will cause some traders to take their profits, thereby creating momentum in the opposite direction. With this overhang of momentum in the opposite direction, the market will reverse briefly.
When enough traders are willing to invest in the main direction again, the market will turn around once more and resume the previous trend.
A consolidation can take many forms. The flag pattern is one of them, with the pennant pattern and the rectangle pattern being close relatives. To make correct predictions, it is important to identify the exact formation you are dealing with.
The important distinction of flag patterns is that they create a trend in the opposite direction of the main trend, which can easily trick you into thinking that the market has reversed. Understanding the flag pattern can prevent you from making bad decisions and show you profitable trading opportunities, thereby providing the most net benefit to your trading of all continuation patterns.
Trading the flag pattern with binary options
For binary options traders, flag patterns offer a number of profitable trading opportunities. Those are:
When the market is in a flag pattern, it will adhere to a relatively exact trading range. Forming a support level in the bottom and a resistance at the top, the flag patterns trap the market and provides you with upper and lower limits for your investments.
From these limits, you can deduct the information to invest in all kinds of binary options:
High / low options: When the market is near one of the extremes of its trading range, you can invest in a high / low option, predicting that the market will close nearer to the other extreme of its trading range. Keep your expiry short enough to make sure that the option ends before the market completes the flag pattern, and you should win a high percentage of your trades.
One touch options: When the market is near one of its extremes and your binary options broker offers you a touch option that is within the flag pattern’s trading range, you can use this option to predict that the market will trigger it’s target price. Take the longest expiry that is still within the flag pattern.
Boundary options: When the market is near the middle of the flag patten’s trading range and your broker offers you a boundary option with its target prices within the flag pattern, you can invest in this boundary option, thereby betting on the good chance that the market will move close enough to one of its extremes that it triggers the option.
Ladder options: At any time during the flag pattern, you can use ladder options to predict that the market will stay above its lower support line and below its upper resistance line.
You can also use flag patterns to trade the main trend in which it occurs. As we mentioned earlier, flags usually wave at half mast. Once a flag occurs, you can use this knowledge to estimate how far the main trend will still move.
With this knowledge, you can invest in a one touch option, a high low option, or a ladder option, or a combination of the three.