Binary options continue to gain popularity among novice traders, and first of all, it is connected with the external simplicity of trading: trading terminal without complex graphics constructions and set of indicators, large buttons "CALL/PUT" create an illusion of irrelevance of technical analysis and market knowledge.
But the first loss of the deposit puts everything in its place and the understanding comes that one cannot do without the theory of how to make money on binary options. In this article, we'll show you the lucrative patterns that use The Price Action strategy.
About candlestick analysis
The methodology was developed by the Japanese trade in rice Munehisa Homma in 1755 and has not changed significantly to date. He also found the basic candlestick patterns by which the reversal or continuation of the current price movement is determined.
In terms of technical analysis, candlesticks confirm two basic principles:
- Price (candle) includes all factors affecting it; no additional analysis is required (one of the principles of Dow Theory).
- History repeats itself and with the help of graphical patterns, it is possible to predict the actions of most stock players (Eder's Chaos Theory, Elliott's wave model).
The volume of the article will not allow us to describe in detail all the candle patterns; we well only on the simplest and at the same time strong figures. They can be used immediately even in binary option for newbie’s.
What is Price Action?
Despite the variety of tools and strategies using technical analysis, they all analyze historical price data and, as a result, always have a delay to current market movement. It is impossible to completely remove the delay, and as an alternative, indicator-free exact binary options strategy, such as Price Action, was developed.
It can be difficult for beginners to understand where the candlestick analysis ends and the Price Action trading begins. This fact is easy to understand, given that the basic principle of both methods is the same: the current price includes all factors influencing it, and no additional analysis tools are required.
In both methods we deal with the same graphic patterns: “triangle”, “head-shoulders”, “double top / double bottom” and others. Despite the “lack of indicators” experience of using Price Action showed that without additional indicators: volume, overbought/oversold, moving averages or binary options signals can not do.
Another Price Action problem is the use of proper names: candlestick combinations are called settings, and the standard “tweezers” shape appears under the term Double High.
Their designs are used, for example, the “1-2-3” strategy and hidden borrowing: resistance/support lines constructed under the Price Action settings are always near extensions and corrections by the Fibonacci levels.
Let's make it clear: Price Action differs from the usual strategy of binary options in deeper development of the methodology for applying standard graphic patterns to the real market.
Especially in terms of working out imperfect figures, since the basic structures described in the textbooks in an unchanged form are rarely found on the chart.
Basic options patterns
All Price Action patterns, as in the classic candlestick analysis, can be divided into two groups: reversal and end/continuation of the trend. About binary options, reversal models work most efficiently, usually occurring at points of a trend reversal or the beginning of a deep price pullback.
This allows you to accurately determine the expiration date (expiration) of the option, which is extremely important for successful trading. Let's take a closer look at three patterns that are easy to find on the chart even for beginners:
• “Pin Bar”;
• “Inside Bar”;
• “Outside Bar”.
The second name for this strong reversal binary options trading signal is "Pinocchio bar". It works on any timeframes from daytime (D1) to 15 minutes (M15). Setup got its name by the characteristic kind of medium (central) candle with a missing or small body and a large shadow - "nose" and the longer it is, the higher the probability of a close reversal of the trend. The basic structure of the pin-bar:
The central candle must meet the conditions:
1. The body of the candle and the Low / High values are mandatory inside the left “eye”;
2. The length of the body is not more than 20% of the “nose”;
We open a deal after closing the candle of the right “eye”: bearish - PUT to fall, while bullish - CALL to increase. The minimum expiration period is 3-5 candles and 5-7 on shorter periods. Additionally, take into account the current volatility of the trading instrument.
Examples of “Pin-bar” in binary trading platform:
Like all graphic patterns pin bars in its ideal form are almost not found, although combinations of candles outwardly similar to them occur quite often and the trader must learn to practice such "imperfect" cases. Before opening an option, make sure of the following:
- The pin-bar is located next to the Fibonacci levels, local, daily and weekly highs/lows, moving averages and trend lines;
- Upper and lower shadows of the “eyes” are much shorter than the “nose”;
- The central candle has a short second shadow or it is missing.
Two false and one non-ideal free binary options signals:
The previous candle completely absorbs the current one, including shadows as shown in the picture:
Price action patterns for binary options on the chart are rarely formed in their classical form and the inner bar is no exception: their max/min often goes beyond the previous or signal bar.
This partial takeover in binary options strategy is also considered a signal to open an option, but less reliable. Internal bar signals that there is uncertainty in the market and the trend can end or resume equally after a short flat or correction. Most reliable signals are formed on the daily (D1) timeframe, but good results are obtained on the intervals H1-H4. Presence of several candles inside the signal indicates a high probability of sharp price fluctuations.
Opening a transaction, we pay attention to the following factors:
- It is not recommended to open options when you see an internal bar at the point of a possible trend reversal. This rarely causes a strong trend change and it becomes difficult to determine the duration of the option. It is more reliable to open a deal at the point of continuation of the trend;
- Presence of "pivot point" for Inside Bar: Fibonacci correction or resistance/support, trend line, moving average;
- Expiration of at least 3-5 candles.
Inner/Outside bars on the chart:
A pattern opposite to the inner bar - the current candle completely absorbs the previous one along with its shadows. If the minima or maxima of both candles coincide, this can also be interpreted as an outside bar:
Like the previous pattern, the absorption indicates an equal probability of price movement both up and down. Studying how binary options signals work always remember that moment of market uncertainty is often preceded by speculative actions of large players, who record current profits/losses through short-term strong price fluctuations and displace small players from the market:
- Bullish outside a bar. The current close above the High of the previous candle leads to the closure of pending BUY orders on Forex if the candle closes below the previous Low removes Stop Loss orders from the market and traders waiting for the resumption of the downward trade suffer losses;
- Bearish outside bar. The situation is the opposite of bullish: pending SELL orders and Stop Loss of buy trades are closed: binary options signals on CALL-options.
The most reliable outside bars are formed on timeframes from H1 and more. To skip the short-term “tremor” of the market, where takeovers often occur before the trend resumes, open the option only after confirming the trend with 2-3 candles.
Let's summarize. The three patterns considered giving a reliable and stable binary option signal on any trading asset. Additionally, there are still varieties of reversal models, such as "Rails" but they are more applicable only in stock market trading.