Head and shoulders formations are very large price formations that can easily contain 20, 50, or more candlesticks. Due to their size, head and shoulders formations offer plenty of excellent trading opportunities to win a binary option.
Depending on your trading strategy, you can use these opportunities to make money by investing in a binary option:
1) Trading the price breaking out of the head and shoulder formation
The breaking of the neck line and the completion of the head and shoulder formation is a significant event for a number of reasons:
a) The preceding trend is over. All swing traders and trend followers invested in regular assets have to close their existing positions and open positions in the opposite direction. This will create significant supply / demand and a significant breakout.
This means, when the market breaks the neck line, it will trigger trading orders of a number of different trading styles that all point into the same direction. It will therefore create a strong movement, you can easily profit from by investing in a binary option. Depending on your preference you can use a touch option or a high / low option to trade the breakout.
This is the most reliable and most common way of trading a head and shoulder formation.
2) Trading a touch option after the formation of the second shoulder
In general, trading a touch option is a good strategy when you can predict the distance of a movement. The head and shoulder formation creates this opportunity a number of times, the plainest after the creation of the second shoulder.
In this situation, you know that the market is highly likely to break through the neck line soon. Therefore, you know the distance the upcoming movement will move at least. If you can find a touch option within the reach of this movement, you have a good chance to win this investment.
Remember: Touch options create a higher payout than high / low option. Therefore, you can afford to win a smaller percentage of your trades and still make a profit. To make sure, your winning percentage is high enough to ensure an overall profit, watch for the volume in the movement to the second shoulder: The volume should be significantly lower than the volume in the trend’s preceding movements in the same direction. If the volume fits these criteria, you should be able to trade a touch option with a relatively high winning percentage that will secure you a nice profit.
3) Trading a high / low option with / after the pullback
After the market has broken through the neck line and the breakout occurred, the market will likely pull back over the neck line one more time.
Some traders like to trade this pullback, as it is an accurately predictable movement, too: The pullback will likely reach a little over neckline. If you can find a touch option with a target price within the reach of this movement, you have a good chance of winning a high payout.
Other traders prefer to wait for the pullback to complete its movement. After the pullback is complete, the market is unlikely to move over the neckline again anytime soon in the near feature. This gives you the perfect chance to invest in a high / low option. Predict that the market will close on the far side of the neckline when the expiration time ends, and you will win a high percentage of your investments.