Continuation patterns are price formations that occur during trends. They indicate that a trend has to go through a consolidation period to create new momentum but is likely to continue in its previous direction once the consolidation is complete. For binary options, continuation patterns offer a number of good investment opportunities you can use to create a trading strategy around them.
- See also: Comparing continuation patterns
This article will give you an overview over continuation patterns and explain how you can use them to become a successful trader of binary options.
What is a continuation pattern?
Sometimes, especially when a trend has strongly moved into a certain direction for some time, this trend is losing momentum. In a bullish trend, all traders willing to buy have bought, and there is currently not enough demand to let prices rise any further. In a bearish trend, all traders willing to sell have sold, and there is currently not enough supply to let prices fall any further.
In both cases, however, there is no momentum in the other direction either. In an uptrend, not enough traders are willing to sell to create a downtrend. In a downtrend, not enough traders are willing to buy to generate an uptrend. Therefore, the market is stuck in his current position. It can neither rise nor fall. The only way it can go is sideways. This sideways movement is restricted by an upper resistance level and a lower support level.
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Which continuation patterns are there?
Depending on how the resistance and support level align to each other, technical analysts recognize a number of different continuation patterns with somewhat different characteristics.
1. The triangle pattern
In a triangle, the resistance and the support level are converging on each other while the market is stuck between them. Eventually, the resistance and the support level will cross each other. At this point, the triangle will end.
A triangle can be a symmetric triangle, with an ascending and a descending line, an ascending triangle, with a parallel resistance level and an ascending support level, or a descending triangle, with a descending resistance level and a parallel support level.
Which way the triangle is pointing is not important. The future price direction will be determined by the direction in which the market breaks out of the triangle. If prices break through the upper resistance level first, the market will continue upwards. If prices break through the lower resistance level first, the market will continue downwards.
In overwhelming majority of all cases, however, the market will break through the level in the direction of the preceding trend, which is why the triangle is considered a continuation pattern.
2. The flag pattern
A flag is a special form of the triangle with two parallel lines. In most cases, both lines are inclined in the opposite direction of the preceding trend. In an uptrend, the flag is usually pointing downwards, in an uptrend the flag is usually pointing upwards.
Therefore, many flags contain a trend in the opposite direction of the preceding trend. Do not let this confuse you. After the flag is completed, the preceding trend is still very likely to continue.
3. The pennant patterns
4. The rectangle pattern
The rectangle pattern is a special form of the flag pattern. Both its lines are parallel to time achses of the price chart.
How to trade continuation patterns
The most common way to trade a continuation pattern is to invest into a High / Low option when the market is breaking out of the pattern. Thanks to the unique attributes of binary options, however, binary options traders have more possibilities to profit from continuation patterns.
- Invest in No Touch options
If your broker offers No Touch options with a target price outside the trading range of the continuation pattern, you can predict that the market will be contained within the pattern and will not touch the target price.
- Invest in a Boundary option or a Touch option
Flags, pennants, and triangles usually wave at half mast. This means, once the formation is completed, you can predict how far the market will move and how long it will take for the market to get there. You can use this knowledge to invest in a Touch option or a Boundary option. Make sure that the target price of your option is within the reach of the price movement, and that you choose a realistic expiration time.