Flag patterns have already done a good job for many Forex traders, and now it’s time for Binary Option enthusiasts to take advantage of these. However, keep in mind that these chart patterns must be considered particularly with classic options rather than short-term options, as they involve basic market principles, which require some time for processing.
How to determine a flag
Now, let’s go straight to the subject and discuss what a flag pattern is and how to trade it:
The flag is known to be a continuation pattern, which means it doesn’t anticipate a trend reversal, but instead a trend continuation, giving hints that traders may open positions in the direction of the current trend. Basically, the flag itself is a pause in the middle of a trend, after which the price movement re-takes its course. Before a flag pattern may be considered, the following two market conditions must be present:
1. A clear uptrend or downtrend.
2. Right before the flag pattern, there should be a sharp movement in the direction of the trend – basically a close to vertical line (candle). This sharp movement represents the flagpole.
In other words, the market goes for a rally or a sharp decline for a while and requires a break. After this short pause, when the flag pattern is actually formed, the market continues its movement.
As you will note in the image below, the market is declining for a while. After a sharp movement downward, there is a price correction – the flag pattern is formed with its flagpole and flag lines. Once the price breaks the support line (bottom line), the trader can buy PUT options, because this flag signal in our case shows the market will continue its trend downwards.
Now, here are some tips on how you can trade flags with binary options:
- In the ideal case the price correction should reach about 50% of the flagpole’s total size.
- One should consider buying options only when that 50% level is overcome.
- One should open a position when the price breaks the flag lines in the trend’s direction.
- In most cases, after the flag is formed, the price action will cover approximately the same distance as the flagpole’s size – so this should be your target.
The main problem is that sometimes it’s difficult for traders to determine the flag pattern in real time. Yet, this is typically true mainly for beginners. If you test this strategy on a demo account again and again, you will accumulate the needed experience to overcome this issue.
As a beginner, you should consider each sharp movement of the price as the flagpole of a potential flag pattern. If the eventual resistance and support lines (that represent the flag lines) confirm the pattern, you should be ready to buy options!