Defining a Consolidation Line
Before even moving into discussing consolidation area, there’s the need for defining what a consolidation area is. Such an area is defined to be any area that has more than two support/resistance levels in the same place or almost in the same place.
In our case, we’re going to use the Ichimoku Kinko Hyo to identify consolidation area and one way to trade binary options is to look for the cloud, the Kinjun and Tenkan to come into the same place and this would be really difficult for market to overcome.
The second example we’re going to cover here is based on moving averages and trading with multiple moving averages can give you an idea about where a consolidation area can be found.
Use the Right Time Frame
But above all, there is one particular factor that is almost always overlook by market participants: the time frame element. The whole purpose of identifying a consolidation area is to look for it to act as a support/resistance for price. As a rule of thumb, the bigger the time frame, the stronger the support and resistance is. The opposite is true as well, as the lower the time frame, the more easier for the area to be invalidated.
Consolidation areas, or ranges, are extremely valuable to any trader and it depends very much on the time frames the ranges are forming. This is important as if the time frame is a short one, like one minute or the five minutes charts, then the expiration dates for the traded options should be smaller as well. On the other hand, if the consolidation area is to be found on the bigger time frames, like the daily, four hours chart or even weekly, we need to adjust the expiration date accordingly.
Consolidation areas can be found by trading with moving averages and the way to go is to plot on the chart different moving averages, exponential ones or simple ones, with values from 20, 50, 100 and 200. This means that these averages will take into consideration different periods back in time to plot the values and a confluence area appears when the averages are crossing and are to be found in the same place. That area is difficult to be broken by price and therefore, in a bearish trend, when price is reaching that area, put options should be traded, while in a bullish trend any dip into such an area is considered to be a place to buy call options.
Ranges are wonderful to be traded with oscillators as we all know that oscillators are showing overbought and oversold levels. If the range is a triangle that is forming on the bigger time frames, then going on the lower time frames and trading call options on any move of the oscillator in the oversold territory and put options on any move in overbought territory is key.
Consolidations with Elliott Waves Theory
If one is using the Elliott Waves Theory to analyze markets before taking a trading decision then looking for second and fourth waves is key. However, there’s a catch in the sense that consolidation areas are to be found mostly on complex correction and not in simple ones. That being said, principle of alternation is coming in handy in the sense that if the second wave for example is a simple correction, then chances are that the fourth wave is going to be a complex one, so ranges can be traded on the fourth wave that is about to come.
Still with the Elliott Waves Theory, when complex corrections are forming on the bigger time frames, look for X waves to intervene and this means put options in overbought territory as well as call options in oversold.
Whenever a range is identified, binary options can be traded and this opens the gates not only for classical high/low trading, but also for boundary and one touch. The idea is for the one touch option for example to buy a one touch in the oversold or overbought territory shown by an oscillator. If that oscillator is the RSI (Relative Strength Index), then buying the options on any move price is making towards the 70 or 30 level should do the trick.
Use Classical Patterns
Last but not least, classical technical analysis patterns can be used and one of them that lets us identify a range is the head and shoulders.
It is known that a head and shoulders pattern is formed out of two shoulders and a spike higher or lower that is called the head of the pattern. The idea is that most of the times the right shoulder is looking similar with the left one and therefore we can have a place to buy put options based on the higher values on the left shoulder and call options based on the lower values of the left shoulder.
However, the amount to be invested should be always bigger on the options that go with the general direction the pattern is about to break.