When to Use?
This type of analysis is specifically valid for corrective waves and for patterns like bullish/bearish flags or contracting triangles.
A range is defined by having at least two points were market is reversing from and that is the beginning of the technical analysis process.
By the time there are two points that can be used, the trader should take a trend line and connect those two points. Projecting the trend line further in time would give a possible resistance/support level for price (depending if the trend is bullish or bearish).
The next thing to be done is to copy that trend line and project it on the lower/upper side, depending if the consolidation is bullish or bearish. This way, we have a channel and a range.
The last thing is to divide the range/channel into two equal parts and this can be done either by using a Fibonacci retracement tool and look for the 50% level, or, if the range is on the lower time frames, by simply copying one of the two trend lines that represent the edges of the channel and put it in the middle.
How it’s Done?
The strategy calls for buying options when price is into the upper/lower side of the range, with put options if the pattern is bearish and call options if the pattern is bullish.
As for the expiration date to be used, it depends very much on the time frame the market is forming the consolidation area. If the time frame is big, more than, let’s say, the four hours chart, even end of week options can be traded.
Trading in general represents taking information from the left side of the chart and trying to make a forecast on the right side of the chart based on that information. This is being called a forecast and people that make forecasts are called traders. But how to make a forecast based on such information? This is called technical analysis.
Binary options trading is very much about finding a range or a trend and then buying call or put options by the time market comes to the perfect striking price. One of the best ways to find a range is to look for triangular formations as triangles are the most common consolidation patterns of them all.
That being said, by the time a triangle is identified, the next thing to do is to look at the time frame the triangle is forming as it is directly correlated with the expiration date we’re going to use for the options to be traded.
Next thing is to look at the trend the triangle is being part of, as it is important for identifying the type of option to be traded.
Moving on, the direction the triangle is breaking is crucial too. If the triangle is a continuation pattern, then we should trade binary options in the same direction as the previous trend. If, on the other hand, it is a reversal pattern, we should trade opposite direction binary options.
Using the Fibonacci Retracement Tool
Taking a Fibonacci retracement tool is the next step to be taken and we need to measure the length of the longest leg of the triangle. In any triangle, the longest wave can be only wave a or b. If it is the b wave the one that it is the longest leg, it is called that the triangle is an irregular one. A contracting triangle is always having five legs or waves and by the time we know the b wave there are still three segments to come. However, in any contracting triangle at least three legs of the triangle should retrace 50% when compared to the length of the previous leg and if that conditions is not satisfied already, we have a trading plan.
Triangles Give Direction
And just like that, we have a range. If the triangle is bullish one, meaning it should break higher, then we should look to buy call options every time market is dipping below the 50% level and the expiration date should be adapted to the time frame the triangle is forming. It means, for example, if the triangle is forming on the daily chart, that the expiration date should be end of month if market is in the first half of the month. Trading end of month expiries is offered by all brokers and taking into account the reward binary options brokers is offering, it is worth waiting for a month for the option to expire.
On the other hand, if the trend was bearish of the triangle is a reversal pattern, still the 50% retracement level should be used with the appropriate option and expiration date.