We are not yet done with basic technical analysis. Trend analysis, and support and resistance analysis, is an excellent foundation. However, the next building block to establish stronger trading skills is to understand the key patterns.Once the underlying market is chosen, it’s time to conduct a pattern analysis. The first choice is the time interval for the charts.
The four-hour time interval represents an effective middle ground. One can gain a sense of
the big picture, as well as of the near-term changes in sentiment. For those trading intra-day, the 30-minute time frame can be used. While there are many patterns that are formed by price action, the ones that all traders should know are the triangle, channel, parabolic, and Bollinger Bands.
Triangles Notice the formation of the triangle: price action starting at a wide range between the low and high and developing incrementally smaller ranges leading to almost no difference between the low and high. The market is telling the trader that a breakout is about to happen. The triangle is a compression of the range between highs and lows.This means the battle between bullish and bearish sentiment is coming to a breakout point.
Triangles can be considered preludes to breakouts. The binary option trader, when seeing a triangle, should locate the strike prices outside of the triangle and play a breakout. This is usually an out-of-the-money strategy.It can also be a deep-out-of-the-money strategy.The triangle can be considered a barometer of emotions and indicatesthat the buyers and the sellers are lacking enough energy to dominate each other.
The distance between the highs and the lows in the triangle are getting smaller until it goes to an apex, or point. When the trader sees a triangle, it means that there is likely to be a breakout.The challenge for the trader is to recognize that there is a triangle forming and then prepare to trade. A descending triangle is likely to break out to the downside and then resume its trend direction, which was down.Lastly, a symmetrical triangle is likely to break out in either direction.
Hesitation or Consolidation Patterns: The Triangle and the Doji Often in viewing price movements, it looks like prices move chaotically. But closer monitoring of price movements will often reveal patterns. One of the
most important kinds of patterns is seen after a big move. After a big move, which is perhaps a response to news, the market goes into a period where it’s digesting new information and is hesitating. Hesitation means that it is ranging,but it also means that the market is preparing to make a decision.
You know this by noticing that the range is getting narrower. The difference between the highs and lows becomes smaller because the buyers and sellers are giving up and have no strong sentiment to keep the range that has existed. Hesitation is a prelude to a shift to a new direction or a confirmation that the prior direction before the hesitation should be resumed. Several hesitation patterns have become useful in trading. You can trade on the bounce of the price, or you can wait for a break but wait further for the price to come back into the sideways channel. This would provide confirmation that the pattern is still in force.