You might know that the binary options market requires traders to predict an asset’s price movement accurately. But did you know that the price moves in two patterns? The first is the continuation pattern, and the next one is the reversal pattern.
In the continuation pattern, the price of any given asset moves in the same direction. It does not change its direction. Whereas in the reversal pattern, the price movement gets altered.
Many times, price trend reversal creates uncertainty in the market. But you can make the best use of this opportunity. How you might wonder? The answer is by using an excellent trading strategy.
To use the best trading strategy during reversals, it’s essential to understand what trend reversal actually is. Also, you should know about different trend reversal patterns and strategies.
This guide has all the relevant information that you require.
What is Trend Reversal strategy?
A trend reversal is nothing but a change in the current trend of the price movement of an asset. While this theory is simple, it brings an opportunity for traders to win a huge payout.
The presence of trend reversal in the market indicates a higher involvement of either bull or bear. In short, either buyers or sellers have run out of steam and are trying to create a different trend in the market.
This reversal can take place in either the upside or downside market. In the downtrend market, the price reversal will be at the upside. However, in the uptrend market, this reversal will be at the downside.
Another thing that looks like a reversal in the trading market is a pullback. The only difference between these two is that a slight counter-movement against the current trend can result in a pullback. Also, pullback creates high lows. In comparison, an uptrend is created by higher swing highs and higher swing lows.
Also, if you want to use trend reversal for making winning traders, you need to have proper market knowledge. That’s because, without it, you can quickly get confused.
Different Trend Reversal patterns
Trend reversal patterns can be boiled down to three patterns. You must understand these patterns to avoid making mistakes.
Head and shoulder
This first reversal pattern is popular among all. That’s because it shows buying pressure in the market is declining. Generally, the head and shoulder pattern in the trading market results from price rallying, then pullback. This thing creates a new high, then pulls back, and then rallies to the lower high.
Head and shoulder in the binary options trading chart show two situations, i.e., ending uptrend and beginning downtrend and ending downtrend and beginning uptrend.
One can quickly notice head and shoulder in the trading chart as it is indicated by three peaks and one baseline. In this situation, the middle peak is larger than the other two peaks. You can also conclude the following things from these peaks.
- The price rise of an asset forms a higher peak in the chart. This peak is the head.
- The left shoulder shows price rise is followed by a decline.
- Lastly, the right shoulder shows a drop in the price, followed by a rise.
You can use this reversal pattern for technical analysis as well. In that situation, it represents bullish-to-bearish trend reversal. Also, in this pattern, traders can know the strategic trading areas by placing a neckline. You can easily create a neckline on the chart by locating the right shoulder, head, and left shoulder.
Inverse head and shoulder
An inverse head and shoulder is the opposite of a regular head and shoulder. This pattern has all the similar characteristics of the previous pattern but in an inverted way. The best thing about this pattern is that one can easily identify it after the trading market has survived a trend lower.
Just like the regular head and shoulder pattern, this one also has three peaks. Here two peaks are of the same height, and one is highest.
In the chart, the left peak shows the decline of price in the market. This decline is then followed by price bottom, which is followed by an increase.
Similarly, the right peak indicates a price rise in the trading market. This rise is followed by a decline. Lastly, the middle peak in the chart shows a price decline, which then forms a lower bottom.
The reason people like reverse head and shoulders is that it offers better trading opportunities. But the risk of losing money during this situation is more.
Triple top and triple bottom
The third reversal pattern is the triple top and triple bottom. Three peaks of the same height form this pattern. Ideally, this pattern is helpful while doing a technical analysis of the market.
During the triple top pattern, you can conclude that the asset is no longer rallying. One can identify this pattern in any given time frame. But if you want to trade, you must do it after the uptrend. That’s because a successful triple top pattern occurs after it. Similarly, during the triple bottom, the price of the asset does not fall anymore. Rather it rises.
In the triple top, the resistance is the area of the peak. And the pullback between peaks is considered as a swing low. In order to complete this pattern, the price needs to drop after the third peak.
Double top and double bottom
This reversal trading pattern looks like the previous pattern, but it’s different. That’s because instead of three peaks and bottoms, it only has two peaks and bottoms.
Also, this pattern functions like a triple top and triple bottom. But the only difference is that in this situation, the pattern changes after a while. Also, the second bottom has formed in the market after a long time. That’s because, during that time, the volume is low.
The only way to know whether the market is forming a double top and double bottom pattern or triple top and triple bottom pattern is by noticing the second extreme. A stutter in the second extreme shows presence of double top and double bottom.
Reasons to combine Reversal pattern with indicators
The beauty of the reversal pattern is that it can work in the best way with indicators. It is possible because trading indicators define the boundaries of a trend.
It’s ideally suggested to use an indicator even when you are sure about the market forming a trend. That’s because an indicator can help you understand which kind of reversal the market might develop.
Not just this, but indicators can also help you know which kind of pattern the market will form- triple top and triple bottom or double top and double bottom. Also, it tells whether the reversal will last long or not.
Many traders believe that indicator is not that helpful, and they end up making mistakes. They either make an early trade thinking that the market will form a double top/bottom when it creates a triple top/bottom.
Similarly, they end up making a late trade by thinking the trading market might create a triple top/bottom when it’s actually forming a double top/bottom. Also, traders mistake a head and shoulder pattern for triple top/bottom.
Here are a few more reasons you should combine a reversal pattern with an indicator.
Find more trading opportunities
One can find more trading opportunities during trend reversal by using an indicator because it helps in identifying reversal patterns correctly. Also, you can know the duration for which the trend will last.
Understand Reversal pattern
Not knowing about the type of technical indicator might result in a considerable loss. But don’t worry because, with the help of an indicator, you can understand the nature of the reversal pattern.
Identify Reversal pattern
Lastly, an indicator comes in handy when identifying a reversal pattern in the trading chart. It offers the first signal of reversal, which you can use for making a trade at the right time.
Different trade Reversal pattern strategies
After knowing about different reversal patterns and the importance of indicators, it’s crucial to learn about some of the best trade reversal patterns. Generally, traders use three types of reversal trading strategies.
Combining Reversal Pattern with MFI
When you combine the reversal pattern with MFI, i.e., Money Flow Index, you should wait till it indicates a reversal. After that, you can quickly make a trade.
Combining Reversal pattern with Bollinger Bands
To understand the market environment, you must combine the reversal pattern with the Bollinger Bands indicator.
Combining Reversal pattern with Moving Averages
When combining a trend reversal pattern with a moving average, you get to learn about the trading market’s behavior.
Trend reversal is an excellent opportunity to trade in the market. That’s because, during this time, a trader can win a better payout. But the thing is, one must confirm the reversal trend before making a move.
So, check the trend, and by using the right indicator, you can further create a winning trading strategy. Also, to win a reversal trade, it’s essential to understand the different reversal patterns.