Binary Options Strategy using Reversal Patterns

Screen Shot 2014-06-17 at 11.12.19

 

Video Transcription:

Hello, traders. Welcome to Day Trading Binary Options. Today, we are going
to teach you how to trade the 60-minute reversal signals, using candlestick
and chart patterns with support and resistance levels.

Now, the first thing we are going to learn is what are reversal patterns.
Well, reversal patterns are chart or candlestick patterns that form at the
end of moves. This formation shows exhaustions in the move. Using them in
confluence with strong support and resistance levels can lead to very
powerful reversal trades.

The first thing we need to learn are the actual reversal patterns. In this
lesson, we are going to go one-by-one on the bullish and on the bearish
side, until we get them all. Then we are going to go to the charts to show
you how they are traded.

Let’s start with a single candlestick pattern on the bullish side. The
first one is the hammer, and the hammer is found at the end of a down move.
You can see that we are in a strong down move, and then we hit an area of
support before we reverse to the upside. The actual candle is this one
right here, the last red candle. It has a flat top, a small body, and a
long down wick. This shows rejection to lower levels in the end of the
move.

Why does it show rejection to the lower levels? This is simple. You can see
that the candle went all the way down here, but closed at about the area of
support. This shows rejection when a wick goes lower. The inverted hammer
is also a pin bar, but the inverted hammer is found at the end of the down
move.

The difference between the hammer and the inverted hammer is that the
inverted hammer has a flat top, a small body, and a long upper wick. The
long upper wick shows exhaustion of the move and possible reversal in play.
Okay? So the difference between the hammer and the inverted hammer is just
that the inverted hammer shows rejection of the lower levels. No, the
hammer shows rejection of the lower levels, and the inverted hammer shows
exhaustion of the move.

Now, let’s go to the bearish side. The first candlestick pattern that we’re
going to learn here is the shooting star. The shooting star is found at the
end of an up move, right here. It has a flat bottom, a small body, and a
long upper wick, this blue candle right here. This blue candle shows end of
move and rejection to upper levels. It’s simple. Even though the candle
opened and went all the way up here, it closed below the area of support,
giving us a long wick to the upside, rejecting the area of resistance.

Now, the hanging man. The hanging man is also found at the end of an up
move, right here. The difference is that this candle has a flat top, a
small body, and a long down wick. As we saw before, the long wick shows end
of move and exhaustion of the move, which can lead to a strong reversal, if
we find this candlestick at a strong area of resistance.

Now, let’s go to the double and triple candlestick patterns. On the bullish
side, we have the bullish engulfing pattern. The bullish engulfing pattern
is found at the end of down moves also. The bullish candle engulfs the last
bearish candle, right here. You can see that we are in a down move. After
the last bearish candle, we have a strong bullish candle that engulfs
completely the last bearish candle. This gives us a reversal pattern, if we
find this formation at a strong support area.

The information that we get is that we have a strong buying pressure at
that level, as simple as that. The buying pressure overcomes the selling
pressure rapidly, as we can see here by the information that you get from
the two candlesticks that we have highlighted here.

The second candlestick pattern is actually a triple candlestick pattern.
It’s called the morning star. The morning star is found at the end of down
moves. After the last bearish candle, we get an indecision candle, and the
third candle is a strong bullish candle.

You can see right here that after the last bearish candle, we get a pin
burn. In other cases, you can get a [inaudible 04:34]. After the indecision
candle, we get a strong bullish candle. That signals a reversal. The
information that we get here is that the bearish pressure is toning down,
and the indecision to go lower and a strong reversal might be in play
because of the strong buying pressure that we have found at the area of
support.

On the bearish side, we have the bearish engulfing pattern. Of course, the
bearish engulfing pattern is found at the end of an up move. The last
bullish candle is engulfed completely by the bearish candle, right here. We
have highlighted the pattern right here. You can see that we have . . . The
last bullish candle goes all the way up here. Even this candle gives us our
rejection of this area of resistance, and then we have a strong bullish
candle to the upside with no week to the upside and a lower week.

The bullish candle engulfs completely. I’m sorry. The bearish candle
engulfs completely the bullish candle, giving us a reversal. The
information that we get from this pattern is that we have a strong selling
pressure at this level of resistance, and that the selling pressure will
overcome buying pressure rapidly.

Now, the last double candlestick pattern, actually, it’s a triple
candlestick pattern on the bearish side. It’s called the morning star. The
morning star is found at the top of an up move. After the last bullish
candle, we get an indecision candle. You can see here, the last bullish
candle and the next candle is dodgy, which is the definition of indecision
when you are analyzing candlesticks and the information behind them.

The third candle is a strong bearish candle. You can see that here the
pattern is complete, and we have a signal to buy puts on this instrument,
when the third and the bearish candle closes. The information that we get
is that the bullish pressure is toning down, and we have an indecision to
go higher and a strong reversal might be in play.

Remember that we are just learning these patterns right now. Afterwards,
we’re going to go to the charts, and we’re going to teach you how to use
them with the 60-minute charts and how to get your entries at strong
support and resistance levels.

Now, these are all the candlestick patterns that we’re going to review in
this lesson, but we will also review some chart patterns because it is
important to get information from the older price action and not only from
single candlestick patterns or double candlestick patterns.

Now, the first chart pattern that we’re going to look at is the double-
bottom. The double-bottom is found at the end of a down move. This chart
formation just gives us a strong reversal signal. [inaudible:00:07:48] test
a support zone, like we did right here. Then we pull back and retest the
same area of support, rejecting it, creating a double-bottom. Okay?

When you spot a double-bottom, you need to wait for the neckline to break.
The neckline is the high that we made on the pullback before we tested the
area a second time. When we have a breakout of the neckline, we have a
signal to buy calls on the instrument you are trading.

The third . . . Well, the second chart pattern on the bullish side is the
inverted head and shoulders. Okay? This is funny because remember that
support and resistance are areas. They’re not straight lines. So the
inverted head and shoulders will appear from time to time, giving you one
of the strongest reversal signals there is.

This chart formation is found at the end of a down move. Price makes three
lows, creating two shoulders and one head, right here. Price went all the
way down here, then pulled up, creating a shoulder, then a lower low,
creating the head of the formation, and then a higher low, creating the
second shoulder.

The neckline must break before this pattern is complete. The neckline is
actually the line that joins all the lows, all the highs that are made on
the pullbacks, which is this one right here. After we made the first
shoulder, we pulled back to this area. After we made the head, we pulled
back to this area. So after the second shoulder is complete, we need a
break above the neckline for this pattern to be actually complete and for
us to get a signal to buy calls on this instrument.

Now, on the bearish side of the chart patterns, we have the double-top.
This is the opposite of the double-bottom. This chart formation is found at
the end of an up move. When price tests a resistance zone, then pulls back,
then retests the same resistance zone, we have a double-top. Okay?

The neckline must break for this pattern to be valid. This is super
important because sometimes we will get a double-top, but price will fail
to break the neckline, and we’ll move up. When price fails to break the
neckline, you don’t have a double-top. You just have double tests of the
resistance area. Okay? When the neckline breaks, you have the complete
formation, and you have a signal to buy puts on this instrument. Okay?

Now, the last chart pattern we’re going to review is the head and
shoulders, and the head and shoulders is found at the top of an up move.
The price makes three highs, creating two shoulders. Here’s the first one.
We have a pullback, then we have the head, then we have a pullback, then we
have the third shoulder. I’m sorry, the second shoulder, creating what
could be a head and shoulders.

Remember that the neckline must break for this pattern to be valid. The
neckline, of course, is the line that joins all the pullbacks for the
pattern. In this case, here, when we pulled back from the first shoulder,
then here where we pulled back from the head, and here where we pulled back
from the second shoulder. We must break below for this pattern to be
complete.

Now, how do you trade these patterns with support and resistance levels?
Well, this is the tricky part. This is what we want to teach you on this
lesson. The first thing we will do is to focus on the 60-minute chart for
end-of-day expirations. This is important because we are trading . . . I
mean, we could be trading this in the lower timeframes, but on this lesson,
we are focusing on 60-minute reversals. Okay? And end-of-day expirations
for day traders, because you will get cleaner patterns and more accurate
patterns on the 60-minute charts than on the two or three-minute chart.

The first thing we will do is to focus on the system in the chart for end-
of-day expirations. Now, we are going to draw support and resistance levels
for the one-hour chart and the four-hour chart. Okay? Remember to use
different colors because the one-hour support and resistance are not as
strong as the four-hour support and resistance. When you have confluence
between the two of them, you have an even stronger support and resistance.
If you get a candlestick pattern there or chart pattern there on that
level, you are more than likely . . . You are in a high probably trade
actually, and your option is more than likely to expire in the money.

Afterwards, patience is key with this strategy because you need to wait for
the patterns to complete. This is important. You can’t jump in before the
patterns aren’t complete because your winning ratio will drop. After the
patterns are completed, you’ll get the signal to buy puts or calls,
depending on what you are trading.

Now, let’s go to the empty floor platform, and I’ll show you how to draw
the levels and how to look for these patterns. Okay. So here’s the empty
floor platform. We have the Aussie/USD, the Euro/USD. We have all the major
currency pairs. We have some stocks here, and we have gold and some stock
indexes, but we are going to focus on the currency pairs, maybe gold, on
this strategy.

Well, let’s start with the Aussie/US dollar. Okay. So this is the one-hour
Aussie/US dollar chart. What we are going to do is we are going to draw one-
hour levels. We have one high here. As you can see, it has been tested a
couple of times. We have this area of resistance, I mean this high, right
here.

As you can see here, this is crazy because we actually have this area of
resistance. Let’s go to the four-hour chart. Okay? Let’s see if we actually
have some confluence with the area that we just saw. We actually have these
lows right here. Let me just color. The four-hour lines are black, and the
one-hour lines are green. Okay?

You can see that we went . . . All the weeks were tested in this area, and
then we tested it with the bodies right here. Okay? So if we go back to the
four-hour chart . . . Okay. I’m sorry, to the one-hour chart. You can see .
. . I mean, we don’t know that we have this area of resistance right now.

Let’s say that we are here, and we are waiting for a formation or a pattern
to appear so we can actually trade these binary options. Since we are here
at an area of support . . . Since we are here at an area of support, we are
looking to buy calls. Right? But here, we don’t have a clear pattern. I’m
sorry. We don’t have a clear pattern. So we must wait. We are waiting for a
price to go all the way up to this resistance area, to see if we get a nice
resistance pattern at this zone right here.

But we don’t. Price bursts through this area and goes here, and then pulls
back. All right. We still don’t have any patterns. Actually what you can do
. . . I’m sorry. Go right here to this high and create a second line. We
still don’t have a pattern. We went all the way down here. After the last
red candle, we have what seems to be an indecision candle and then a
bullish candle.

So we can easily make the mistake to confuse this with a morning star.
Remember that morning stars are found at the end of down moves. So this is
not a morning star. So we must wait. After this pullback, we have a test of
the four-hour. Before, it was support. Now, we are testing it as
resistance. Then we pull back.

So what do we have here? We have a high right here, and then a second high
which is higher, and a strong pullback. So what you must think right now is
we might have a head and shoulders in play. Right? A head and shoulders
which the head is testing the four-hour resistance area, which is a strong
resistance area.

So I mean, not only you are looking at this area of resistance, but a lot
of traders are looking at it. Okay? So you might find a lot of selling
pressure at these levels right here. So after we pulled back and we made a
new high, we had the second shoulder. Okay? Remember that the head and
shoulders is found at the end of an up move, and we have a strong up move.

So what we do is we join the first pullback with the second pullback, to
get our neckline. Remember, the first pullback, then the second pullback
gives us the neckline. When we break below the neckline right here, boom.
We have a clear signal to buy puts on the Aussie/US dollar one-hour chart,
and end-of-day expiration when we get a completion of the head and
shoulders, which is a strong reversal pattern. As you can see, this option
will have expired in the money.

So this is what you do actually. Okay? We have found a head and shoulders
on the Aussie/US dollar. Let’s go to another currency pair to see if we can
find another one, an easier one. Okay? Now, this is the one-hour cable
chart. So let’s go to a four-hour, and let’s start drawing levels there.
Okay?

We have a support area right here and another one right here. These are the
two strongest four-hour levels that I can see. If we go back to the four-
hour chart, you can see that we clearly don’t have a pattern or any
patterns in play. Okay? But if we go back and we draw this area of
resistance right here, we have drawn this area . . . I’m sorry. The one-
hour horizontal lines are green. That is my bad, and I apologize. Okay.

So you need to understand that. I mean, this area was tested as support and
broken, and then we retested it as resistance. So we grab this low and this
high, and we have an area of resistance. Why resistance? Because price is
trading on the downside. So we just wait until we hit one of these areas.

Right here, you can see that we have one test, a second test, and even a
third test. So this is what we call a triple-top. You can have double-tops
and triple-tops. After we break with the neckline, we retested it. We
retest this area of resistance. That’s of course twice before dropping.
Okay? So this is another pattern that you can trade at areas of support and
resistance.

Let’s go with the US dollar/Japanese yen. This is going to be very amusing
because let’s say that we are looking at price action right here, and we
are drawing our support levels on the one-hour chart and our resistance
levels also on the one-hour chart. Okay? We are just waiting for price to
present us with a pattern at these levels.

Right now, there is nothing. We forgot to draw this area of support, and we
just wait. Right here, we have one test of this area of support, which is
this entire area. We have a retest of this area right here.

Why are we choosing this area of support? Well, this is easy. I mean, this
is a very choppy range. If you really want to choose an area that was
successfully rejected and tested as resistance or support, you have to
choose a swing high or a swing low. You can choose a choppy area to draw
your levels.

Of course, this is a mistake we made on purpose so you understand the
importance of drawing these levels. Okay? So we chose to swing high, and of
course we break it. We retested it, and we don’t have any pattern until we
get a double-bottom here and when we actually break with the neckline right
here. We have a clear signal to buy calls on the one-hour chart for an end-
of-day expiration. As you can see, we end up in the money.

Why do we choose a double-bottom here? Even though we are in a strong up
move, we reversed . . . I mean, we corrected deep enough to take this down
leg as our downtrend of the double-bottom. Once again, we have to wait for
the breakout of this area because sometimes it might take a little while
for a price to break through this area, and we might get caught in a
correction or in a range market before the actual breakout.

As you can see here, we went all the way up here, and we chopped for a
little while before actually breaking to the upside. This is basically how
you use support and resistance levels to trade chart patterns and
candlestick patterns.

Adam

More About

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

View Posts - Visit Website

Comments are closed.