Binary Options Strategy “Head and Shoulders” is based on the same name reversal pattern that alerts the trader that the market changes will occur soon (the direction of the main movement of the market will change to the opposite).
If you look closely at the picture above you can see why this graphic pattern has got such name. It consists of a “head” – the highest point, extremum, and two shoulders which are formed on the left and on right of the head.
Formation of the left shoulder occurs during the formation of the next extremum of an uptrend. After that, the price of the tool goes down (it is especially shown on the picture – the neckline is outlined and the price of the instrument after the pullback from the first maximum contacts it). Further, the upward trend continues and reaches a new maximum (forming the head). After that, the price is sent back toward the neckline and touches it. In this situation, we can say that the rule of forming an uptrend is broken, since renewing highs, the lows are not rising, but remain at the same level. Finally, the right shoulder is formed, which is on the same principle as forming the left. Thus begins work on binary options trading strategy “Head and Shoulders”.
A signal to buy a Put option appears only after the price overcomes the neckline (which acts as a support level). However, some traders advise to wait for another contact of the neckline (which after a breakthrough downward, turned into a resistance level). Often, during the formation of this pattern, the price tends to go back to the neckline, which used to be a strong enough support before the penetration. After such contact a trader can also purchase a Put option.
As can be seen from the above, the use of binary options trading strategy “Head and Shoulders’ can be profitable for a trader. However, there is one important nuance. The most important thing is to determine the formation of the figure on the chart right. This pattern may not look perfect, as shown in the example. Its “shoulders” can be on the different levels. But in order to make binary options trading strategy “Head and Shoulders” work, it is important to respect the basic conditions for the formation of the figure on the chart.
It should also be noted that the “Head and Shoulders” figure may portend not only the turning point of the uptrend, but of the downtrend either. In this case, the purpose of the system “Head and Shoulders”, as a technical analysis of the market, is making a profit from the purchase of a Call option. With regard to the pattern, it will be a mirror image of that shown in the figure. At the time of breaking the resistance line (in the mirror image of the figure the neckline will first be the line of resistance), a trader should buy a Call option. It is best to apply this strategy with the expiration in the end of the week or month, that is, in the following cases:
- for medium-term trading.
- for long-term trend.
That’s all for now. Got any questions? Just ask the expert!