In this journal entry we are covering Flags and Pennants strategy with a range of underlying assets including currency pairs and stocks. 5 minute candlestick chart was used for analysis. To support trading signals, Stochastic indicator with traditional parameters (14, 3, 1) was applied to the chart. However, price action patterns that work were the main aspect to consider while placing a trade. In this journal entry, both Flags and Pennants were applied to spot trend continuation.
Flags and Pennants strategy summary
The binary options trading strategy is about identification of a moment when the price breaks the predefined pattern – flag or pennant. Once the price has broken the pattern, it’s time to place a trade. Flag pattern represents a rectangular area on the chart that marks a period of consolidation before a resumption of the prevailing trend. Pennant pattern represents a symmetrical triangular area on the chart showing a convergence of two trends over a shorter period of time. In both cases, when a candle breaks the pattern, it signals about time to place a trade.
The first trade to describe was done with USD/CAD currency pair. There was a prevailing downtrend before the bearish flag pattern occurred. Eventually, there was a bearish breakout for which provided an opportunity to purchase a PUT option. Moreover, the decision about put option was supported by stochastic indicator which signaled about overbought asset.
Eventually, the price went on moving downward which made the option expire in the money. With a bet of $50 and 75% profit, the trade closed with $37.5 profit.
This is another currency pair that was used for trading with Flags and Pennants strategy. This time there was a prevailing uptrend on the market which was followed by a pennant pattern. A bullish breakout was noticed after applying a symmetrical triangle on the chart. This made an opportunity for placing a call option trade which was done at that moment.
Unfortunately, the uptrend continuation didn’t happen and the trade expired out of the money. With a bet of $50, the broker I am trading with returned $2.5 for the unsuccessful trade.
This trade was executed with a stock option with Citigroup stock as an underlying asset. A prevailing downtrend was noticed on the market before the pennant pattern was spotted. A symmetrical triangle was drawn to identify potential bearish breakout. After several price fluctuations, a bearish breakout happened which made a good opportunity to purchase a PUT option for Citigroup stock. The option has been purchased with an expectation that the downtrend will continue. In this particular case, the breakout happened not at the peak of the triangle.
Eventually, the option expired in the money since downtrend continuation happened. With 75% profit, the trade made $37.5.
In this journal entry, Flags and Pennants strategy has been tested. Both patterns were applied during trading session. With this strategy, it is recommended to purchase options with expiry time close to the time of breakouts so that the trend continuation does not reverse before the option expiry time.