Lesson 7 - Trading models in binary options PRICE ACTION – PINOCCHIO (PINBAR) REVERSAL PATTERN We all know the story of Pinocchio – the boy whose nose grew longer anytime he told a lie. A pin bar is also called a Pinocchio bar because it is telling us that the market is lying and the length of the pin indicates the elongating nose of Pinocchio. As the market price moves in the direction of the trend to a certain level, it suddenly retreats all the way back to near the opening price. Thus, it lied as to where the price was headed and should start moving in the opposite direction. Particular importance should be given if Pinocchio was formed on the important levels of support, resistance or round price levels.
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How does this pattern look, and what conditions must be met according to this strategy: Model consists of three candles (bars) The key candle (bar) that is in the middle should have a small body, i.e. opening and closing price must be close to each other. The smaller the body of the candle, the stronger the signal. Middle candle must have a large tail (shadow), which goes far beyond the surrounding candles. Candle body must be within the previous candle. Candle body must be on one end of the tail, essentially looking like a mallet or hammer On the pictures you can see examples of Pinocchio (Pinbar):
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What is the Pinocchio strategy for binary options? Assume the price of an asset for some time had an uptrend or climbing up. Once you see that the pattern began to form, or rather candle (bar) with a large tail, analyze it and see if it fits the parameters that I have listed above. Wait for the next candle to cross the maximum or minimum of the key candle and open the option in an opposite side of the tail.
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This screenshot shows a graph with the 1H timeframe, where each candle represents the movement of prices in a given 60 minutes. You can see already formed pattern. According to the strategy for binary options, you must buy a Call option at the point, which is marked by a black line in the picture. The Expiry Time in this case, is 60 minutes. In general, the expiry time should be equal to the time of the pin bar formation. This strategy can be used on options with different expiry times. If the expiry time is 15 minutes, then look at the 15M chart, and if you are analyzing 30 minutes chart, the expiry must be also 30M.Pay special attention to Pinbars that are on the highs and lows or close to critical levels. If a Pinbar surrounded by candles with small bodies, it is better to skip it and don't trade.
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PRICE ACTION – DOJI BAR REVERSAL PATTERN A Doji is a reversal model that is formed when the open and close prices of a candlestick (bar) are the same (or almost the same), and there is little difference between the high and low. This model reflects the uncertainty of the market and it is likely that the price of an asset will reverse and go against the prevailing trend.
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Strong trend before the formation of the pattern The open and close price of a Doji candle are the same or nearly the same Before Doji candle, there must be a large full-bodied candle going in the direction of the trend After the Doji candle, there is candle which goes in the opposite direction of the dominant trend Doji in binary options strategies Suppose before the formation of a Doji candle, asset price was going up all the time (there was an uptrend). A Doji candle has been formed, followed by a candle moving in the opposite direction – down. You should buy a PUT option after candle breaks the LOWER extreme of the Doji candle. Same applies when Doji was formed in an downtrend; buy a CALL option upon the breakout of the higher extreme.
As you can see it’s a very simple model that helps a beginner to make money on binary options. The most important is to strictly follow all the rules. open in browser PRO version
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PRICE ACTION - INSIDE BAR REVERSAL PATTERN An Inside Bar is a reversal formation characterized by a bar that forms totally within the trading range of the preceding bar. Inside Bars reflect a balance between buyers and sellers or in other words uncertainty in the market, which is sometimes later resolved by a change in trend.
What is the complexity of trading this setup: The difficulty lies in the fact that the price may go up as well as down. So you should pay attention to the inside bar, if it is formed at the highs/lows, and if it is near important price levels. Look at the screenshot below: the price for a while was going up until it rested on the level of resistance. Further inside bar was formed, and the price reversed and went down.
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How to apply this setup to trade binary options: When the Inside bar was formed, it is necessary to get additional confirmation of reversal (important levels, moving averages, etc.). Then, watch the candle after the Inside bar. You need to buy Call or Put option depending on which way the price will break outside the bar. In the case of the screenshot above, the next bar went up, so you should buy a CALL option immediately after the price breaks above the maximum of the Inside bar. In regards to expiry time, we should adhere to the following rules: Expiry period should be around half of the period / timeframe used for chart analysis. Our screenshot above shows the 1H timeframe, so it would be a 30 minutes expiry. As mentioned above - it's pretty complicated setup for beginners, so when you see the Inside bar, you should not rush to buy an option immediately. Practice to determine the direction and trade on paper, and then you can apply this technique in real trading. PRISE ACTION - OUTSIDE BAR REVERSAL PATTERN The Outside bar is the analogy of the Inside bar setup, just look at it as the inverse model. A candle can form an Outside Bar pattern when it completely covers the range of the previously printed candle; taking out the previous high and low. This pattern tells us that market will change its trend, and go in an opposite open in browser PRO version
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direction.
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It’s not a rule without exceptions, so confirm your setups: watch support and resistance levels, Fibonacci levels, etc. Bars (candles) with a large body and small shadows have very high importance. This indicates a strong signal. It’s not worth paying attention to huge Outside bars formed on news release as they can provide false signals. In case of formation of an Outside bar pattern, you need to buy an option in the same direction as the outside bar.
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As you can see on the picture above, before the formation of the Outside bar model the price went up. Market reversed and the price went down. In this case we would have bought a PUT option straight after the closure of an outside bar. If the candle of the Outside bar quite large, it may be worthwhile to wait until the price retraces, and you can enter at the better price. In regards to expiry time, it can be two to five candles long based on what timeframe you used analyze the chart. If you follow an hourly chart, the period of expiry is 2-5 hours. In the following lesson we will learn the most important indicators, and how to apply them to our strategy.
Home work: 1. Look at the historical price movement of a chosen asset and try to find patterns discussed in this lesson. 2. Try to see how predictable the price was after the formation of these patterns.
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Sincerely, open in browser PRO version
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Abe Cofnas Professional trader
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