The triangle pattern is a commonly used pattern in the financial markets. When detected, it can be used to trade with a high degree of accuracy. In this article, we will show how this pattern can be adapted for use in trading binary options, specifically to trade the Up/Down option.
To be able to do this, certain modifications have to be made. In binary options, the time factor comes into play as all trades must expire. Therefore, the trader must also know how to predict to some accurate extent, whether the expected outcome on the charts will happen within the time allocated for the trade.
What Do You Need to Trade the Triangle Binary Options Strategy?
To be able to trade binary options with the triangle pattern, it is important to have the right knowledge and tools in place. These are as follows:
- Access to an interactive chart with indicators. This is crucial as most binary options platforms do not possess charts that will serve this purpose.
- Knowledge of how to identify a triangle pattern, or a triangle pattern recognition indicator.
- Knowledge of how to identify and trade a breakout.
Charts and Indicators
You do not need to pay for charting software to do the job. All you need to do here is to open a demo account with any forex broker that offers the MT4 platform. They are legion and opening an account alongside downloading the MT4 platform to your PC takes only a few minutes. The MT4 is loaded with all the indicators and charts you need to detect and trade the triangle pattern.
If you have access to a chart pattern recognition tool that is compatible with the MT4 platform, you can download it and add it to the Indicator folder. Many of the chart pattern recognition software in the market are not very accurate and do not plot the trend lines properly. Therefore, you will still need to know how to adjust the trend lines properly or better still, draw them yourself using the MT4 line tool.
Pattern Identification and Tracing
Identifying the triangle pattern is the bed rock of this strategy. There are three types of triangles:
Each triangle is named after the shape they assume. A triangle is usually formed as a result of a convergence of trend lines touching the highs and lows of price action to form a characteristic triangle shape.
- When a trend line drawn across the candle highs is horizontal and the trend line drawn across the candle lows slopes upwards, this is known as the ascending triangle. This will be used to trade the UP option.
- When a trend line drawn across the candle highs slopes downwards and the trend line drawn across the candle lows is horizontal, this is known as the descending triangle. This will be used to trade the DOWN option.
We have left out the symmetrical triangle because it is not reliable for trading either the UP/DOWN option as it has no directional bias.
How can you identify and trace a triangle pattern?
- The easiest way is to use a chart pattern recognition indicator built for MT4. Go to the MQL Community Store and look for a free one to download and attach to your MT4 platform. After downloading the MQL4 indicator file, open the MT4 platform and click on File -> Open Data Folder. In the new folder to open on your PC’s task bar, click on MQL4 – > Indicators. Then copy and paste to this subfolder. Restart the platform, then click on Insert -> Indicators -> Custom. The downloaded indicator will be found here where you can attach it to the chart. Whenever it sees a triangle pattern, it will attempt to draw it.
- You can perform a manual trace. Look for where the candles form at least three lows which can be joined with a trend line. If this line is sloping upwards, look to see if the highs can be joined with a horizontal trend line. If so, this is an ascending triangle. If the lows can be joined with a horizontal straight line, see if the highs can be joined with a downward sloping trend line. If so, then this is a descending triangle.
Even when you use a chart pattern recognition tool, you have to manually double-click each trend line and drag it to the desired highs or lows so as to be able to adjust them. This is important as one single misplaced trend line can put your targets off by a few pips and this in binary options can make the difference between a winner and a loser.
Identifying the Breakout
The breakout occurs when:
- For an ascending triangle, the candle in view closes above the previously traced upper, horizontal trend line. In other words, the candle closes above the resistance formed by the price highs. If the candle goes above this line but closes below it (i.e. closes within the triangle), this is not considered a breakout.
- For a descending triangle, the candle in view closes below the previously traced lower, horizontal trend line. In other words, the candle closes below the support formed by the price highs. If the candle goes below this line but closes below it (i.e. closes within the triangle), this is not considered a breakout.
UP Option Trade with the Ascending Triangle
The UP component of the Up/Down option is traded with the ascending triangle. The strategy is to detect when the price action has broken above the upper trend line close to the point of convergence of the trend lines, then setup the UP trade.
The specific trade entry and exit parameters are as follows:
- Allow the candle in view to break above and close above the upper trend line. This establishes the breakout.
- Allow the next candle to open and attempt to pullback to the broken trend line. This trendline now functions as a support. When the candle touches the trend line or is close to touching it, initiate the UP trade.
- For expiry, the closing price of the candle that follows the entry candle is used as the expiry. The time frame of the chart will determine the length of time the candle will remain open before another candle forms. This trade was done with a 1 hour chart, therefore the trade should be set to last 2 hours. Check the expiry times provided by your broker and select the one which matches the expiry parameter.
DOWN Option Trade with the Ascending Triangle
The DOWN component of the Up/Down option is traded with the descending triangle. The strategy is to detect when the price action has broken below the lower trend line close to the point of convergence of the trend lines, then setup the DOWN trade.
The specifics of the trade entry and exit are as follows:
- Allow the candle in view to break and close below the lower, horizontal trend line. This establishes the breakout.
- Allow the next candle to open and attempt to pullback to the broken trend line. This trendline now functions as a resistance. When the candle touches the trend line or is close to touching it, initiate the DOWN trade.
- For expiry, the closing price of the candle that follows the entry candle is used as the expiry. The time frame of the chart will determine the length of time the candle will remain open before another candle forms. So assuming this trade was done with a 30 minute chart, the trade should be set to last 1 hour, which is equivalent to 2 candles. Check the expiry times provided by your broker and select the one which matches the expiry parameter.
Other Points to Note
Please note that many binary options brokers now offer the opportunity to sell off positions before expiration. So if your trade is in profit and you feel comfortable enough to close the position before expiry, feel free to do so. Usually, this will come with a reduced profit. But a reduced profit is always better than no profit at all.