As you trade binary options, your ability to analyze candlestick patterns will help you to understand price movement, fast. You will come across basic patterns and more advanced ones. The basic patterns do a great job of showing you market sentiments but tend to give out false signals.
How to Trade Binary Options with Hook Reversal Patterns
Advanced patterns such as the Hook Reversal patterns are more reliable and when used with gaps, they can drastically improve your binary options trading strategy. Here you will learn about the Hook Reversal patterns and how to trade using this formation.
What is a gap?
As mentioned earlier, advanced candlestick patterns such as the Hook Reversal patterns can be used to formulate a profitable strategy when used alongside gaps.
But what are gaps?
A gap is a separation that occurs between prices on a chart. This separation or break forms when the price of an asset moves sharply upward or downward without any trade occurring in between the price points. The sharp upward or downward movement of prices can be caused by many factors e.g. macro or micro economic news, company earnings, demand and supply of assets etc.
How to spot hook reversal patterns
This short-term patterns can form in an uptrend or down trend. The Hook Reversal patterns are signals that a reversal in the direction of the trend is about to happen.
The patterns form when the present candlestick demonstrates a lower high and a higher low in contrast to the previous day’s candlestick pattern. The Hook Reversal patterns are quite distinct from other engulfing patterns; for these particular patterns, there is a very small difference between the body of the first and second bar.
When the Hook Reversal forms in an upward trend, the open is usually near the previous high and the close is near the previous low. Many traders categorize these patterns as a Harami candlestick pattern given that the body of the second candle forms inside the previous candle’s body.
When this pattern forms, the imminent reversal is more reliable and stronger if the formation occurs in a strong price trend. If the trend is not strong, then the suggested reversal may not be significant after all.
How to trade with hook reversal patterns
While there are many ways to trade these patterns, the most popular strategy is to trade using the support-resistance method or the trend-line method. Traders usually want to spot bullish Hook Reversal patterns that occur close to or at the support line, especially for long trade positions.
When bullish Hook Reversal patterns appear close to or at the support line, it is an indication that the asset is retracting and moving away from the support line. When this happens, it is recommended that you place a stop-loss just below the support line. Find the resistance line so you can identify the profit target.
When traders spot bearish Hook Reversal patterns close to or at the resistance line, they pursue a short trading position. The resistance could appear as a downward trend line or a flat horizontal line. When the pattern forms close to or at the resistance line, it is recommended that you place the stop-loss above the resistance line so you can take profit.
Finally, trading reversals is full of risks. This is because you are trading against the current trend. It is important that you maintain tight stop-losses and enter a long or short position only when the signals are strong, reliable, and the reversal pattern is clear.