This article originally appeared on FXEmprie.com
Making heads and tails of various chart patterns and discovering trading signals in them is the name of the game for successful binary options traders. Chart patterns do indeed represent an awesome and powerful tool in the hands of those who know how to draw conclusions from them and how to put those conclusions to use properly, and make no mistake, there are quite a number of subtleties in this respect that can go wrong and that will go wrong for those too lazy to properly read up on why, how, and when they should make their chart-pattern signal-based moves.
The rounding chart pattern is what we’re going to dissect a little bit today, taking an A-Z look at the strategy, beginning with how one can identify such patterns and wrapping up with recommended expiry periods for the two types of contracts one should trade based on this approach.
What are rounding chart patterns and how can one spot them?
There are two types of rounding chart patterns: Rounding tops and rounding bottoms. A rounding bottom pattern is essentially a trace defined by the bottoms of candlestick lows, which takes the shape of a curve. The rounding bottom starts at an area of an initial support, after which several minor supports will develop. If the curving trace touches at least two candlestick lows in the pattern, the trader knows he’s dealing with a rounding bottom. Once drawn, the rounding bottom acts as a firm support and the price will bounce from it until a complete reversal of the previous trend is achieved.
The same description is true for rounding top patterns, with the difference that the trace drawn onto such a pattern looks like an inverted saucer instead of an upright one and it acts as a firm resistance, from which later candlestick highs will pull back, until a full bearish reversal of the trend is achieved.
To sum things up: rounding bottoms and rounding tops are chart patterns signaling the end of a trend and eventually its complete, bullish or bearish reversal.
The actual trading strategy
As I said above, two types of contracts can be traded with the rounding chart patterns: put/call and touch/no touch. Both of these strategies make perfect logical sense and are therefore straightforward and easy to understand.
While for the identification of some of the chart patterns traders can use various tools to make life easier for themselves, in the case of the rounding patterns, they will be forced to mostly rely on visual assessment.
As always, the most sensitive and difficult part of the strategy is the proper identification of the patterns. Again: the best way to do that is to:
1- Find an initial level of support (we’ll be talking about rounding bottoms from here on out).
2- Find two more candlesticks bottoms that touch the curving trace you start from the initial support.
3- Replicate the resulting pattern in a symmetrical way, until you get your saucer-shaped rounding bottom.
Once that’s out of the way, it’s time to get down to business. Once the above said saucer-shaped curve is completed, the trader allows the price to bounce off it a few times, essentially confirming the trend hinted at by the pattern. The CALL trade is then entered, right where the second bounce-off occurs.
The expiry time is another delicate issue for this trade. One needs to give the trend-reversal enough time to come into effect properly, so – if one uses an hourly chart for the whole thing – the expiry should be set to 4 hours.
Trading the PUT option is essentially the same as described above, with the difference that it works with rounding top patterns instead of the rounding bottoms.
The Touch/No Touch approach
The saucer-shaped trace which defines the chart pattern gives birth to a clear delimitation of the Touch and No Touch zones. The Touch zone is obviously above the saucer (where the price is likely to go) and the No Touch zone is below the saucer. The point where the CALL option was entered is the reference point for the Touch trade as well. The Touch option should be placed about 30 pips above the CALL option entry price. The expiry for this trade should be set to 48 hours, and that represents a minimum, because – once again – the trend needs to be given enough time to work out the way it’s supposed to. The deal with the Touch option is that if the asset price manages to hit the mark before expiry, the trade is closed a winner, so being generous with expiry here makes perfect sense indeed.
The No Touch deal is a bit more delicate a balancing act but only expiry-wise. The No Touch option has to be entered about 30 pips below the saucer, and its expiry needs to be set to about 12 hours. The No Touch trade is a winner if the price of the asset fails to hit the set mark within the set period and that explains why the expiry period needs to be a lot less generous here.
The Touch/No Touch trade works in a similar fashion with rounding top patterns with the obvious differences drawn from the analogy, so there isn’t really a point in explaining that in detail as well.
In an ideal case, one should use hourly charts with this strategy, even though it does work with longer-term ones as well. Hourly charts make the spotting of the patterns easier though and the appropriate expiry periods are easier to determine as well.
Many a successful trader uses this strategy to great effect. For beginners though, it is recommended that they test-run it on a free demo account first, at least until they get the hang of how all the details and subtleties are supposed to click. Whenever one brings a new strategy to bear, it always pays to play it safe and the rounding patterns-based strategy presented above is no exception.