1-2-3-4 Reversal Strategy

1-2-3-4 Reversal Strategy

Submitted by adil on Thu, 03/13/2014 - 21:07

Learn How to Apply This Strategy Today!

Binary options are exotic derivatives, meaning that they are a unique form of derivatives, but derivative nonetheless. Similar to simple derivatives, binary options derive their value performance of another underlying asset. However, the difference between these types of derivatives lies in complexity of terms determining the payoff.

Understanding this concept allows the traders to imitate a lot of things utilized in trading simpler derivatives and apply them on to the trading of binary options derivatives. Therefore, traders can employ certain strategies adopted in trading simple derivatives and use them to make sound gains while trading binary options. After all, both types of derivatives are traded to make gains on expected movement in assets prices.

Traders can reproduce strategies followed in trading vanilla options in trading binary options such as 1-2-3-4 reversal strategy. In this strategy the trader first has to pick the right price chart which is anywhere between a 5 minutes price chart to 2 hours price chart or daily price chart. Traders would need to pick price charts of shorter duration because trading binary options for surer and shorter durations earns best gains. In a 1-2-3-4 strategy the trader identifies a particular pattern of price action correspond to points 1, 2, 3 and 4, and aims to enter positions that are most likely to reap gains.

Refer to picture below and notice that the 1-2-3-4 reversal pattern is forming off an uptrend. The pattern forming off an uptrend is used to determine a downward reversal and a purchase a PUT binary option.

At the end of the uptrend the price peaks out at Point 1. It then goes downwards to find support at point 2. From point 2, the price goes up and follows a 50% or 38.2% retracement of the distance laying in between points 1 and 2. At the end of this retracement the price heads in to a strong resistance level which is lower than point 1. This resistance level is point 3, and from here the price starts to dive. When the price dives to a level parallel to point 2, the trader enters in to a Put or short trade, betting on further decline in price. This is entry level is point 4.

Now refer to second picture below and notice that the 1-2-3-4 reversal pattern is forming off a downtrend. This reversal pattern is used to determine and upward reversal and enter a long position, that is, purchase a Call binary option.

Notice that the price bottoms out at point 1. It then goes upwards to find resistance at point 2. Here, the price goes up and follows a similar 50% or 38.2% retracement of the line between point 1 and 2, to run in to a support level at point 3. This support point then follows an uptrend and when it crosses the point parallel to point 2, the trader enters in to a Call binary option position, betting on an increase in the price of the asset.