The pennant is a continuation breakout pattern found across many CFDs like FX, crypto, stocks, metals and options resembling a pennant with a flagpole. We have two types: the bullish and bearish pennant chart patterns.
A pennant is a long narrow flag… nope, we are not talking about those flags you see in high school sports teams or ships! Here, we are referring to the chart pattern, which, of course, resembles a pennant.
Traders have created peculiar names like shooting stars, head and shoulders and Doji stars for interesting formations they see in the markets. The pennant is no different. So, without further ado, let’s put a magnifying glass on this set-up and how to trade it.
What is the pennant chart pattern?
This is a continuation breakout pattern found across many CFDs like FX, crypto, metals, stocks, and options resembling a pennant with a flagpole. We have two types: the bullish and bearish pennant chart patterns.
The bullish version of the set-up is where we expect rising prices, while the bear pennant chart pattern is where we expect falling prices.
In either case, this occurs regularly in trends to signal a pause or consolidation, as traders take profits and decide the next direction.
The highs and lows begin converging into a vortex. Such a formation leaves the price no choice but to break out of the structure. This makes the pennant effective because the result is usually a fast, parabolic-like movement.
Identifying the pennant chart pattern
Before going deeper into the components of the chart pennant pattern, it’s common for traders to confuse it with other formations like the symmetrical triangle and wedge.
Let’s start with the triangle. A symmetrical triangle is quite similar to a pennant because it’s a continuation formation. However, the distinguishing factor is the ‘flagpole’ present in the latter but not in the former.
Here’s an image of a symmetrical triangle below (for comparison purposes).
Pennants also look strikingly like wedges. The main difference is that the triangle structure with the former is horizontal, while wedges have an ascending or descending triangle. Here is an image to demonstrate this.
With the confusion out of the way, let’s look at the main elements of the pennant chart pattern.
This formation consists of the following:
Flagpole: This is the first leg of the movement before the consolidation.
Breakout zone: This is where we expect the market to push out of the pennant forcefully.
Pennant: This, of course, is the crux of the entire pattern. A pennant is triangular, consisting of two trend lines converging at about a 45° angle. These act as the support and resistance where the price bounces.
As a rule of thumb, the trend line should touch at least three swing highs/lows to be valid.
Now that you know how to identify this set-up, let’s look at the simple entry and profit-taking rules.
The basic way to enter the pattern is to place pending orders at the breakout zone. However, some traders prefer to use live execution once the price has confidently broken out.
Either way, it’s a conservative approach to enter once the breakout has occurred compared to another period.
Your stop loss should be at the most recent low of the support (for a bullish pennant) or the most recent high of the resistance (for a bearish pennant).
Finally, the profit target is generally the distance of the flagpole. Here is an image demonstrating all of these parameters in better detail.
Pennant pattern chart examples
Let’s go straight to real markets to see this set-up in action. Our first example shows the bullish candlestick pennant chart pattern on GBP/JPY. Here, we see two nice impulses before the formation of the flagpole.
This, of course, led to the pennant. We have labelled where your entry and stop loss would have been below. Additionally, the market travelled the height or distance of the flagpole.
Now let’s look at the candlestick pennant chart pattern on the CAD/CHF pair. The set-up begins with a downward impulse (the flagpole) before the price contracts. After the formation, the market moved even further down.
The pennant chart pattern is a rare formation. But it can be pretty effective once it appears, particularly in higher time-frames. As with other set-ups, you should always add more confirmation elements to your trading idea to increase the probability of success.
One thing to consider is that geometric set-ups like pennants generally need larger stops. Therefore, you may choose to enter at a different time than usual. Regardless, your reward must always be at least twice the risk.
Contract for differences trading may sound like a complex thing. However, it dominates most online trading globally, from FX to precious metals. This is because CFDs allow us to trade numerous instruments without owning them. We can also go ‘long’ (buy) or ‘short’ (sell), which is impossible through physical ownership. Overall, CFD online trading is the most accessible way to invest or speculate in the financial markets.
Contract for differences trading may sound like a complex thing. However, it dominates most online trading globally, from FX to precious metals. This is because CFDs allow us to trade numerous instruments without owning them.
We can also go ‘long’ (buy) or ‘short’ (sell), which is impossible through physical ownership. Overall, CFD online trading is the most accessible way to invest or speculate in the financial markets.
Let’s cover this topic in more detail.
What is a CFD in trading?
A CFD is simply a broker-trader arrangement to exchange the difference between a financial asset’s opening and closing price (hence ‘contract for difference’ or CFD).
The broker will pay the difference in profit based on the closing price at the end of the position. On the other hand, if the position is not favourable to the trader, the broker will debit their account.
Let’s make a simple example to demonstrate CFDs online trading. Suppose you took a buy forex spread bet position at 7114.5 at £10 per point.
Consider two scenarios: if the market moved 35 points and you closed the trade at this point, your broker would credit your account with £350 (35 X £10).
Conversely, if the market moved 37 points against your set-up and you exited at this stage, your broker would debit £370 (37 X £10) from your account.
We commonly refer to contract for difference trading as derivatives, meaning that the financial instruments are derived from real-life assets. Essentially, it’s trading a ‘replica’ without actual possession while being able to make profits and losses from it.
Key components of CFD online trading
Now let’s look at the standard elements of CFD trading accounts.
Leverage: This is, of course, the most attractive ingredient to CFD online trading. Leverage or margin allows you to trade the full value of most markets using a relatively small account balance using ‘borrowed’ funds from your broker.
Below is a simple visual to demonstrate the difference.
Although leverage is a capital amplifier, your profits and losses are based on the entire
value of whatever you’re trading. Leverage magnifies both equally, a significant concern when it comes to losing.
We express CFD online trading leverage as a ratio (e.g., 1:100 or 100x), and these vary widely depending on the broker, market and specific country regulations. For instance, if the value of a position was $10 000, 100x leverage means that you would only need $100 to open this trade (10 000 / 100).
The margin in CFD trading forex pairs is, by far, the highest of any financial instrument. It’s common to receive ratios from 1:100 up to 1:1000 (or sometimes unlimited). The leverage in other products like CFDs in commodities and CFD stock trading is often on the low end of the scale.
Something also worth mentioning is that some markets, like futures, have further margin requirements. So, in addition to the initial margin (or the amount you need to open the position), you also need a maintenance margin to hold the position.
Lastly, because leverage equals borrowed funds, interest is necessary, also known as a swap or rollover. In most cases, this applies to every night a position is held. But some exceptions exist, like with crypto futures, where the rollover applies every four hours.
Sometimes, it is possible to earn from swaps, particularly in forex, where you buy a currency with a higher interest rate and sell it against one with a lower rate.
Another massive appeal to CFD online trading is that you can buy and sell a particular market (in many cases, you can do this simultaneously. While this may seem like an everyday thing, it’s not possible when you own the physical version of a financial instrument.
For instance, you buy a cryptocurrency like Bitcoin (BTC) from an exchange at $20 00 at 1 BTC. At some point, you decide that the price will drop from this point, and eventually, it does.
With contract for difference trading, you would have been able to open a sell position at $20 000 and profit from the drop.
Buying the actual coin means you can only profit from selling it to the exchange at a higher price than $20 000. On the other hand, a CFD allows you to sell a market without having bought it or buy a market without having sold it.
Unlimited duration: Theoretically, you can hold a CFD position for a limitless time, provided you have enough margin to maintain it. Therefore, CFDs are suitable for all trading styles, from scalping and day trading to swing and position trading.
OTC trading: All CFD online trading happens ‘over-the-counter’ (OTC). This means that markets are provided between private dealers or brokers without a central exchange.
OTC trading allows higher margin and lower capital requirements compared to an exchange. Also, you can expect more experimental trading products like binary options and unlimited leverage in forex.
Most popular types of CFD online trading
Let’s look at the most common CFD online trading you’ll find.
Foreign exchange: CFD trading forex is speculating on the prices of different foreign currencies.
Stocks: CFD trading stocks is buying and selling shares or equities listed on numerous stock exchanges worldwide.
Crypto: speculating on the prices of many digital currencies.
Options: these CFDs offer you the right, but not the obligation, to trade various markets at a certain expiry time.
Futures: these CFDs allow you to buy or sell a particular financial instrument at a later expiry date and time.
Indices: the trading of such CFDs involves indexes primarily from stocks (but also forex, commodities, crypto, etc.)
Bonds: these CFDs include trading government bonds like the US 10-Year Treasury Note, UK 10-Year Gilt and Japan 10-Year Government Bond.
Advantages of CFDs trading
By this stage, you can confidently answer the ‘what are CFDs in trading?’ question. Now let’s look at their benefits.
Leverage: As stated earlier, this feature is the most attractive part of trading CFDs. Leverage is the only method of making substantial profits in the shortest time.
It also means you can start with lower capital and achieve better returns compared to unleveraged trading. But, if used irresponsibly, leverage can quickly lead to massive losses.
No physical ownership: No trader wants to hog around gold bars or keep a stash of currencies in a safe (both of which are expensive). CFD online trading is an efficient way of creating wealth without physically owning many different financial assets.
Duality of going long and short: This is another substantial plus to trading CFDs. You never have to own any market to buy or sell it. Also, this duality means you can hedge your positions (i.e., buy and sell several securities at the same time).
Diversification: CFDs allow you to trade a variety of unrelated markets on one platform or broker.
Disadvantages of CFDs trading
Of course, there are two sides to every story. So, let’s look at the downsides.
Potential for over-leveraging: The main drawback of CFD online trading is the ease at which you may lose substantial amounts of money quickly. You can withstand drawdowns for an extended period without leverage because you often have to invest more.
Overnight fees: As stated earlier, swap fees (along with spreads) are the direct costs of trading CFDs. Although these are typically minimal, they can add up to a sizable amount for long-term positions.
In some cases, they can also be higher than the average, e.g., with exotic forex pairs.
Lack of regulation with some CFDs: Anti-CFD proponents often label the industry as the ‘Wild West’ due to the decentralized or OTC structure of CFD trading. In many markets, it’s common to find unregulated brokers or the deceptive promotion of certain products.
Ultimately, CFD online trading is best suited for short-term trading. While some experts will advocate for buying unleveraged physical financial assets, this is not something everyone can do. The main reason is, of course, the amount of required capital.
Also, tangible ownership in some markets comes with extra costs for storage (as with commodities) or safekeeping (as with digital currencies).
Each avenue is suitable for certain groups of people. Some prefer long-term investing, so they will benefit from owning certain assets in their actual form. Conversely, others, particularly the younger generation, desire short-term capital gains.
Overall, despite the immense benefits, CFD trading certainly has more risks involved, which you should be aware of at all times.
Spot vs margin trading: these are different branches of the same ‘tree’ in a financial market. In either case, a trader purchases or sells a financial asset at its current price and hopes to cash out later for a profit. Yet, margin adds something extra to the deal, a way in which you can bank far more than you usually could.
Spot vs margin trading: these are different branches of the same ‘tree’ in a financial market. In either case, a trader purchases or sells a financial asset at its current price and hopes to cash out later for a profit.
Yet, margin adds something extra to the deal, a way in which you can bank far more than you usually could.
This is the primary difference in spot trading vs margin trading. However, with risk management in mind, margin is necessary to magnify profits in the shortest period possible.
What is spot trading?
Spot trading describes buying or selling a financial market at its current value for ‘same time’ delivery or execution. This market can be anything like forex, stocks, metals, options, crypto, bonds, etc.
The current value (or the spot price) remains uniform regardless of where you trade the asset.
The main point to understand is that your trading platform executes at the current price after you’ve clicked ‘buy’ or ‘sell.’
Many spot markets involve taking ownership of the traded asset. For example, trading a stock through an exchange means owning the underlying shares. However, we also have spot trading through derivatives.
Here, instead of trading actual shares, you trade a ‘replica’ of the stock while being able to make or lose money with it as you would with the real stock.
So, we have spot trading through physical ownership (or digital ownership in the case of crypto) and derivatives.
Another key component is that spot trading is traditionally unleveraged. In simple terms, it means that you trade on a 1:1 basis. So, if a financial asset costs $1000, you must bring that amount to the table.
Back in the day (before the 21st century), leveraged trading wasn’t common for the average investor. Yet, once markets began branching into non-exchange trading, decentralisation allowed for more freedom and experimentation.
One of these changes was the availability of higher and higher margin.
What is margin trading?
Let’s look at the second part of our spot vs margin trading discussion. Margin is collateral or ‘loan’ offered by a broker to a trader allowing them to open a position much larger than their account balance.
We use leverage and margin interchangeably. Margin is the amount of money you need to open a leveraged position, while leverage is a term that describes having increasing trading power.
In spot trading, you trade on a 1:1 basis. However, depending on the market, you can ‘gear’ your account from a 1:2 to an unlimited ratio with margin.
Now, margin has been around for decades. The reason it’s so popular nowadays is due to capital access.
As a spot trader, you need to commit the total value of a financial asset, whether it costs $100, $10 000 or $100 000. Generally, investing in a market is expensive for the average Joe. So, margin drastically lowers the barrier to entry.
It’s pretty much the only incentive that brokers can offer their clients to trade with them (otherwise, they’d be out of business).
Let’s make an example of a leveraged trade in forex. Assume you wished to trade 2.5 standard lots EUR/USD pair at 1.06060.
Generally, a standard lot on this market is worth $100 000 (so 2.5 lots is $250 000). Let’s also assume that your broker offered a maximum of 1:500 leverage.
Of course, $250 000 to buy currencies is too much money for most people. Yet, 1:500 leverage means that you would only need $500 (250 000 / 500) to have the privilege of trading the same value.
Let’s say a trader decided to sell at the price of 1.06060. If this market fell 10 pips (where each pip is worth $10), this would result in a floating profit of $100.
Yet, if the pair went in the opposite direction, the trader would have a floating loss of $100. We can see that a $100 deficit is 20% of their equity ($500), which is substantial. This is why the cliché of leverage being a double-edged sword remains true.
Differences in spot vs margin trading
The primary distinction between spot vs margin trading is, of course, leverage. This naturally equates to varying degrees of risk. But, at the same time, it’s only the way for traders to make substantial returns.
Let’s go back to our previous example. A $100 profit on a $250 000 balance is a 0.4% increase. Yet, a $100 profit on a $500 account equals a 20% rise. Therefore, margin allows for higher growth with less capital invested.
Needless to say, we have to consider the downside. The higher the leverage, the greater the chances of blowing your account.
This is far less likely when you’re committing the full value of a position as you do with spot trading.
In our last example, if a trader didn’t apply a stop loss, a small 50-pip drop (worth $500) would result in a trader’s account going to zero.
But, the same $500 on a $250 000 account is only a drop in the ocean. A trader could withstand even further losses with this massive balance.
To summarise the differences in spot vs margin trading:
The capital requirements are higher on spot and lower on margin.
Leverage is not present with spot but available on margin
Conclusion: which you should between spot vs margin trading?
Earlier, we mentioned that margin is one of the main incentives brokers offer clients. Without this feature, the growth of any traded market is slower.
Due to economic pressures, most of us have no choice but to seek for the biggest returns in the shortest time possible.
Therefore, leverage is necessary to achieve this goal. However, it’s something you should use responsibly. Also, it doesn’t matter whether your leverage is 1:50 or unlimited. Traders are not obliged to utilize the entire ratio.
Spot trading is suitable for wealthier investors looking for slower growth or looking to own physical assets instead of trading derivatives. Also, it is simpler as you don’t have to calculate margin requirements for each position and deal with potential margin calls.
To summarise, spot trading is the easiest way to trade a financial security because of the instant settlement. Moreover, it’s the most accessible method for the average investor. But this is where the simplicity stops. Spot prices, like any markets, are driven by many variables that need to be studied.
Spot trades are a lot more common than most people think. For instance, it happens when someone exchanges their local currency for another through a forex transaction.
Or when a person goes to an exchange to buy their favourite cryptocurrency (check out our piece comparing the two instruments here).
As you can see, we can be spot traders across many capital markets. Here, we’ll look at the spot trading meaning in more detail.
What is spot trading?
Spot trading refers to trading a financial instrument for instant settlement at the current or spot price. So, in a nutshell, everything happens ‘on the spot’ without any future references. In many cases, this type of trading involves physical delivery or ownership of the asset in question.
For instance, crypto spot trading means owning the actual coin from an exchange you keep in a designated wallet.
In the case of forex, it would be receiving real currencies. As a crude example, if you went with US dollars to get euros at a forex dealer, you would obtain euros in cash. This, of course, can happen electronically, but the point is:
Spot trading accounts for the instrument’s current price, with the immediate transfer of funds.
You usually take ownership of that asset, which you can decide to keep or sell later.
Spot trading is different from futures trading (more on this later), where the delivery of the asset only happens at a later price and date.
Another critical component of spot trading is that you own the asset at its full value without leverage or margin (we go into the differences between the spot trading vs margin trading here).
We broadly classify spot trading into two types: OTC (over-the-counter) and exchange-based:
OTC: Over-the-counter describes a system where trading happens without an exchange. It consists of brokers that connect buyers and sellers on a private platform. Therefore, no third party (like an exchange) supervises everything that happens.
As a result, brokers have more freedom to offer less standardised products. Also, the spot prices through an OTC system are not exactly the same as those you’ll find with an exchange.
We use OTC when we’re not looking to own the financial asset in its physical form while looking to profit from it simultaneously. This is what we refer to as a derivative or CFD (contract for difference)
For instance, when you trade a forex pair from a broker, you don’t own the underlying currencies.
In the same context, spot trading crypto from a broker means that you have no digital possession of the coin.
However, you can make or lose money the same way if you exchange the same currencies through a bank (or buy the coin from an exchange).
Also, brokers are more accessible, and you can expect quicker settlement of your transactions.
Exchange: This represents how we buy and sell most financial assets (e.g., crypto, stocks, bonds, options, commodities, futures). The main exception of a non-exchange traded instrument is FX, which remains decentralized or OTC-based.
An exchange is a system of an organised market where trading happens on a public platform.
In the old days, this platform was a trading floor or physical location. But nowadays, most trading happens electronically.
The core benefit of an exchange is transparency. Because everything is centralized, traders can access the same information on the same platform. This also means you can see how orders are executed at different levels through a matching engine called an order book.
So, effectively, traders are dealing with each other. On the other hand, your orders are matched with a private institution through the OTC system. This can result in several counterparty risks. Also, exchanges are always regulated, unlike OTC dealers.
Another point worth mentioning is that some markets have duality in how we can buy or sell them. For instance, we can trade bonds, stocks, crypto, commodities, futures and indices on exchanges and brokers.
Alternatives to spot trading
Needless to say, there are different avenues to spot trading, namely futures trading and options trading.
A future is a way of trading a market at a pre-determined value at a later expiry date. Traditionally, the purpose has always been to ‘lock in’ for something that will only be delivered in the future.
For instance, a corn producer may sell a corn futures contract now (after planting is done) for delivery in three months to secure a cheaper price. Yet, futures trading is also for speculators, not just hedgers.
This means there is no need to wait until expiry to close your position. Additionally, some traders may choose futures for features not available in the spot market.
For instance, leverage for crypto futures generally is higher than in the spot market; some FX traders can view useful exchange data they wouldn’t find with a FX broker.
An option is a financial derivative where you have the right (but not the obligation) to buy or sell a specific market at a certain price and expiry date.
Simply put, you can buy or sell but aren’t obligated to hold what you’ve bought or sold. The only price you pay is a premium if your prediction is wrong.
Options trading is like wagering or betting the value of an asset will be below or above a certain level (the ‘strike price’) within a set time limit.
Traders may choose to focus only on options or trade the options and spot markets at the same time for hedging purposes. So, one may take a sell position on one and a buy position on the other.
Benefits of spot trading
Let’s explore the several reasons why people choose to become spot traders:
Simplicity: The concept of spot is straightforward. Traders buy and sell at the immediate price with instant settlement, meaning there is no waiting. This is beneficial if you’re selling a market for a profit because you’re confident that the closing price is final.
The concept of spot trading is much simpler than futures trading since you don’t have to account for later events or periods.
No leverage involved: This benefits more risk-averse investors or traders. Let’s look at a popular spot market like forex. FX has the highest margin rates across all instruments.
However, the failure rate is quite high because traders misuse the leverage, leading to substantial losses.
Yet, most spot trading is unleveraged. This doesn’t mean that you can lose money. But, the loss rate is slower, allowing you to remain in the market longer.
Suitable for investing: This point extends from the last line. Most spot trading involves taking ownership of a financial asset. For example, buying stocks from an exchange or even buying gold or silver from a dealer.
When the market is in a downturn, you can withstand these periods without worrying about margin, which can wipe you out faster. Also, some people prefer owning actual assets instead of derivatives.
So, the spot market is suitable for this purpose. Yet, it is also a good fit for short-term trading when ownership isn’t necessary.
Drawbacks of spot trading
Of course, there are downsides to this trading style:
Often needs more capital: In many cases, you need more money in your account for a spot trade. Again, this is due to the lack of leverage. Margin allows investors to trade larger positions with a smaller balance.
Without leverage, you need to have the full value of the position as capital. For instance, a standard lot on EUR/USD is generally worth $100 000. However, leverage can allow traders to trade the same position with as little as $1000 in their equity.
Physical ownership: Of course, this doesn’t apply to all markets. Yet, it’s worth considering if you’re an investor looking to own actual assets, e.g., physical gold, bonds, coins, etc.
A physical asset will need extra care and attention. For instance, if you own gold, there are more costs involved in storage and insurance.
Consider another example. When you buy a cryptocurrency, you might need to consider a ‘cold’ wallet (a wallet not connected to the internet) to protect yourself against online threats. This understandably will cost you extra.
So, in many cases, trading derivatives in the spot market is a better and less tedious method.
To summarise, spot trading is the easiest way to trade a financial security because of the instant settlement. Moreover, it’s the most accessible method for the average investor.
But this is where the simplicity stops. Spot prices, like any markets, are driven by many variables that need to be studied.
Generally, because of the capital requirements, you may need to consider margin to increase your bottom line. Yet, ensure you understand the risks involved, so you don’t ‘lose your shirt.’
Binary options have become one of the most hyped exotic financial products since the late 2010s. So what are binary options, and how do they work? We’ll answer this question and look at the benefits and risks involved.
In life, we know that many things are binary. There are always two sides to a story, two sides to a coin. Well, the same goes for options trading, and this is where binary comes in. Binary options have become one of the most hyped exotic financial products since the late 2010s.
So what are binary options, and how do they work? We’ll answer this question and look at the benefits and risks involved.
What is binary options trading?
Before we understand how to trade binary options, let’s briefly explore what an option is. An option is a type of financial instrument allowing you the right, but not the obligation, to trade a market at a specific price on or before a defined expiry date.
With binary options, it’s a simple ‘yes or no’ or ‘all or nothing’ proposition where you receive a fixed profit or fixed loss.
This is why it’s called ‘binary’ because there are always two known outcomes to a position. Exploring how to trade binary options is similar to betting. One of the key differences between ‘vanilla’ (or regular) options and binary trading is the requirement to buy or sell.
With binary, there is an obligation to trade, while this is reserved with options (with the only downside being a premium if you decide not to exercise the position).
A binary trade is simply a question of whether a market will be above (or below) a certain price (the ‘strike’) at a set expiration time. You make a profit if your prediction turns out correctly; you lose a certain amount if things don’t go your way.
Let’s uncover the basic components to understand when you learn how to trade binary options:
The underlying asset: Like regular options, the traded price is derived from a real market. You can perform binary tradingon a wide range of instruments like forex, stocks, crypto, metals, indices, commodities, and even economic events.
The strike price: This is simply the price level on which the trade is based.
The expiry date and time: Unlike conventional options, the expiration lengths with binary is much shorter, typically from 60 seconds to an hour. So, your prediction has to remain correct at any time from execution until the trade expires. At this point, your broker will either credit or debit your account.
How does trading binary options work?
The scenarios we will provide shortly cover the most basic type of binary trading known as a call/put (also called an up/down or high/low).
This kind of binary revolves around “Will the price of X be higher or lower than its current price after the expiration time?”
Let’s look at a simple example of a binary call option. Assume the strike price of a market was $1.30, with a fixed payout of $85 and a loss of $100.
Let’s also presume that the expiry time was 1 minute. If you said the market would be above the strike price after expiry, you would gain $85 (‘in the money’). Conversely, you would lose $100 if the market was below the strike price after expiry (‘out of the money’).
As you learn how to trade binary options, you’ll notice that the risk-to-reward is often skewed. Trading experts generally advocate for a risk-to-reward of at least 1:2. So, you aim to gain $2 for every $1 you risk.
Yet, many binary option trading brokers offer between 60-90% of your stake, while you always have the potential to lose 100%. This is one of the drawbacks of this trading style. However, it’s one reason many traders explore other interesting and complex binary investments with higher payouts.
Range (or boundary): This binary option requires the trader to predict whether the price will remain in or out of a pre-defined range before expiry. Here, you can profit up to 100% of your deposit on the position.
Touch/no touch: With this binary option trade, the speculator predicts if the market will touch or not touch a pre-determined price at any time before expiry. Returns from your stake can go up to 300%.
In/out: This option is separated into two forms. The ends between/ends outside is where the trader predicts whether a market ends between or outside two defined price targets or ranges before the expiry.
On the other hand, the stays between/goes outside option sees the trader determine if a market stays inside or goes outside two predetermined targets or ranges before expiry.
Ladder: This is one of the most advanced binary trading strategies, yet it can offer over 10X of your initial investment. Here, the aim is to predict the market hitting several predetermined ascending or descending strike prices.
So, a successful trade happens when the asset hits all the pre-defined levels before the expiry.
How to trade binary options
Now that you understand binary and all the different types involved, let’s look at how to trade binary options for the best chance of success.
Understand short-term trading and risk-to-reward: As mentioned, binary options trading is based on short-lived price fluctuations. This requires a different way of analysing the markets compared to other methods.
Traders often rely mainly on technical indicators and tools on lower time frames or charts to make their predictions. However, there are other scenarios where fundamental analysis (mostly by way of high-impact news) is to used to find opportunities. This applies if you’re specifically trading options geared around economic events.
Ultimately, learning how to trade binary options is about quick thinking and making smart decisions on the fly.
Regarding risk and reward, your strategy should naturally have a higher winning percentage if you’re trading regular binary. As stated earlier, the payout is less than your potential loss. So, you need to win more of your positions to make money in the long run.
Pick your preferred market: While binary trading rules remain the same, the traded instrument influences your success or failure. One element that determines how far prices travel is volatility.
Crypto and forex are generally regarded as the most volatile, meaning they may be the best for binary.
Some markets like stocks and forex generate the most buzz when it comes to news, which can offer you an upper hand. Regardless, you should have your preferred market before going into binary.
Most binary traders started with the spot version of the underlying asset or use binary as a secondary market.
Find a regulated broker: The presence of scams for binary options trading is well-documented. One simple way to minimise the risks is using a regulated options dealer or provider.
Regulation means they have a license from a recognised financial services regulatory body within the country. A regulated broker enforces more trust and confidence they will treat their clients fairly.
Practice on a demo account: Finally, as with any market, you should spend considerable time on a demo account. Platforms for binary options trading may be a little complex for less experienced traders. So, it’s crucial to familiarise yourself before going into live trading.
Benefits of binary options trading
Let’s look at the upsides of exploring how to trade binary options.
Defined loss and profit parameters: This is perhaps the most significant benefit of binary options trading. Most traded markets use stop loss to control losses. While it’s necessary, you can always lose more than intended.
This typically happens when traders remove the stop loss or slippage occurs, resulting in orders executing at different prices than expected.
However, the parameters for loss are always known regardless of market conditions. Also, the trader will know how much they stand to profit after the expiry date. With other instruments, there is more uncertainty.
Wide range of traded markets: With binary, you can access more instruments on one platform. This is in stark contrast when you’re trading a single security.
Leverage: Like many derivatives, margin is present. This mechanism allows traders to make substantially more profit with a smaller balance. With binary, it’s better because the losses are more controlled. Still, the leverage is lower than markets like forex, meaning your profit potential is limited.
Risks of binary options trading
Of course, despite the benefits, you should note several downsides to binary.
Capped profit potential: We have just alluded to this point. While knowing much you stand to lose or gain for each trade is beneficial, it puts a cap on your earnings. On the other hand, conventional options have unlimited profit potential. So, in this aspect, they are better than binary trading.
Lack of regulation: Binary options trading is banned in several countries, particularly in many European nations like the United Kingdom. There have been many scams in this investing arena, mainly fueled by the salesy marketing promoting the simplicity of binary.
Limited demo testing capabilities: Most binary trading brokers provide a demo platform for a few days. Of course, more time is needed to learn the ropes. It’s much better with forex brokers on MT4 where you can use a demo account for a limitless period (provided you are actively using it).
Complex: There’s a perception that binary is easier. The concept of all-or-nothing execution is pretty straightforward, but that’s where the simplicity stops. Short-term speculation is psychologically challenging because you must make good decisions in seconds.
While long-term trading is slower, you have more time to think before you press buy or sell. It is possible to have a full-time job while trading the markets with this approach. We cannot say the same for binary, where you will need to be at your charts frequently.
It’s quite clear to see why binary options trading is globally popular. Traders can use it as their primary market or alongside other markets.
Overall, binary is best-suited for traders looking for fast-paced opportunities rather than long-term traders. But, like any market, remember there are risks involved. Also, it can take several years before reaching mastery, particularly with the exotic options.
A chartist is a master of anticipating mass psychology, which is what a formation like the shooting star pattern is for. This is a simple-to-spot set-up that appears regularly on all time frames. Let’s look at the shooting star candle pattern and how it forms in more detail.
A shooting star is a glowing meteorite through the Earth’s atmosphere… No, we aren’t talking about that shooting star!! As traders, we love chart patterns, whether we’re trading forex, stocks, metals, options, or crypto.
A chartist is a master of anticipating mass psychology, which is what a formation like the shooting star pattern is for. This is a simple-to-spot set-up that appears regularly on all time frames.
Let’s look at the shooting star candle pattern and how it forms in more detail.
The shooting star pattern is a bearish candlestickreversal formation where the body is small, the lower shadow (or wick) is tiny, and the upper shadow is noticeably long. It looks almost like a bearish pin bar, except it doesn’t have a ‘nose’ or a slightly bigger lower wick.
A shooting star appears after price has been trending upwards and suggests the market may change into a downtrend.
The most significant part of the bearish shooting star pattern is the long upper wick, which is at least twice as long as the body. The candle will form as it usually does during an uptrend, producing a new high.
But there will be a strong rejection and mounting selling pressure at some point. This causes what was once a full-bodied green candle to have a long wick. Furthermore, the body’s colour will change to red, suggesting the bears will likely take control of the upcoming session.
Many traders wait to see if the next candle is bearish before going short with this set-up. Yet, there are other techniques for confirmation that we’ll soon explore.
The opposite of the shooting star pattern is the inverted hammer. This has the same body structure and formation; it just forms oppositely during a downtrend. Think of it like a ‘bullish shooting star.’
How to trade the shooting star candlestick pattern
We know that a shooting star pattern can form at any time. But merely seeing it doesn’t mean much without confluence (combining two or more factors in your analysis). So, the most essential aspect is where it forms.
Before getting to this concept, the time frame where you see a shooting star candlestick pattern matters greatly.
Of course, the lower the time frame, the more shooting stars you will see, but this doesn’t mean they are worthy of causing a reversal. This is due to ‘noise,’ a concept describing the overload of price action which distorts the underlying momentum or trend.
On the other hand, the higher in time frame you go, the more reliable shooting star patterns become. This is because these charts are less ‘noisy’ and the length of time decreases the chances of false signals. However, the trade-off is that the formation will seldomly appear on your charts.
Nonetheless, let’s look at the different ways of exploiting a shooting star trade.
Trend lines: It’s common to find the shooting star pattern on a trend line. This happens during a retracement phase as the price moves towards it. The set-up would suggest the correction is over and that the market will move in its previous direction.
Support and resistance: A trend line is essentially a diagonal version of support and resistance. The traditional support/resistance is horizontal and represents turning points.
Traders look for various price action patterns like the pin bar, spinning tops and, of course, the shooting star pattern. Many reversals stem from these formations on key support and resistance because they are highly anticipated areas on the chart.
Moving average: This is like an advanced version of a trend line (also referred to as ‘dynamic’ support and resistance). Again, you’ll see shooting stars on moving averages often.
Now that you understand the typical appearances of the shooting star pattern, let’s look at how best to enter the set-up:
You’ll always want to wait until the candle has formed completely. Some traders will enter before this period. But this can be a mistake and result in a false signal or false shooting star.
Once the pattern has formed, you can enter, with your stop loss at the high point of the shadow.
The alternative technique is to wait for the price to retrace around midway (50% Fib retracement) of the bearish shooting star. This allows for a better entry, increasing the potential reward of the trade.
Yet, note that the market doesn’t always correct to this point. So, you will miss a few trades with this method.
Chart examples of the shooting star pattern
With all the theory out the way, it’s time to look at real chart examples of shooting star trading. We’ll incorporate everything that we discussed in the last section.
Let’s look at the first example on the 4HR chart of EUR/GBP.
We see the price failed to break a key resistance zone for a few months, as noted by the long wicks. This resulted in a range, and it’s quite usual to find a shooting star pattern appearing in this scenario.
When it eventually did, we see the price retraced to halfway of the candle’s length. This is an example of the alternative entry ‘trick.’ The pair soon went into a downtrend, resulting in a strong reversal worth tens of pips.
Our next example takes us to the daily chart of Bitcoin, where we see the market moving down and respecting the trend line.
Notice the two retracements that ended after the shooting star pattern. This formation would have been a strong signal that the downtrend would resume. Plus, the set-up was more reliable because it formed on a daily chart.
Overall, the shooting star works equally well for traditional reversals and trend continuation.
Our final illustration of the shooting star pattern takes us to the weekly chart of gold (XAU/USD).
We applied a 200-day moving average, which confirmed the downtrend. When the market returned to the indicator, it printed a nice bearing shooting star. As with the trend line example, this would have provided a reversal signal. Eventually, the market moved in a downward fashion from this area.
We should point out there is more to trading shooting stars than seeing them on the chart. Like other patterns, context is key, especially for a one-candle formation. The shooting star is not always a reliable reversal signal.
So, to increase its chances of working out, you should cross-check with other indicators or tools that offer confluence and confirmation.
Support and resistance is a mysterious concept, as numerous factors cause it. But the simplest way of explaining it is supply and demand. Now, this is where the confusion comes in for many traders. If supply and demand causes support and resistance, what’s the difference between support and resistance vs supply and demand?
Support and resistance is one of the first concepts new traders learn for any traded market, whether we’re talking about stocks, forex, crypto, options or metals. We know that price doesn’t move in one direction without bouncing off an area on a chart, often several times.
Support and resistance is a mysterious concept, as numerous factors cause it. But the simplest way of explaining it is supply and demand. Now, this is where the confusion comes in for many traders.
If supply and demand causes support and resistance, what’s the difference between support and resistance vs supply and demand?
Some chartists say they only trade support and resistance, while others trade supply and demand. For the most part, both are similar, but subtle differences do exist.
What is support and resistance?
It makes sense to look at each of these things individually before diving into the demand and supply vs support and resistancedifferences.
Support and resistance refers to the mechanism where certain levels on a chart act as obstacles stalling the price from moving beyond them.
The simplest way of thinking about support and resistance is that support is the ‘floor’ while resistance is the ‘ceiling.’
In a bearish trend, the ‘floor’ or support prevents the market from further down, causing retracement or minor reversal.
In a bullish trend, the ‘ceiling’ or resistance prevents the price from advancing further up, resulting in a retracement or minor reversal.
Support can turn into resistance, and resistance can become support in the future.
Here are chart images demonstrating what we’ve discussed.
The natural state of price in any instrument is to move in this zig-zag motion of impulses and corrections caused by supply and demand. But what exactly is this?
Let’s look at the second part of our support and resistance vs supply and demand discussion.
What is supply and demand?
Supply and demand is a trading strategy introduced by Sam Seiden, an experienced trader, writer and author, in the early 2010s. It’s based on several theories:
Actual economic supply and demand (where demand is greater, prices rise; where supply is greater, prices fall; when both are equal, we have a range).
Wyckoff’s accumulation and distribution
‘Smart Money’ concepts
What’s more practical to understand is that supply and demand is an advanced form of support and resistance. It is about looking for zones where there were past rallies and advance, and anticipating the same will happen in the future.
The supply zone is a resistance area where there is high selling interest, while a demand zone is a support area where there is high buying interest.
So, what causes supply and demand? Like many other things in trading, we have theories. The most commonly accepted one is how Smart Money (i.e., large financial institutions) places orders.
These guys trade massive volumes, making it difficult to meet the demand or supply. Remember, you need a buyer for every seller and a seller for every buyer.
For instance, if a bank decides to purchase 100 lots of a forex pair, there must be an opposite trade (sell) to finalize the transaction. If this doesn’t happen, the price will shoot up and look for orders on the way to fulfil the volume.
The problem is that this results in a partial fill, meaning that the Smart Money doesn’t get the full 100 lots at their initial price. This, of course, means less profit. So, one way is to execute the position in smaller chunks around more or less the same zone.
The hope is that enough sellers will be present at that zone once the price returns to it. When this happens, the Smart Money can place the remainder of their order and make more money with the eventual rally.
Supply and demand vs support and resistance: the differences
Now let’s explore the main distinctions in the support and resistance vs supply and demand comparison.
Supply and demand traders emphasise a zone’s newness more than how it has performed in the past. On the other hand, we only conclude support and resistance after the market has returned to it at least once before.
Although there are many types of supply and demand zones, they all develop along with the chart with little to no historical context. There’s a reason for this.
Supply and demand traders have long argued about the effectiveness of so-called old zones. Sam Seiden said that the longer the market has been away from a zone, the more powerful it becomes.
Yet, the opposite is often true; newer zones have a higher probability of causing a turning point. Again, it’s all market psychology theory. But the idea revolves around urgency. Smart Money wants their orders executed as soon as possible.
The longer the price has been away from a zone, the less interest it generates. Now, this isn’t to say that old zones (or support/resistance identified weeks or months ago) don’t work; they do.
Yet, recency is more necessary. To summarise this difference when looking at supply and demand vs support and resistance :
Support and resistance relies on historical data. You will need to go back to your chart to pinpoint these areas before concluding they are support or resistance.
With supply and demand, you don’t need to go back to the past to spot good zones (but nothing stops you).
Lines versus zones
Another primary difference is that we refer to supply and demand as zones, while we often look at support and resistance as exact levels.
Supply and demand offers roundabout areas where we anticipate a turning point. We don’t need to worry about the price reversing at an exact level compared to support and resistance.
Traders face several challenges with the latter. The first one is that the market doesn’t always stall at precise levels (but near it) before turning. Let’s look at an example with the chart below.
Note the resistance at 75.300 and support at 70.900 on CAD/CHF. However, see how the pair reversed several times close to these levels without touching them. These would have represented decent supply and demand zones.
Another problem is that the price can sometimes hit the exact level but quickly turn around. This is what we call a false break. However, you can use this occurrence to your advantage, and this is how you can combine support and resistance vs supply and demand.
It’s a common scenario, meaning it’s beneficial to understand. Here’s an example:
Notice how the price reversed from the supply zone. On the second occasion, it touched the 169.100 resistance, but this turned out to be a false break.
A simple way to identify a false break is with price action by looking at candles with long wicks or engulfing patterns (learn more about these here). We see a bearish Maribozu or full-bodied candle in this area.
One way to enter such a trade is to wait for the price to retrace to 50% (using Fibonacci) of the move. Eventually, this zone proved influential, resulting in a decline stronger than the previous.
So, support and resistance vs supply and demand: the former deals with pre-determined levels, while it’s not necessary to have pre-determined levels with the latter.
Also, support/resistance typically refers to exact levels, while supply and demand is more about zones.
Otherwise, these are two sides of the same coin; they are technically quite alike. Whether one person calls it support and resistance or supply and demand, the purpose is the same: to look for turning points.
Remember that this article scratches the surface. What we have provided are merely theories. Some traders go deeper into why price changes the way it does by looking for other evidence using indicators, fundamentals, order flow, etc.
Triple tops and triple bottoms frequently appear across all time frames, and you can find them in many markets like FX, crypto, options, metals, stocks, etc. Let’s look at the triple top pattern and triple bottom pattern in more detail.
The main difference is that one has an extra peak and trough. Everything else remains the name. Triple tops and triple bottoms frequently appear across all time frames, and you can find them in many markets like FX, crypto, options, metals, stocks, etc.
Let’s look at the triple top pattern and triple bottom pattern in more detail.
What is a triple top and triple bottom?
A triple top occurs when three defined consecutive peaks (or ‘tops’) bounce from a resistance zone. On the other hand, a triple bottom is formed with three defined successive troughs (or ‘bottoms’) rebounding from a support level.
In either case, both of these are reversal patterns. The triple top is a bearish reversal formation as it appears when a market is trending upwards. A triple bottom is a bullish reversal set-up because it forms during a sell-off.
You’ll notice that this set-up is strikingly similar to the head and shoulders. The main difference is that the middle peak or trough is the same height as the others. On the head and shoulders, it is higher than the adjacent two.
The triple top and triple bottom are examples of consolidation phases. We know that the price during any trend will not travel in one direction indefinitely. There will always be a brief pause as buyers or sellers are taking profits and new participants enter the market.
These moments cause a retracement, a sign of uncertainty about the future prediction. The ‘breakthrough’ level (as in the image above) is where traders enter the pattern. This is a point which confirms the reversal is in full swing.
The extra time it takes to form makes the triple top and triple bottom better than the double top/double top. The fact that the price fails to break the support or resistance zone two times makes it a more reliable pattern.
Like several other patterns, your stop loss should go at the resistance level for the triple top or at the support level for the triple bottom. The profit target is the height distance from the top/bottom to the breakout level.
Identifying and trading the triple top and triple bottom
Like most chart patterns, you won’t know if a triple top pattern or triple bottom formation is present until after some time. Yet, you can stand ready with your trend lines once the third peak or trough has appeared.
The entry is the most crucial part of a breakout set-up, like the triple top and triple bottom. It is a conservative method to enter once the price breaks the level holding the pattern. This minimises the chances of the set-up failing when entering too early (although you can do this, depending on other factors we’ll cover letter).
Another technique is waiting for a 50% Fibonacci retracement after the breakout. This can allow for a tighter stop than the traditional method, where your stop is usually larger. Yet, it is possible to miss more positions with the alternative way because the price doesn’t always retrace.
Best tools to use with the triple top and triple bottom
Traders are always looking for ways to increase their chances of success with patterns. It is no different with the triple top and triple bottom. Confluence matters. The more things align on your chart when trading this pattern, the better.
So, here are the things to watch. We will incorporate all these elements in the next section with real chart examples for better demonstration.
We mentioned the possibility of a failed or false break with triple tops and triple bottoms. A simple way to judge between a true breakout from a false one is the candle. Ideally, you’ll want to see a full-bodied candle like a Maribozu (or a candle with a little wick) that breaks the level.
It is possible to see pin bars or candles with more wick. These are typically signs that the market is rejecting the zone, making it likely that the price will revert in the other direction.
So, keep in mind the price action at the breakout level. A full-bodied candle gives more confidence of the reversal’s force.
This concept relates to what we’ve referenced now. You want to see strength to confirm the triple top and triple bottom. Aside from the price action, using a momentum indicator like the Relative Strength Index (RSI) can be helpful.
Here, the indicator should be beyond an overbought or oversold level. This would suggest extreme bearish or bullishness, which is necessary for the breakout.
Divergence is common with momentum indicators or oscillators like the RSI. This can give you an early signal of the reversal before the price hits the breakout level. Here, you would look for divergence between the price and indicator as the third peak/trough is forming.
Chart examples of the triple top and triple bottom
Okay, enough talking. Let’s get busy with the charts. Our first example looks at the triple bottom on the 1HR chart of AUD/CAD. We are demonstrating the alternative 50% entry technique here.
We see the market went out of the breakout level once the three bottoms were formed. Yet, the price retraced to the 50% Fib level, allowing for a more favorable entry. This forex pair covered the distance of the pattern’s height after the breakout level, which would have been your profit target.
Now let’s look at the triple bottom on the 4HR chart of CHF/JPY.
Here, the market pierced the breakout level with a nicely defined bearish Maribozu. This is an example of using price action as the first sign that this pair was likely to trend downwards.
The second confirmation is, of course, the bearish momentum on the RSI. We see that it went oversold at the same time as the breakout. This would have added more conviction of strong selling force, which eventually caused the decline.
Our last example observes using divergence with this pattern. The chart below is the 4HR time frame on Ethereum.
This illustration shows how you can achieve an earlier entry (although it’s riskier). At the third peak, we see hidden divergence on the RSI. This would have been the first sign of a potential reversal.
The hammer candle is a nice candle with a long wick and a small body. As mentioned before, this suggests rejection, further adding to warnings of a reversal. So, you could have entered after this candle closed.
Afterwards, we see a bearish Maribozu approaching the breakout level, eventually going through it.
The triple top and triple bottom is an intriguing and reliable reversal pattern that’s easy to identify and trade using simple rules. But, like any formation, context is key. Forming a solid trading idea is about creating a story.
The triple top and triple bottom should be a small part of the narrative, not the entire thing. In simpler terms, you shouldn’t trade by seeing this pattern alone. Instead, combine as many elements (including those we discussed) to have a well-rounded set-up.
Did you want to trade forex, learn a little bit about the business of it and find out how chart analysis works? You may have been surprised at the level of study and how many types of chart formations there are. With our help, you will gain a clearer understanding of how they work. Today we will start with the alligator trading strategy.
An alligator trading strategy may sound like a bizarre term. It can be a dizzying and humbling experience to enter the world of trading without knowing what any terms mean. Even the best traders in the world had to start somewhere and learn their trade. Usually, the best approach is through proven, well-sourced and highly-rated literature about your asset. While this is an ideal start, digesting online literature and speaking to traders who know the industry are two key things to consider.
It isn’t specific to one asset, either. It could form a shape on a forex chart, a cryptocurrency chart or another type of chart, including commodities such as gold.
These terms may sound complex and challenging to get your head around, but much like anything in life, the anticipation is scarier than the practical execution. Today we will explain to you what an alligator trading strategy looks like. This includes
A stock alligator indicator
Alligator strategy forex
Alligator indicator strategy
Alligator technical indicator
That’s only part of what we will be discussing today. However, by the end of this page, we hope you will fully grasp the idea of an alligator trading strategy and how alligator trading plays out on a live trading desk.
Who Created The Alligator Trading Strategy?
The legendary trader Bill Williams, who sadly passed away in 2019, created the alligator trading strategy. He also developed the idea of several other strategies that professional traders still implement. Throughout his distinguished career, he authored many books about trading and was widely respected in the field.
With over half a century of experience in his expert fields of stocks and commodities, Bill Williams has left a lasting legacy in the trading world. The Bill Williams alligator indicator began to gain serious traction as the man who coined the theory had a decorated and esteemed history in the trading world. Even after his death, the alligator trading strategy is still widely discussed and used by analysts and traders alike.
Who Was Bill Williams?
Bill Williams was born in 1932 and gained expert qualifications in several fields. It was part of this education that allowed him a unique insight into trading. With degrees in psychology and engineering physics, he has identified many new pieces of chart analysis and strategies that professional traders have used for decades.
Williams began to cultivate the idea that strategies were based on human psychology much more so than any method derived from studying chart analysis or theory regarding a specific asset. By establishing that psychology played a leading role in this, Williams identified how this played out on a trading chart and how to execute your trade appropriately. Some traders even refer to this pattern as a William alligator indicator.
He then went on to provide his knowledge to traders worldwide, visiting every continent and over 50 countries to give back the ability he discovered. As we discussed in our introduction, he had multiple best-sellers. The highlights of his collection were Trading Chaos (first and second editions) and New Trading Dimensions.
Focussing on the considerable role that psychology plays in trading is now something that virtually every trader agrees with. The impact that negative emotions can have when it comes to trading is phenomenal. Tools that involve risk mitigation, such as automated take profit and stop loss limits and dollar cost averaging, are two ways to protect yourself when the market begins to take a turn.
For several reasons, you must do ample research on the market you are investing in. First, if you don’t take the time and effort to use considerable resources to understand better the asset you are trading, this is a perilous game. Essentially, if you are investing in an asset you don’t understand, you are gambling.
Applying the risk mitigation tools we mentioned at the end of the previous paragraph is some of the key ways you can help protect yourself in severe market volatility.
What Is The Alligator Pattern?
When applying the alligator trading strategy to your investment strategy, it would be best to identify when a pattern has formed. Before we explain how you can use the alligator trading strategy to your advantage, we will show you what one looks like on a chart.
As you can see in the chart above, the alligator strategy takes shape in the most literal way. The alligator lips, teeth and jaw all form part of a moving average shape. Dozens of chart analyses take their name from how they shape up on a chart, and the alligator trading strategy is no different.
So What Is An Alligator Chart Indicator?
The alligator trading strategy is set at five, eight, and 13 periods. The indicator applies convergence-divergence indicators to establish effective points of trading. Once this pattern has been established, it is relatively straightforward to use the logic for the raw data. The lips perform the fastest turns, and the jaw performs the slowest turns.
It has proven to be a reliable indicator for decades. Many traders still rate the alligator trading strategy so highly because of how it works, irrespective of the asset class you are trading.
The fact that traders monitor various moving averages in this particular strategy shows that the research and analytical vision of Bill William’s alligator method compromised several different observations. It might seem obvious and not that much of a groundbreaking idea that psychology plays a more prominent role than initially thought.
However, when Williams devised the alligator trading strategy, he was implementing psychological theory and mathematical analysis to effectively construct a model that traders could use to try and make a profit. Given that so many are still using the alligator trading strategy and we are still writing about it, we would say he devised a pretty solid strategy.
Alligator Indicator Forex
The buying and selling of foreign currencies are one of the biggest markets in the world. With trillions of dollars worth of activity every day, it is one of the most profitable and active asset markets anywhere in the world.
Regarding forex trading, the significant pairings stretch across multiple continents and dozens of countries. Although the primary currency pairings are between seven to ten of the biggest world economies, the majority of which are paired with the US Dollar, plenty of other currencies are also available.
Identifying which pairs reveal an emerging alligator pattern could be the difference between executing a solid, profitable trade and losing your initial investment. However, it is more complex. You could still lose your investment even with plenty of excellent chart analysis and a firm grip on what drives the market.
Because forex is a volatile market, several significant factors are at play, ranging from economic policy announcements to huge world events. Ensuring you are managing risk appropriately while taking on all of these variables will give you ample time to learn how the market works, how it reacts, and how to build a successful strategy that works for you.
Do All Alligator Forex Strategies Look The Same?
Your alligator forex strategy may look different to another trader. This doesn’t necessarily mean either of you is incorrect. The market can be ambiguous and unpredictable. As long as you can justify why you believe it will move in one way and appreciate the factors that cause these volatile swings, you will be thinking like a trader.
An alligator forex strategy may sound complex if you are starting as a beginner in the market. Learning how to identify how to use the alligator indicator successfully is a great first step. You have then completed a significant learning curve in how to conduct thorough and proper market analysis.
Alligator Stock Indicator
As we discussed in our previous section, if you identify the teeth, lips and jaw of the alligator trading strategy, you can effectively implement it across a range of assets. Many analysts and traders will often say that having a diversified portfolio is essential to shield yourself from bearing the brunt of one specific market downturn.
How Does An Alligator Forex Indicator Look On A Live Chart?
As a novice trader, how to read an alligator indicator on a forex chart might be a bit of a stretch. You must understand the market effectively before learning more about specific strategies. You can see an example of a forex indicator alligator on the chart below.
As you can see, the chart looks the same. It is the shape that we need to pay close attention to instead of the asset. The asset price isn’t relevant as long as you can identify where the alligator chart forms.
Regarding stock trading, it can be easier than a forex pair for some. This is because you only deal with one specific asset and price. However, when it comes to forex trades, you will usually have to weigh the individual factors. Many things will drive the price and how both currencies will interact with each other on a global market.
Some traders find it easier to trade stocks. Simply because you can buy the asset at one price and sell it at another (hopefully higher) price. Some traders believe there are fewer variables to consider. Both markets require serious knowledge and respect.
However, every trader has their journey and their ideas. There will be plenty of traders who prefer to trade forex compared to stocks. They will have their own reasons why this is the case. In terms of dealing with trade from a novice perspective, you may not enjoy researching a company or its stock.
Irrespective of this, the alligator trading strategy is something you can apply across all assets, and it doesn’t change shape regardless of what you choose to trade.
How To Use The Alligator Indicator
Even though identifying chart patterns is a critical skill for those looking to make it in the world of trading, other variables are at play. You could correctly identify the shape and then execute an effective alligator trading strategy and still lose money because of other market variables. Always manage your risk appropriately and factor in many different variables before entering a trade.
If you were looking to use an alligator indicator to execute your strategy, it would be a case of viewing it simply as:
When the lines are apart, the “Alligator” is eating. As long as the candlestick stays above or below the alligator, traders will usually remain in the trade. However, when the lines begin to get tight or cross over, that is when volatility arises. Traders who use this technique will consider this cross-over as a sign to exit the trade.
You could spend hours reading through chapters on how this strategy works. However, this is an alligator indicator explained simply. If you identify these alligator indicator settings, you are already placing yourself at an advantage over other novice traders who need more help to grasp chart analysis.
How to read an alligator indicator is an integral piece of any trade. Once you know what to look for and what the signs are, you can look to implement your alligator trading strategy across a broad range of assets.
However, if you are a beginner trader, it is advisable to stick to one asset class and understand thoroughly how it works before you begin to trade another asset. Your capital is always at risk, and if you enter a market without solid prior knowledge, you are already on thin ice.
An alligator trading strategy might not be the first strategy you wish to employ if you are only starting in the market. Some beginner traders will use more conventional methods, such as swing trading, while they find their feet on how the market works.
We hope you now have enough knowledge to apply this practically to your trading methods and psychology. We have mentioned this already today, but it is essential to emphasise that accurate chart analysis isn’t something you can magically master overnight.
It takes a lot of time, effort and usually plenty of financial loss before you settle on a strategy that works for you. However, mastering the art of chart analysis will set you well on your way to understanding the market better and give you a better chance of making a more profitable trade in the future.
Much of the battles traders face are internal. Your brain can be your greatest weapon but also your downfall, depending on the thoughts fed into it. Profitable trading is as much about controlling your emotions as it is about having the best strategy. This is why understanding the psychology of a trader is essential.
A few months into the new millennium, a book that became the trading psychology bible was released. We are talking about ‘Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude.’
The late author and trading psychology coach, Mark Douglas, wrote this seminal book, exploring themes of risk, randomness and probabilities, which all form part of trader psychology.
Much of the battles traders face are internal. Your brain can be your greatest weapon but also your downfall, depending on the thoughts fed into it.
Profitable trading is as much about controlling your emotions as it is about having the best strategy. This is why understanding the psychology of a trader is essential.
What is trading psychology?
The psychology of trading refers to a trader’s mind or mental state and how it affects their charting decisions. This applies to any financial market, whether FX, crypto, options or stocks. Each trader has their individual and inherent behaviors influencing their actions.
The uninformed person will assume that trading successfully is about making objective technical conclusions not influenced by feelings. Of course, that is the whole point. Yet, trade psychology plays a major role in how good or bad these decisions become.
Although experts advise investors to be as ‘robotic‘ as possible, we are humans at the end of the day. Let’s make a simple example.
Assume you’re trading a forex pair; soon enough, it begins to show a profit. Normally, you may move your stop to breakeven or defined support/resistance to prevent a loss.
However, something kicks into your mind suggesting that this trade will move further in your direction. Furthermore, you seek evidence from many places like the chart, economic news or even confirmation from a friend.
Your trading mentality will naturally turn to greed as you add multiple positions or ‘scaling in’. You know that this is a dangerous action that can quickly lead to a margin call or blow your account. However, because we are programmed to be excessive, ramping up your risk will feel like the right thing.
Unfortunately, the position starts going against you as soon as this happens. Before long, your account is at zero. Even though opportunities to reduce the loss were there, greed would have made the trader overconfident.
This is one of many examples of trading psychology in action. A profitable trader with a sharper trading mentality will have done things differently. They would have recognized the risks of adding multiple positions and devised a plan beforehand to manage them.
It’s not to say greed is always a bad thing. Scaling in forex is an advanced money management technique that works wonders but should be practised carefully.
So, this is the point of trading psychology. Natural human instincts are difficult to ignore. Yet, the key is ensuring you can consistently make sound trading decisions.
Common trading psychology biases (and why they should be avoided)
The psychology of trading revolves around preferences triggered by specific individual emotions. Identify these whenever they show up and avoid them at all costs.
All traders have heard of these phrases. Trading is a challenging endeavour because you’ll only know the new direction of a market once it has materialised. There is no crystal ball; we are taking a risk on the unknown.
Hindsight bias means traders discern past events as more predictable than they actually were. This can offer them a trading mentality of overconfidence when looking at new opportunities.
Also, if they were to miss a trade, they would feel regret, excessively contemplating what could have been.
This trade psychology refers to how people look for information that confirms pre-existing beliefs while disregarding contrary signals. Confirmation bias has similarities to hindsight bias. For instance, it’s simply to have strong feelings that a certain market will increase.
This may be based on seeing a past chart pattern, looking at new evidence or pure favouritism. Yet, having confirmation bias is unproductive because the trader wouldn’t consider a holistic picture and factor in what can go wrong.
It’s easy to frame the psychology of a trader into focusing on the present. Recency bias suggests that people give greater importance to recent events than older ones. It’s prevalent when traders face a losing streak (but it also applies to winning streaks).
When you’ve lost two trades in a row, it’s easy to assume that the next one will have the same outcome. This can lead to analysis paralysis or fear of taking that next trade because of potentially experiencing a loss.
Hot hand fallacy
The hot hand fallacy is the concept that a trader will continue to experience a run of good luck after the first or first few successful attempts.
It has some resemblance to recency bias because traders often gain more confidence if their recent positions went favorably. The hot hand fallacy can be a destructive trading mentality because it produces unnecessary overconfidence.
Also, it doesn’t factor in that the outcome of each position is independent of the previous.
Improving your trading psychology
Here are quick-fire tips so that you can have an elite trading mentality.
Control the ‘Four Horsemen’ of trading emotions
Of all the emotions traders can experience, these tend to be the most common: fear, greed, hope, and regret.
Fear: a bit of fear can be technically a good thing. Yet, it can lead to recency bias during hard times, resulting in missed opportunities.
Greed: almost always a bad feeling because it usually results in overleveraging.
Hope: unironically a positive emotion in life but not in the markets. It leads to traders having a ‘fingers crossed’ approach. Hope is related to greed as it involves the strong desire for something to happen, which has little to no risk management.
Reget: prevents you from moving on to new opportunities because you get stuck in the past.
Appreciate the probabilistic nature of trading
Mark Douglas put it best in ‘Trading in the Zone’ when he wrote of the five truths in the financial markets:
Anything is possible.
There is no need to know what will happen next to make money.
Wins and losses are randomly distributed.
An edge only indicates a higher probability; it is never a guarantee.
The market is unique at every moment.
Read trading psychology books
Of course, ‘Trading in the Zone’ is perhaps the most well-received and popular trading psychology book. But other great titles you should check out include:
The Investor’s Quotient by Jake Bernstein
Market Wizards by Jack Schwager
The Art of Thinking Clearly by Rolf Dobelli
Sway: The Irresistible Pull of Irrational Behaviour by Ori and Rom Brafman
Consider automated trading systems
The last point to our trading psychology is considering trading robots like GalileoFX. An automated system removes emotions from the equation because it acts according to pre-programmed instructions.
A robot can make unbiased decisions with no deviation or uncertainty.
Like anything in life, it’s about balance. Appreciating trading psychology is, of course, essential. Yet, you shouldn’t neglect other attributes of knowledge, skill and experience.
While your trading mentality may be sound, it’s pointless without an edge-defining strategy. It is only a piece of the puzzle, but a significant one nonetheless.