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Option Trading Chart Patterns – 5 Best Chart Patterns For Option Trading

Do you know that Option Trading Chart Patterns can help you achieve a 70% win rate?

Option trading will become much easier if you know which chart patterns to use for maximum accuracy and a higher win ratio.


Table of Contents


I’ll show you exactly how to use chart patterns for option trading, which chart patterns are the best for option trading, and how to improve option trading with chart patterns.

I back tested over twenty-five trading chart patterns before settling on the top five option trading chart patterns.

Back Test Results

Option Trading chart patterns back test
Back Test Results

Option Trading Chart Patterns Analysis

Chart patterns are widely used in all types of trading. However, chart patterns have a very special significance in option trading; in fact, chart pattern trading is one of the most widely used trading strategies for option trading.

Apart from simply anticipating a directional move, there are some specific requirements from technical analysis and chart patterns to become profitable in option trading.

These requirements arise due to fact that option trading is a very different derivative instrument than stocks and futures.

Let us list down what are the four things you need for analyzing option trading chart patterns :-

  1. Risk Profile

  1. Accuracy

  1. Probability

  1. Momentum
option trading chart patterns analysis
Analyzing option trading chart patterns

1️⃣Risk Profile

Although all types of trading are risky, option trading is a riskier instrument due to the fact that there are many factors in option trading that can lead to price change apart from the directional move, and thus money management becomes more important in option trading. Option trading Chart patterns that allow for money management are considered far superior to those that do not.

For example, an option trading chart pattern is preferable if it is flexible enough to provide systematically adding the quantity throughout the price move.

2️⃣Accuracy

It is preferable to have very accurate entry and exit points for option trading. For example, if the price move is likely to move higher, the option trading chart patterns should clearly identify a specific price for entry where there is a higher probability of prices moving high.

Lacking a clear identification of price levels to enter and exit can lead to theta decay in option trading.

3️⃣Probability

Finding the best option trading chart patterns necessitates considering the probability of profit for all patterns. According to our research and back test chart patterns, the “Pennant” chart pattern has the highest profit probability – 73.87%, followed by the “Flag” chart pattern, which stands at 71.27%.

4️⃣Momentum

Momentum is one of the most important metrics for option trading; a price move with good momentum frequently results in very good profitability.

Option trading chart patterns which provide highest momentum breakouts are the ones which we should be looking into.

The Top 5 Option Trading Chart Patterns

Top 5 Option Trading Chart Patterns are listed and explained in this section. Its important to note that option trading requires accuracy, momentum, sound risk management and good probabilistic edge. Hence you will find a rating system based on these factors for each pattern which is based on back testing results.
 
option trading chart patterns explained
Option Trading Chart Patterns

1️⃣ Flag Chart Pattern

option trading chart pattern flag

The flag chart pattern is without a doubt the number one chart pattern in terms of net gain% for option trading; one of the reasons it is so effective in option trading is due to its simplicity and good risk management capabilities.

  • It is critical that a trend exists prior to flag formation.

  • If a breakout occurs in the direction of the trend, the trend may continue in the same direction.

  • Call options can be purchased if a flag breakout occurs in the same direction as an uptrend.

  • If a flag breakout occurs in the opposite direction of an uptrend, there is a very good chance of a trend reversal, and buying put options could be a very good trade.
Option Trading ParameterRating for Flag Chart Pattern
Risk ProfileLow ⭐⭐⭐⭐
AccuracyHigh ⭐⭐⭐⭐
ProbabilityHigh ⭐⭐⭐⭐
MomentumGood ⭐⭐⭐⭐
Flag Chart Patterns for option trading

2️⃣Pennant Chart Pattern

pennant for option trading

Pennant chart pattern is the best option trading chart pattern with the highest profit probability. I have personally used the pennant pattern for many profitable option trades. There are many things I like about pennant chart patterns, but one of the best is that the stop loss is reasonable and low, which increases net profitability in the long run.

  • Pennant chart pattern can be traded in same way as flag chart pattern

  • Stop loss should be placed below second leg

  • Breakout in direction of trade gives us the trend continuation signal

  • Breakout opposite to direction of trade signals trend reversal.
Option Trading ParameterRating for Pennant Chart Pattern
Risk ProfileLow ⭐⭐⭐⭐
AccuracyHigh ⭐⭐⭐⭐
ProbabilityHigh ⭐⭐⭐⭐
MomentumVery Good ⭐⭐⭐⭐⭐
Pennant Chart Patterns for Option Trading

3️⃣Double Top Chart Pattern

option trading double top chart pattern

Double top chart patterns can be used for long-term option trading goals. Double top patterns frequently signal very good risk-to-reward trades.

  • Double top pattern gives bearish trend reversal signal.

  • When breakout below neckline happens wait for retracement

  • Once neckline becomes resistance its time to buy put option

  • You can shift put options as market moves in bearish category ( always trying to buy put options at the money)

  • Triple top patterns can be traded in same way as double top patterns

  • Stop loss should be above neckline resistance level

  • Always book profit systematically after the put option becomes in the money
Option Trading ParameterRating for Double Top Chart Pattern
Risk ProfileMedium ⭐⭐⭐
AccuracyLow ⭐⭐
ProbabilityMedium ⭐⭐⭐
Momentum Good ⭐⭐⭐⭐
Double Top Chart Patterns for Option Trading

4️⃣Double Bottom Chart Pattern

double bottom chart pattern

The double bottom chart pattern is the inverse of the double top chart pattern.

  • The double top pattern indicates a bullish trend reversal.

  • When a breakout occurs above the neckline, wait for a retracement.

  • When the neckline becomes a support level, it is time to buy a call option.

  • You can shift call options as market moves in bullish zone ( always trying to buy call options at the money)

  • Triple bottom patterns can be traded in same way as double bottom patterns

  • Stop loss should be below neckline support level

  • Always book profit systematically after the call option becomes in the money
Option Trading ParameterRating for Double Bottom Chart Pattern
Risk ProfileMedium ⭐⭐⭐
AccuracyLow ⭐⭐
ProbabilityMedium ⭐⭐⭐
Momentum Good ⭐⭐⭐⭐
Double Bottom Chart Patterns for Option Trading

5️⃣Wedge Chart Patterns

wedge chart pattern

Wedges form as a result of two trend lines approaching each other. Wedges are classified into two types: rising wedges and falling wedges. If used correctly, wedges can provide good profits for option trades.

Rising Wedge:-

  • A rising wedge indicates a strong possibility of an uptrend reversal.
  • If such an opportunity exists, traders should begin buying puts once the lower trendline has been broken.
  • Stop loss should be placed above the trendline. Because trendlines are converging, traders have a better stop loss point.

Falling Wedge :-

  • A falling wedge represents an opportunity of downtrend reversal
  • Falling wedge can be traded with help of buying call option when breakout from upper trendline happens.
  • Stop loss in such case should be placed just below second trend line.
Option Trading ParameterRating for Double Bottom Chart Pattern
Risk ProfileLow ⭐⭐⭐⭐
AccuracyMedium ⭐⭐⭐⭐
ProbabilityMedium ⭐⭐⭐⭐
MomentumAverage⭐⭐
Wedge Chart Patterns for Option Trading

Best Tips for Option Trading Chart Patterns

Option trading with chart patterns can be both difficult and profitable; Option trading chart patterns are widely used in derivative contract trading.

When trading option contracts with chart patterns, one should always consider the bigger picture, which includes the price action behind the patterns as well as the psychology of smart money.

Here are the best five tips that will help you trade options with chart patterns:

  1. Wait for a chart pattern to fully unfold before entering the trade. Timing is everything in option trading, and if you think you entered the trade prematurely, simply exit the trade and wait for a better opportunity to emerge, as in option buying you cannot afford to wait for momentum to build up.

  1. Sometimes chart patterns do not work as expected, and if this occurs and you realize something is in uncharted territory (something you have no idea about), you simply have to wait and let the price be your lighthouse.

  1. Failed chart patterns are often good trade opportunities. You just have to reverse the original trade idea based on chart pattern, but wait if you are not comfortable with reverse trading because it take practice and experience.

It takes a great trader to recognize when he is on the wrong side of the trade, and an even greater trader to recognize and reverse his position when he is on the wrong side of the trade.

  1. Combine your knowledge of chart patterns with candlestick patterns to increase your chances of winning even further.

  1. For trading chart patterns, choose your timeframe carefully. Some patterns do emerge in a short time frame, such as 10 minutes, but they do not appear to emerge on a larger time frame, which means that when analyzing chart patterns, stick to one time frame or you will get many conflicting signals.

“The best trend followers are the ones that have made peace with themselves, “This is what I do in the case of things going up or down, with the value increasing and decreasing. This is how I behave and this is how I act,” and of course as you know, there are all kinds of things you can do when things go up.”
-Ed Seykota

Author is Senior Technical Analyst
At Bulls Arena Trading
info@bullsarenatrading
New Delhi
India

Bulls Arena Trading

[Explained:- Chart Patterns For Day Trading ]

Author

  • RUPIN JOSHI

    Rupin Joshi Senior Technical Analyst, Finance Writer, and Trading ExpertRupin Joshi is a seasoned Trading Expert with over a decade of experience. As a prolific Finance Writer, he has authored numerous research papers in Technical Analysis and Price Action. Rupin's insights and strategies have earned him global recognition, including awards in Trading Competitions. Currently serving as the Director at Bulls Arena Trading, he continues to empower traders and investors with his expertise and innovative approaches.

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