Despite the overt morbidity of the name of this strategy, it is a fairly popular strategy to use for establishing call option position when it comes to binary options trading. It is also a very easy to use tool when it comes to quickly analyzing potential positions and finding just the right entry point. Let’s look at how to use this trading strategy, and what you should look out for when using it.
Applying the Bullish Abandoned Baby Strategy
First, the bullish abandoned baby is a pattern that we are looking for while using candlestick charts. It is called by this name because the telltale pattern consists of two large candlesticks with a small candlestick between them, yet far below. It gives the impression that the two larger candlesticks have abandoned the tiny one as they go up in price.
The pattern consists of three individual candlesticks. The first is a downward trending one, and typically consists of a large range of prices, with a high opening, and a low closing. The next is also a downward trending one, but has a very tiny range, with the opening and closing near the body of the session. This is going to need to have both opened and closed below the lowermost wick of the previous candlestick. The final one is upward trending, and the opening is well above the entirety of the “baby.” The closing should be much higher, and this should be indicative that an upward trend is underway, giving you cause to initiate your call option.
When you see this pattern, it is an indication that prices are going to rebound. You should initiate a call option here that is relative to the candlesticks that you are using. Like many other candlestick methods, you need to give yourself enough time before the expiry so that the markets can react to the information that you have, but not as much as you typically would. One of the nice things about this method is that it marks that a price reversal has already begun to occur. If you are looking at one minute candlesticks, then a 1 to 5 minute call option is correct. There is a danger in going out too far beyond this because of the fact that the trend has already begun, and if it is a false indicator, the psychological impact that it has on short term traders will fizzle out before the trade expires. In this respect, it is a better tool for ultrashort term traders than many other visual indicators out there, although, as you will see, it is not perfect.
Drawbacks to this Strategy
Like other visual indicators, the bullish abandoned baby is flawed in that it doesn’t measure the asset’s movement or strength directly, but instead looks to the patterns that this movement creates. It’s still a strong indicator because the visual data left behind is based upon those things, but it’s not a direct representation, and as a result of this, there can be discrepancies in how the asset will move afterward. Because this is linked to actual information, and because it is a well-known indicator, there is a psychological impact upon traders that see this pattern, which can lead to the desired result anyway.
Do be careful about timing your trades with this. When using binary options, it is important that this pattern be at the bottom of the chart, as close to the support line as possible. If your expiry is out too far, you may also lose money, even if you are correct in your interpretation of things. The more experience you have with using candlestick charts in your binary trading, the less of a problem this will become.
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