The Pinocchio Strategy has earned its name because when you look at a candlestick chart while trading binary options, you will find an individual candlestick with a small gap between the opening and closing price, but a large line indicating that during the timeframe indicated, either the high or the low was an extreme outlier. This strategy is fairly reliable, but before you use it, you need to know how to properly apply it and what pitfalls to look out for.
Application Will Be the Key
This strategy is pretty easy to recognize, which makes it a very popular one. It is a visual indicator, but it relies heavily on trader psychology and price motion, giving it a double whammy when it comes to efficacy. Thanks to the fact that the long wick, this signal indicates that traders are not confident in the reversal that is occurring, but rather expect the old trend to continue. Oftentimes, these kinds of things become self-fulfilling prophecies, allowing it to be extremely effective when you apply it to a larger trading strategy.
The best way to approach using this strategy is to observe a few different assets at once. Once you notice that an asset is in a confirmed trend—it can be either an upward one or a downward one—then you want to start looking for signs of a reversal. It should be only in the beginning stages. At this point, if it is going to happen, the “Pinocchio” candlestick should emerge. When it does, you should execute an option in the direction of the previously confirmed trend. If it was going down, then the Pinocchio candlestick should be a highpoint. Once this happens, execute a put option. If it was going up, the Pinocchio candlestick should have a wick going downward. When you see this, execute a call option.
Timing on this is essential. If you are looking at a 5 minute chart, your option should have an expiry of no less than 5 minutes, but no more than 15 minutes. If you are looking at a 1 minute chart, then your trade should range somewhere between 60 seconds and 5 minutes. Regardless of what timeframe you are trading, you should execute the trade as quickly after the Pinocchio candlestick as you can.
Drawbacks Do Occur
The biggest drawback to this strategy is that it won’t materialize often. When the pattern arises, it is very reliable as the long wick indicates trader indecisiveness, but this isn’t a pattern that pops up every single day. That’s why you should monitor a few different assets over a few different timeframes in order to try and maximize your chances of success. If you are going to use this strategy, you need to be sure that you have other strategies and indicators that you look to. If you don’t, you will not have enough trading opportunities to make your binary options trading worthwhile.
Another drawback to this strategy is the fact that it can be easy to grow complacent with it. Many traders are tempted to risk too much on this because of its high likelihood of success. This doesn’t mean that it is infallible, though. The chances of success are only slightly better than other visual signals or patterns, but it can still fail. You should be sure not to risk too much, but rather stick to your normal 1 to 2 percent risk per trade. Because this strategy occurs so infrequently, this can be an easy trap to fall into, which is why the discipline of an advanced trader is an absolute must if you are going to use this in your trading.
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