The use of trend lines may be one of the most basic trading tools in binary options, but no less sufficient nonetheless. Although some traders think that the use of trend lines is too simplistic, in fact they are extremely effective and valuable tools which can result in great success for a trader. Any trader who learns how to use trend lines to analyse the patterns that the market is forming will need to rely less on the use of technical indicators to inform their trades.
As may be surmised, in an uptrend, market prices will continue to rise, producing higher lows as well as higher highs. On the other hand, a downtrend indicates a situation where the prices produce lower lows as well as lower highs.
When a binary options trader determines the trend lines on their chart, they can find the market sentiment. If sentiment appears to be strong, it may be tempting to go with popular sentiment, however if that sentiment appears to be exceptionally strong, this could be a sign that the market is about to change trend, just as much as it could be a signal that the current price action will continue. Trend line analysis helps an investor to predict the future, defining the boundaries of support and resistance.
Drawing a Trend Line
It is important to know how to properly draw a trend line in order to correctly judge the price action of a specific asset. To do this, in a bullish trend a trader should locate the lowest low on their chart together with the next lowest low and draw a line between them, carrying the line onwards as a projection. In a bearish trend, a trader should locate the most recent high and the one immediately lower than it and draw a line between them extending it into the future.
Once you have done this, you will need to know how to identify an inner or outer trend. An inner trend line is an indicator of a move in momentum and sentiment and is a sign that market conditions are rapidly changing. An outer line is able to be used as a boundary at which the price will struggle to break through. Both inner and outer trend lines help traders to choose the correct striking price for their options.
What are Price Movement Corridors?
A price movement corridor refers to the potential price swing spread to each direction. This can identify the market’s general sentiment and assists in making projections. To determine the corridor, a trader must plot two parallel lines on the chart. For example, if a downward trend reveals the market sentiment is towards selling the asset and the current trend continuing, a trader is able to purchase put options safely using the upper line as a level of resistance and the bottom line as a level of support.
One key strategy when trading binary options is working with trend lines and the lines of support and resistance. The longer the lines of resistance and support remain unchanged, the more reliable the trend and the more obvious the forecast to be made. Also, the more frequently the asset’s price has tested the lines of resistance and support and failed to break them, the stronger the trend is.
A Trading Strategy for Trend Lines
When looking to purchase in the market, the best idea for a trader is to purchase near an area of support, and conversely if they wish to sell, they should do so near an area of resistance. This is because the strong level of support indicates that the price low has been established while strong resistance reveals that a price high has been established. Trading close to these levels assists a trader in achieving their goal of selling high and purchasing low and this is always a profitable strategy.
Although this sounds very simple, in real life, the lines are often broken and this needs to be incorporated in your trading strategy. Once a line has been broken it changes character with a line of support switching to a line of resistance and vice versa. It is important to determine the strength of these lines as if they are very strong, the more confidence a trader can have in using this lines to inform their trade.
Other educational articles
- Using Fibonacci Confluence Zones To Trade Binary Options
- Finding The Right Striking Price Using Fibonacci Levels Is Key In Successfully Trading Binary Options
- What is the Trend Following Binary Options Trading Strategy?
- Use the Straddle Strategy for a Possible Put and Call Double-Win
- How to Use a Risk Reversal Strategy to Avoid a Large Part of Your Risk While Trading Binary Options
- What is the Pinocchio Binary Options Trading Strategy?
- Naive trading rules in financial markets and wiener-kolmogorov prediction theory: a study of” technical analysis” Neftci, S. N. (1991). Journal of Business, 549-571.
- “GP-evolved technical trading rules can outperform buy and hold.” Becker, Lee A., and Mukund Seshadri (2003)