Technical analysis of binary options trading

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

The Most Important Technical Indicators For Binary Options

Consider the following bets:

  • Pay $45 to bet that the price of gold will be above $1,250 at 1:30 p.m. today. Get $100 ($55 profit) if you win, lose $45 otherwise.
  • Receive $81 now to bet that NASDAQ US Tech 100 index will go below $2,224 at 2 p.m. today. Keep a profit of $81 if your prediction comes true. If it does not, lose $19.
  • Pay $77 to win $100 if the USD-JPY forex rate goes above 78.06 at 2 p.m. today; you lose $77 if it does not.
  • Gain $33 if you bet on the price of bitcoin will go below $379.5 at 3:00 p.m. today. If it doesn’t drop that much, lose $67.

Welcome to binary options. All or nothing, one or zero, these securities are available on Nadex and the Chicago Board Options Exchange (CBOE). Binary options allow traders to make time-bound conditional bets on predefined values of stock indices, forex, commodities, events, and even bitcoin values. Like a standard exchange-traded option, each binary option has an option premium ($45, $81, $77, and $33 in the examples above), a pre-determined strike price ($1,250, $2,244, 78.06, $379.5), and an expiry (1:30 p.m., 2 p.m., 3 p.m. today).

The differentiator is the settlement price that remains fixed at $0 or $100, depending on the option condition being fulfilled. It keeps the net profit (or loss) fixed. The option premium also remains between $0 and $100. (Related: Guide to trading binary options)

Calculating Probability

Since binary options are time-bound and condition-based, probability calculations play an important part in valuing these options. It all boils down to “What is the probability that the current gold price of $1,220 will move to $1,250 or above in the next four hours?“ The determining factors include:

  • Volatility (how much and is it sufficient to cross the threshold/strike price?),
  • The direction of the price move, and
  • Timing.

Technical indicators suitable for binary options trading should incorporate the above factors. One can take a binary option position based on spotting continued momentum or trend reversal patterns. Let’s look at some of the popular binary option technical indicators:

  • Wilder’s Directional Movement Indicators (DMI) Average Directional Index (ADX): Composed of three lines, namely ADX, DI+, and DI-, and their relative positions, this indicator aims to capture the strength of an already identified trend. Here is the table for interpreting the trends:

Position

Momentum

ADX Value > 25

ADX Value

Here is an illustration, using 3M Company (MMM) stock:

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

Image courtesy StockCharts.com

Depending upon the identified momentum and trend strength, an appropriate buy/sell position could be taken.

  • Pivot Point(in conjunction with support and resistance levels): Pivot point analysis helps determine trends and directions for any given timeframe. Because of the flexibility in timing, pivot points can be used for binary options, particularly for trading highly liquid major currencies. A good example (with calculation and graphs) is included in the article Using Pivot Points in Forex Trading.
  • Commodity Channel Index (CCI): The CCI calculates the current price level of a security relative to the average price during any given timeframe. The average price level is usually the moving average. Time periods can be selected as desired, allowing the trader flexibility in choosing when a binary option expires. The CCI is useful in identifying new trends and extreme conditions of overbought/oversold securities. It is very popular among day traders for short-term trading and may be used with additional indicators such as oscillators. In the below formula “price” is the asset’s current price, “MA” is the moving average of the asset’s price, and “D” is the normal deviation from that average. High values above +100 indicate the start of a strong uptrend. Values below -100 indicate the start of a strong downtrend. The CCI is computed with the formula:
  • Stochastic Oscillator: In an interview, the creator of the Stochastic Oscillator, Dr. George Lane, said “it follows the speed or the momentum of price. As a rule, the momentum changes direction before price.” This important underlying detail indicates extreme cases of overbuying and overselling, allowing reversals for bullish and bearish phases to be identified. The crossover of %K and %D values indicate trade entry signals. Although a 14-day period is standard, binary option traders can use their own desired timeframes.

%K = 1 0 0 ( C − L14 H14 − L14 ) where: C = most recent closing price L14 = low of 14 previous trading sessions H14 = highest price traded during same 14-day period \begin &\text <\%K>= 100 \left ( \frac < \text– \text > < \text– \text > \right ) \\ &\textbf \\ &\text = \text \\ &\text = \text \\ &\text = \text \\ \end ​ %K = 1 0 0 ( H14 − L14 C − L14 ​ ) where: C = most recent closing price L14 = low of 14 previous trading sessions H14 = highest price traded during same 14-day period ​

Levels above 80 indicate overbought, while those below 20 indicate oversold.

  • Bollinger Bands: Bollinger bands capture an important aspect of volatility. They identify upper and lower levels as dynamically generated bands based on recent price moves of a security.

Commonly followed values are 12 for simple moving average and two for a standard deviation for top and bottom bands.

Contraction and expansion of the bands indicate reversal signals that help traders take appropriate positions in binary options. Overbought situations are indicated if the current market price (CMP) is above the top band. While overselling is indicated when the CMP is lower than the lower band.

A challenge in binary option trading is correctly predicting the sustainability of a trend over a given period. For example, a trader may take the right position for an index, predicting it would hit 1250 at the end of a five-hour period, but the level was achieved in the first two hours. Constant monitoring is needed for the rest of the three hours if the trader plans to hold the position until expiry, or a predetermined strategy should be executed (like squaring off the position) once the level is reached.

The Bottom Line:

The technical indicators discussed above should be used for timely actions with constant monitoring. One major disadvantage with technical indicators is that the results and calculations are based on past data and can generate false signals. Traders should practice caution with detailed backtesting and thorough analysis for high-risk, high-return assets like binary options.

Market Analysis For Binary Options

Remember back when you enrolled yourself into the School of Pipsology, we talked about “The Big Three” types of market analysis. In case you forgot, they are:

Fundamental Analysis

Trading the News

One way to make use of fundamental analysis would be to go with a trade-the-news strategy.

For binary options, this can be particularly effective when you trade simple Up/Down options.

After all, you would simply need to get an idea how price may react to better/worse than expected data and how strong the reaction may be. You just have to be confident that price can reach the strike price of the option that you bought.

For example, you plan to trade the Australian retail sales report. Let’s say you have a bullish bias on the results.

Chances are that a better-than-expected result will spur the Aussie to new highs, so you would look to buy a “call” option on AUD/USD.

Now let’s say that, as you expected, we saw a better-than-expected result. Luckily, AUD/USD also rose, rising above the strike price. Paycheck time, baby!

Of course, there are a couple of factors to take into consideration when playing the news.

First is the potential for volatility. When playing a news report and buying a binary option, you have to be fairly confident that the event will spark enough volatility so that price can reach the strike price and stay above/below that level.

If you try trading a report that rarely causes a ripple, you’ll be throwing money down the drain.

Second, you have to factor in the time component of binary options.

When trading binary options and implementing a trade-the-news strategy, you may also want to consider going with one-touch options since price would only have to touch and not necessarily close at a particular level.

You can also try the Out of Range options if you expect the price to move with strong momentum away from its previous range.

With this option you don’t have to pick a direction, just decide whether or not the market will move big time in one direction or another.

Technical Analysis

Love using those fancy-schmancy indicators like moving averages, Bollinger bands, and Stochastic?

Don’t be afraid to slap these indicators on your trading charts when you plan to trade binary options!

These are used across all sorts of trading markets and not just spot currencies.

Just make sure you have a good understanding of how each indicator works before incorporating it into your analysis.

Studying technical levels and inflection points may also prove helpful when you trade binary options.

Let’s take a look at this example on GBP/USD.

Price has just broken down from a double top.

With this behavioral pattern, price normally continues to trade lower at a distance equivalent to the height of the double top.

One way you could play this is by taking a One-Touch trade.

If the strike price that your broker offers is somewhere between 1.5450-1.5550, which is within the height of the double top, buying a “put” option might be a setup worth considering.

Sentiment Analysis

Sentiment analysis is the task of measuring the market’s current “feeling” with regards to broad risk flows.

Are traders confident in buying up risky assets or would they rather reduce risk by buying safe-haven assets or going into cash? This type of analysis will prove to be particularly useful when trying to hop on trends.

Will EUR/USD break for new highs? Or do you think the trend is overdone and there’s not enough momentum? You can use sentiment analysis to gauge how the market is feeling.

If you’re fairly confident that market sentiment will favor a risk-on environment, you could consider purchasing a “call” option on a risk currency or asset (e.g., Australian or New Zealand Dollar, Equities, Commodities, etc.)

On the flip side, if you think a reversal in sentiment is in play and depending on how overdone you believe the move is, you could consider purchasing a “put” option on those same risk currencies or assets.

Combination

Just as in spot forex trading, it’s not necessarily a case of choosing which type of analysis you’re going to use because they’re not mutually exclusive.

In fact, you can combine all of these types of analysis to form the basis of any trade that you take.

Fundamentals can help give you a bias as to what direction you want to take, while technical analysis will help determine the chances of the market reaching, breaking and finding support/resistance at a certain price.

Meanwhile, sentiment analysis may let you know whether the market is in a risk-on or risk-off mood.

In the end, the key is for you to learn from all your mistakes and gain experience. Over time, this process will help you fine tune your analysis and help you develop good trading practices.

Binary Options Technical Analysis

Here we explain the main technical indicators you may use for binary options trading. The assets offered in the binary options market are the same you’ll see in other markets. This means that binary options traders have access to the same charting data, statistics and analysis strategies that are used by traders in other markets. Every trader knows that there are two types of analysis – fundamental and technical. In a previous post we spoke about fundamental analysis, so now we’ll continue by familiarizing you with technical analysis and how it can be used to predict the market’s behavior.

Technical analysis is entirely based on charting data, spotting repetitive trends and making a speculation based on the information you collected. Technical analysis can be arranged into three small categories:

Best Forex Brokers for United States

1. By using and analyzing chart information (candlesticks and patterns)
2. By using price action
3. By using technical indicators

Technical Indicators You Should Use:

  • Candlestick Charts
  • Open High-Low-Close Chart
  • Line Charts
  • Bollinger Bands
  • Pivot Point
  • Resistance
  • Support
  • Trend Line
  • Average Directional Index
  • Commodity Channel Index
  • Relative Strength Index
  • Accumulation/Distribution Index

Use of Chart Information

Charting data is relatively easy to read as long as you have some experience and knowledge of how these charts work. By reading the data provided by candlesticks, you can easily predict the future price movement of a specific asset. Candlesticks are the number one helper of every trader, because they can form patters and give you valuable information about past, present and future trends. There are many candlesticks patterns that can be used to predict an asset’s price movement, so don’t hesitate to look for additional information on the web, and to get familiar with all candlestick patterns.

There are also some less reliable candlesticks which are usually used in combination with technical indicators in order to provide a more accurate prediction. As a trader, you won’t need to learn about all candlestick patterns and chart patterns, but it is highly recommended to read about as many of them as you can. This will help you get a better understanding of the way these patterns work, and help you become a more successful trader.

Use of Price Action

The accuracy of technical analysis can be improved by taking advantage of price action analysis. Of course, in order to do this, you’ll need to have access of Level II pricing system. Unfortunately for you, this feature isn’t offered by many brokers, so you’ll need to see if your broker provides access to this helpful function.

By using price action, you can see the trading volume which a specific asset generates. Apart from the total trading volume, you’ll also receive details about the actions of other traders – do they sell the asset or buy it. For example, if many people sell the same asset at the same time, then its price will most probably start going down. If you notice that a specific asset is being traded in one direction, and in large volumes, then it is very likely that its price will follow the direction. If the asset is being bought, then the price will go up and vice versa.

Use of Technical Indicators

Technical indicators aren’t always necessary, but they can help you make better predictions. Most traders prefer to combine them with candlesticks, because they will either support or oppose the opinion you got from candlesticks. There are several types of technical indicators which are split into two categories – trend-seeking indicators and momentum indicators.

Conclusion

One of the problems most traders face when they start working with binary options is that they may not have access to some of the most popular technical indicators and charting tools. This is why it is very important to check your broker’s trading platform and see if it gives you access to the functions you need the most. Make sure that you take full advantage of the tools your broker provides, because with their help you can significantly increase your chances of completing successful trades.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

Like this post? Please share to your friends:
How To Start Binary Options Trading 2020
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: