The role of technical analysis in binary options trading

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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

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ADX Value > 25

ADX Value

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

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.

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:

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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.

The role of technical analysis in binary options trading

The vast majority of newcomers in binary trading, completely unaware of the principles of work on the stock exchange and in matters of market forecasting, are beginning to trade options. The natural result of this activity is the loss of investment capital. To remedy this situation, we decided to consider the role of technical analysis in trading in the options market, as well as provide information on the classical forms of forecasting that this approach offers estimating trading quotes.

So, first about the role of technical analysis. In binary trading, the main condition for obtaining a profitable trading position is the generation of a forecast that has the maximum probability of confirmation. To determine the future direction of trading quotes of the underlying asset, there are two areas of analysis – fundamental and technical. The first variant of generating forecasts is in the vast majority of options the prerogative of professionals and financial analysts with extensive experience in trading. The reason for this is complex assessment techniques and a wide range of indicators that need to be analyzed to form a trade forecast. Technical analysis in this regard is simpler and is available to a simple investor of the online market for binary options. The techniques of this direction of market valuation allow identifying high-cyclical signals on the market for registration of trade rates, which are often formed with the help of automatic or semi-automatic tools. This allows us to use the principles of technical analysis even for traders with minimal experience and knowledge in trading. At the same time, the effectiveness of using this signal generation technique is characterized by the maximum level of efficiency and allows you to obtain the highest financial indicators of trading in binary options. Thus, the role of technical analysis in option trading is invaluable.

Classical techniques of technical analysis

This direction of generation of forecasts differs by an extremely broad list of various approaches and forms of strategies. If you analyze their main list, then all systems of technical analysis can be divided into conditional types.

• Indicator strategies

In this mode of forecast generation, specialized automated tools are used to assess the market and generate trading signals. Indicator strategies are the simplest and most effective technique for technical analysis, which allows you to receive more than 60% of successful contracts in a stable mode. A simple example is a strategy based on trend and oscillator indicators, the system of signals of which gives 85% of the effective forecasts for binary options:

• Graphical Analysis Systems

In this mode of technical analysis, simple regularities are used, in which asset quotes in the process of fluctuation form a variety of reversal levels and geometric shapes, allowing the trader to execute option contracts under the most favorable conditions. A classic example of this kind of strategy is working at the trend levels – support and resistance. Simple signals in the form of rebound quotes from the trend level or in the level breakdown format allow you to make up to 80% of the effective deals on the market:

• Trading on Japanese candlestick patterns

Japanese candles are a peculiar mode of charting quotes, which is distinguished by a wide set of trading patterns that are effective for trading, allowing you to clearly identify the upcoming market movements. Candlestick patterns have many varieties and make it possible in a universal mode to generate trading forecasts. A classic example is the reversal pattern “Absorption”, which identifies the initial moment of the formation of a new trend:

As you can see, the variety of methods of technical analysis and a set of its technical tools gives a wide range of possibilities for investing funds in a binary market. Any trader for good financial results simply needs to thoroughly study the techniques and strategies of this area of ​​market analysis!

“General Risk Warning: Binary options trading carry a high level of risk and can result in the loss of all your funds.”

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