Spotting Trends in Binary Options
Unless you are trading with a binary options broker who allows you to do boundary or no touch trades, you are going to be profiting (or losing) through movements of price. It’s possible to profit from price movements even in a ranging market, but it’s a lot more difficult than trading with a trend. If there is no trend, then obviously you can’t trade with it, and considering most markets seem to spend most of their time ranging, you probably should learn how to profit from that. But when those great opportunities come along, you don’t want to miss the boat. If you’re ready to learn about how to spot trends as they develop, then read on.
Look for Breakouts
Before a trend starts to develop, price is ranging. Price ranges between invisible boundaries of support and resistance, inside of a channel. Channels may be relatively flat, or they may have some angle to them (up or down). Either way, they contain price movement. A breakout is what happens when the price of an asset passes above or below the support or resistance defining a channel.
Beware of Fakeouts
A “fakeout” is exactly what it sounds like—a break out that is fake. Sometimes the market will “test” a support or resistance line, and price will briefly break above or below, and then go right back down again, generating a spike. If you are using bars or candlesticks in a chart, you’ll often see the wick pass above or below the support or resistance line, but the close of the bar inside the range.
Avoiding fakeouts is largely a matter of experience and a good system. Context can help you get a feel for whether a breakout is likely to be real or not. Choppy markets are full of fakeouts. Smoother markets are less likely to generate them, though they are always a possibility.
Make Use of Retracements
Do you know what a retracement is? If you open up any chart of an asset, you’ll see them. They are a ubiquitous part of how price moves for any given asset. Do you notice how even in a strongly trending market, price does little dips or peaks which go counter to its general movement, before resuming its course? Those little reversals are called retracements. A retracement is a temporary reversal in the direction of a financial instrument’s price movement. There is then a correction and price continues along its way. They are common at any point in price movement, and may also occur at the beginnings of trends.
How do you use a retracement to your advantage when you are trying to get in on a trend? Many traders wait through the first retracement when they believe they have spotted a trend, and then enter only after that retracement is complete. A completed retracement tests support or resistance, acting as a confirmation of the direction of price.
For example, maybe you are interested in buying gold, because you believe that you have a signal which is saying that gold is going to break out of its ranging channel and the price is going to skyrocket. You could immediately get into a trade, placing a “buy” order on a binary option for gold. But then when price retraces, you might find yourself losing if the option expires during the retracement. There is also the possibility that you are wrong about the trend in the first place and the signal you are seeing is a fakeout, not a breakout.
You could wait for the initial retracement to take place, and then enter the trade, buying the gold. You may find you have better fortune this way, since market will have tested the counter-movement, support will have held firm, and then the price of gold will go on up. Just remember there will be retracements along the way, even in a strong trend.
Finding Trend Signals
How do you actually spot a potential breakout in the first place? This is where having a trading method comes into play. A trading method tells you when to enter a trade based on fundamental events, indicators, or price patterns. A trading method does not have to be used to spot trends, but many of them are designed for exactly that purpose. Using a trading method helps you to spot the best trade setups. And even if you are trading binary options for fun and not for professional reasons, why trade against the trend when you can trade with it and increase the odds that you will be profitable?
- Fundamental analysis: This involves looking at news releases and other important events in the financial world which can drive price movement in a particular way. Fundamental events can signal trade entries. Note that you have to have a very strong understanding of economics to spot trends based on fundamentals.
- Technical analysis: With trading methods built around technical analysis, you plot indicators on your chart which help you to spot breakouts.
- Price action: With price action, you look for certain formations in candlesticks or bars which can signal that price is about to break out of its range.
Plotting Support and Resistance
No matter what kind of trading method you use to spot trend breakouts, plotting support and resistance can be helpful in that it can help you to see context. Not only will it show you where price is hesitating around current levels, but it can also warn you about other areas where price is likely to hesitate in the future. These areas are also referred to as “pivot levels.” Finding pivot levels can help you to figure out the best expiry times for your trades.
The more times price has tested a certain support or resistance level without achieving a breakout, the stronger that support or resistance level is. It is also helpful to know that support levels, once broken, become resistance levels. Resistance levels, once broken, become support levels. This is why we say that they “pivot.” You can plot these levels on your charts really simply. Using charting software like MetaTrader 4, simply draw a horizontal bar anywhere you see price hesitating. If you then scan forward or backward on your chart, odds are you’ll see other times (even in the distance past) where price hesitated at the same spot before. Often you can see it right in front of you without scrolling at all. Learn more about Pivot Point Strategy here.
Plotting Trend Lines
Once you’ve learned how to identify support and resistance levels and plot them on your charts, you can learn how to plot trend lines. Trend lines are drawn horizontally or diagonally upward or downward in the same manner as support and resistance lines. When you draw a sideways trend, you’ll be drawing two horizontal lines which denote a channel. When price stays inside a channel that goes sideways for some time, we say that price is ranging.
With an uptrend, you will draw a diagonal line along the bottom of the candles. With a downtrend, you will draw a diagonal line along the tops of the candles. You can then add lines across the tops and bottoms as needed to create up and down channels. Some of the simplest trading methods are built around breaks of theses channels. When price breaks out of a horizontal (ranging) channel, it can mean that price is about to start trending up or down.
If you become really good at spotting these breakouts, you can be there to catch the wave and the profits which come with it. You can also trade breakouts of ascending and descending channels which signal reversals. Just remember that retracements are very common, and you will want to make sure you use them to your advantage. If you are not careful, you can get faked out by retracements, thinking there is a reversal, when there is only a test of a support or resistance level. You should now have a better understanding of how to plot basic support and resistance on your charts, look for channels, and spot potential price breakouts. The more you test this out on your own, the better at it you will become!
Learning to Recognize Market Conditions
Whether you have decided to trade binary options casually or seriously, one thing which can help out a great deal with your trading is learning how to recognize and interpret different market situations. Markets, kind of like the weather, have different patterns. You can think of a market like an ocean. Sometimes it’s smooth sailing, while other times the waters are choppy and unpredictable. When you learn to see what’s going on in a broad sense, you can figure out whether you have a good context for a trade or not. Really good trading methods can sometimes take care of this on their own to some degree, but even the best, most reliable systems usually also require a human eye to distinguish whether the market conditions are going to be conducive to profit or not. Here are several different situations you might encounter while trading.
A ranging market is a market which isn’t actively going anywhere (that you can see). Markets usually range within particular channels. A ranging market may be headed in a particular direction, but it isn’t going there fast. There may be a lot of up and down movement within a narrow band. Or there may be little movement in price at all. Most markets spending the majority of their time ranging in this fashion.
Outside the binary options market, it is pretty tough to profit in a ranging market, although it’s essential to learn how in many cases, since trending situations only happen every so often. If you want to learn to profit in a ranging market with binary options, it may be a little easier, depending on what your broker offers you in terms of types of trades. There are a couple of different trade types which could feasibly help you to become profitable when the market isn’t going anywhere.
Boundary trades, also called “range” trades, are trades which are designed to help you profit when price is trading inside a particular range or channel. That range or channel is defined by boundaries which you, as the trader, call. When you take part in a range trade, what you are saying is, “Price isn’t going to move outside of the range defined by these two price boundaries (a high and a low price value) within this given expiry period.” If indeed price does not break either boundary you or the broker set, then you get to profit—all because price did nothing.
Another way you can profit in a ranging market with binary options is by doing a “no touch” trade. With this type of trade, you say that price will not touch a particular value within a given time period. If price touches that value, you lose your trade. If price doesn’t touch that value, then you win the trade. Payout will be dependent on how close that value is to the current market value for a given asset. So you cannot pick a point way off in the distance and expect a good payout (or a trade opportunity at all).
A trending market is one in which price is moving in an obvious direction, and is doing so in a well-defined fashion. While trending patterns still display switchbacks and plateaus, the dominant movement is clearly up or down. Being able to spot trends as they are developing and catch long waves in the direction of profit is the key to success in many markets. While you aren’t as dependent on trending markets in binary options as you might be if you did a more traditional type of trading, they are still some of the best situations to take advantage of when you see them. If your broker lets you use double up or rollover to extend or expand your profit potential, you may be able to ride one of these waves for some time, building up profits all the way.
Choppy markets are easy to mistake at first glance for ranging markets. In some sense, they are ranging markets, but they don’t offer the same trading opportunities. A choppy market, like any other ranging market, isn’t going anywhere specific fast. Unlike a well-behaved ranging market where price is relatively flat, however, a choppy market will feature spikes, whipsaws, and other forms of misdirection which can easily snare an unwitting trader.
How do you know if a market is choppy? One good way to figure it out is to look at the bars. Most broker charts don’t display bars, only lines. It’s a lot easier to tell what’s going on if you can see individual bars with opens, closes, highs and lows. We recommend you download some charting software to get a better look at what’s really going on (it’s free, so don’t worry about cost!).
One warning sign is if you see a lot of bars which have relatively short bodies, but long wicks. If you need to review how to read a candlestick chart, then check this page. When you see a lot of long wicks, that means that the market has been testing higher or lower prices (or both), but still encountering too much support or resistance to go anywhere. Signals which could result in safe trades in normal ranging markets may be false signals more often than not in markets which are choppy. Imagine getting into a trade based on a signal only to find that your entry criterion being met was just a “test” by the market, after which price reversed, causing you to lose money. It’s really easy to end up repeatedly in this situation as the market pivots around, testing the opposite direction over and over again.
How do you profit in choppy markets? Most traders don’t, plain and simple. The best choice is usually to wait them out until things seem to get smoother again. If you don’t want to wait, then look for another asset where trading might go more smoothly. You will only lose money and become frustrated in a choppy market, losing confidence in your trading.
Practice, Practice, Practice
If you want to get better at recognizing market conditions, the best way to do that is to practice. You don’t need to use real money to practice. Try backtesting, where you look at historical charts of different assets and look for trading opportunities. Find out what would have happened if you followed particular entry rules in different market situations. There is nothing quite like experience to teach you how to avoid certain situations and seek out others.
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