Trading Binary Options with Price Action and Trendlines
When trading binary options, it is good to have a lot of clarity in order to know how to pick the correct conditions for placing or exiting new trades.
Using price action and following the general trend helps traders profit more often by just keeping things simple and straight forward.
Even some very experienced traders complicate their trading too much, to the extent that crowded charts make them miss out on good trades.
Simply figuring out the price action and identifying the general trend lets you build a consistent approach with very few disappointments. The following tips will help you read chart prices and help you base the trades on what the market is actually doing, instead of ‘predicting the future’.
Using support and resistance to figure out the price action
The most basic concept of price action trading is the support and resistance zones or levels. These may not be obvious at first glance, but at any moment, the price is always moving in between a certain high price and low price. The support levels represent the points of a chart at which the buyers overpowered the sellers and that caused the price to rise, making a bottom.
The resistance levels are just the inverse of that; where price rose so much due to buying activity, but new sellers emerged and the price had to make its turn for a lower level. That said, the support levels protect the price from further decline, while resistance tends to cap the rising prices.
Chart: Resistance and supports
Levels versus zones
Many traders use a single horizontal line to mark the support or resistance. In that case, they are using a support and resistance line. It is one specific price level. On the other hand, price may not have stopped at a specific level, but you can tell there is a struggle to proceed in the direction it was moving.
The price keeps stalling each time a certain price range zone) is reached even though it is not a fixed mark. That can be said to be a support or resistance zone instead of a level.
Over time, the support and resistance zones help people to make better decisions compared to relying on a single price line. That is because through time, a trader who only watches out for a specific line will miss out on chances just because the price did not reach the exact number he was looking for.
The trader may also be thrown out of the trade because of volatility jumps that frequently occur unannounced. On the chart below, the red line marks the support level while the whole rectangle represents the support level.
Chart: Differentiating a support level and a support zone
In this chart example a bounce occurred at the support level A before turning bullish. If the person waited for the same to happen again, he would have missed the chance at B. That elaborates why you may win more with zones than exact levels.
The momentum factor in price action
The momentum aspect of trading is often ignored when people look for entries. True, a certain market condition my have all the ingredients of a bullish market. However, many people get it wrong when they buy the pair when it has already been overbought.
Entering a trade too late may sometimes lead to an immediate reversal or often, the pair moves into profit levels before reversing back to losing positions as time goes by.
Looking identifying the highs and lows and comparing those to the current price level can give someone a quick snapshot of the trend strength and direction. It is even possible to foreshadow the possible regions where the trend reversals are likely to occur.
Analysing the highs and lows is an activity that can be combined with most of the conventional trading systems so that a trader does not rely on untried stuff. When the price moves more in one direction and the pullbacks are relatively smaller, it can be said that the market is currently undergoing a very strong trend.
When the price is on the other hand struggling to make lower lows or failing to make higher highs, the price action is in that case losing its momentum.
Placing trend-following positions right at the levels where the price is facing low momentum is risky because reversals are likely to occur around that area. Also note that volatility shoots up around the areas where turning points occur.
To understand price action that will help you trade the momentum please visit 7 candlestick formations every binary trader should know.
Beginners can sharpen their momentum reading routines by picking out the swing positions every time they open their charts.
Note those recent points where the momentum buying pressure ended and the trend turned to head lower (swing highs) and those points where everyone stopped selling and instead started buying again causing the price to turn bullish again (swing lows).
The uptrends are notable when there are higher swing lows. The prices bottom out at levels that are higher than the last swing low. On the other hand, a down trend can be picked out when the market seems to spell out lower swing highs and lower lows.
In an uptrend, each swing-low is then a cluster of support while on the down trend, the swing highs are crucial points of resistance. Proximity to the psychological levels (round figure prices) also add to the importance of these swings. On an uptrend, the trader looks to buy cheaply when the price dips slightly.
Chart: Example indicating higher highs with the original low remaining lowest
How to ace your trading using Trend Lines.
Once a trader can make a quick glance and figure out the tops and the bottoms, he is now able to draw trend lines. A trend line is one of the most simple yet effective tool available to the binary options trader to pick out his strategy for the day.
Trend lines, in fact, give a clearer picture of the direction and sentiment that prevails in the market.
Using tops or bottoms to plot trend lines
Create trends by first linking more than one swing high or swing low on a straight line. The idea behind the links is that you can extrapolate further into the next sessions and get an idea of how the price is likely going to move.
Prices tend to stick within a defined movement when the market conditions and fundamentals remain the same. There are bounces that occur frequently on these trend lines and these are excellent reaping grounds for trend traders.
When the price action also breaks these trend lines, a new trend is likely to form on the opposite side.
Chart: A drawn trendline along higher highs shows selling opportunities
Ideally, traders look to enter the trades when the price has struck the trend line or just gets near it but within the trend direction. That is usually a very strong binary signal, especially on the 1H, 4H, or Daily chart.
It’s important to underline that trendlines should only be drawn on the above mentioned charts. Smaller time frames are of lesser significance and should not be used to draw support and resistance levels.
For a binary options trader who want to trade lower time frames such as the 5min, 15min, or 30min (we strongly suggest not to trade the one minute chart since it is mostly market noise and because it is very unpredicatable coupled with the 60 sec expiry time) the best option is to use the trendlines drawn on upper time frames such as the H1 or H4.
Trend lines also guide Forex traders on where to place the stop losses or stop orders in case the trend line is convincingly broken. (For binary option traders stop losses are not very relevant since they are bound by expiry time of the trade.)
This price action cross over the trend line needs to be a convincing one because sometimes, when markets are testing the support or resistance levels, the price action can cross slightly and then revert back within the trend line.
That is an ideal entry opportunity for binary options traders, as well as, Forex traders.
The more the price bounces off a trend line, the higher the chance that there are many other traders who have also noticed that trend and are also playing according to the same script. The trend lines if done well and monitored closely can help traders open multiple good entries consecutively.
Just note that trend lines do not span that long. Trends still get broken and new ones come up making it necessary to look for other newly formed points that can bring about new trends.
Ultimately, the trend is your friend. Always make sure that you stay on the right side of the trend by understanding how the current price action is behaving. To learn to trade trend lines and price action like a professional visit trading live with a professional trader.Published in Education