How to Recognize Trends in the Market
In the financial markets, the trend is everything. New traders are taught a popular market slogan very early in their trading careers that the trend is the trader’s friend until it ends. The binary options market, just like other financial markets, can be traded in a bi-directional basis, with the opportunity to trade and profit when prices are going up or when they are coming down.
There are also trade types which can be used to trade sideways trends. However, the big question is this: which of these binary options trades should you be trading? We will examine how to recognize the trends in binary options, and then do a comparison to show why you should be focusing more on the directional trend-based trades.
Recognizing the trend
Trends are best recognized on long term charts such as the daily charts. A typical daily chart displays price action for an asset over a two or three month period, depending on whether the zoom tool on the chart was used. You will therefore have a clearer picture of the trend using the daily chart. Short term charts such as the 5-minute, 15-minute or 1 hour chart are intraday charts that show a lot of market noise. You may see a price movement on a one hour chart which may look like a trend, but if you look at the situation on a daily chart, it may just be a retracement from the main trend. The chances of getting caught out by a reversal will thus be very high. It is therefore essential to first get a picture of what the trend is, and then to place trades accordingly. Three trends exist in the financial markets: Uptrends, Downtrends, Sidetrends.
An uptrend is seen when prices are heading upwards. An uptrend is characterized by higher highs and higher lows. This is seen in the snapshot on the left. When market is in an uptrend it is also known as a bullish market.
When you’re drawing your trend lines onto your charting window, for an uptrend, you should draw your line below the low data points as these would potentially be your entries if you’re trading with the uptrend. If you are trading against the trend (reversals) you could draw your trend line above the high data points.
The binary options trade which is used to capitalize on rising prices as seen in an uptrend is the CALL trade contract. It is also known as BUY, HIGH, ABOVE or UP binary option, depending on which platform is used. This trade is made expecting the expiry value of the asset to be higher than the market/entry price of the asset.
A downtrend is seen when prices are falling. The candlesticks which constitute price action are therefore seen to form lower highs and lower lows. This is seen in the snapshot on the left. When market is in an downtrend it is also known as a bearish market.
When you’re drawing your trend lines onto your charts, for a downtrend, you should draw your line above the higher data points as these would potentially be your entries if you’re trading with the downtrend. If you are trading against the trend you could draw your trend line below the lower data points.
The binary options trade which is used to profit from falling prices as seen in a downtrend is the PUT trade contract. It is also known as SELL, LOW, BELOW or DOWN binary option, depending on which platform is used. This trade is made expecting the expiry value of the asset to be lower than the market/entry price of the asset.
Then there is the sidetrend, which is seen when prices are in consolidation i.e. stuck in a tight range. The high prices are at almost the same horizontal level and the low prices are also at a horizontal level. The sideways trend is the basis of the IN/OUT or BOUNDARY trade, which is a bet on whether the price will stay within the constituted range (IN) or will step out of the range (OUT).
Different brokers have their definitions for the IN or OUT trade. Some brokers define OUT as price completely stepping out of the price boundaries, while some will include price touching the boundaries as OUT. This trade type is very tricky because price will always break out of any range either to the upside or downside, no matter how long it has been range bound. It is merely a question of time.
Trading binary options in a sidetrend is very risky and it is advisable to trade only during an uptrend or downtrend. You will have a lot more winning trades when you enter the markets during those times.
Trading on trends to the upside or downside
A simple way of trading a trend either to the upside or to the downside is to use price channels. Channels are formed when the trend lines which join the high prices is parallel to the trend line which connects the low prices.
When we have higher highs and higher lows and the trend lines connecting them are parallel, this is an ascending channel which can be used for CALL trades.
If the trend line connecting the lower lows and that connecting the lower highs are parallel to each other, then this is a descending channel which can be used to trade the PUT option.
To trade the Call option, check to see if the trend on the daily chart is upwards. Then step down to a lower time frame chart and see if an ascending channel has been formed. If yes, aim to trade the option when the price has bounced off the lower trend line so that the rising price can put the option in profit.
The entry must be timed properly. Once the candle approaching the lower trend line from up downwards has bounced off the trend line without closing below it, the entry must be made at the open of the next candle as close to the lower trend line as possible. At least three candles must be allowed to elapse before the trade expires, so the expiry must be set to three candle lengths, equivalent to the three times the time frame of the chart.
To trade the Put option, check to see if the trend on the daily chart is downwards. Then step down to a lower time frame chart and see if an ascending channel has been formed. If this is the case, aim to trade the option when the price has been rejected at the upper trend line so that the falling price can put the option in profit.
The entry must be timed properly. Once the candle approaching the upper trend line has rejected at the trend line without closing above it, the entry must be made at the open of the next candle as close to the upper trend line as possible. At least three candles must be allowed to elapse before the trade expires, equivalent to the three times the time frame of the chart.
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