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Binary Options Technical Analysis |Basics and Advanced Methods

Technical Analysis

Binary Options Technical Analysis is very important for every options traders. Trading is an excellent opportunity to earn money and it gets extremely rewarding once you find your preferred style and indicators. Truthfully, you are able to use any form of analysis you wish, such as fundamental analysis and technical analysis. For the purposes of this article, we will be touching on technical analysis. Technical analysis is the preferred study of traders because it focuses on charts and price action rather than efficiency ratios.

If you have decided that Binary Options Technical Analysis is right for your trading strategy, you must decide how to read the charts; patterns or indicators. Pattern traders look for familiar patterns in the chart of the asset to be traded. Some popular patterns are double top, head and shoulders and multiple bottom. On the other hand, we have indicator-based technical analysis that does not rely on patterns. Instead, the strategy uses indicators such as MACD, ADX and stochastics. As far as charts go, resistance and support are the main focus.

Both routes can not be learned overnight but pattern trading can be misleading. In order for the pattern to move the way you are expecting, the pattern must be pretty darn perfect; otherwise it’s a botched trade. Indicator-based trading is much more reliable when it comes to trading signals and the strategy calls for analyzing indicators not searching for patterns.

Whichever route you choose, be sure to make sure you thoroughly understand the concepts before continuing. Many new traders hear about a new strategy and try to implement it right away and, in the process, hurt their account balance. Confidence is needed to be successful in this business but it is healthy to have a little bit of skepticism in place to keep your confidence in check.

The Basics of Technical Analysis

The key to success with technical analysis is learning the trading signals. If your moving averages have a downward cross, this is a sign that you should be looking for a trend change to the downside. This same is true when moving averages show an upward cross. If you are a pattern trader, you must become extremely familiar with the different patterns and be efficient enough to be able to pick the patterns out of the chart. Remember, the actual patterns are not going to be as clean and neat as the examples. Furthermore, if you use indicator trading, you must get used to the indicators and really learn when they give off signals. Being able to identify the trend will help you stay above the rest of the pack and grow your returns. In either case, “the trend is your friend”. Do not trade against the trend, unless your system is giving you signals that the trend is weakening and vulnerable to a correction.

The bottom line here is that technical analysis can be a very rewarding strategy when done properly. You must first educate yourself and determine whether pattern trading or indicator-based trading is your preferred strategy. Whichever path you choose, you must open a paper trading account and educate yourself. Go to the bookstore or an online retailer and pick up a few books on technical analysis, this will help you get off the ground and running. I wish you great success in your trading quest.

Trading Binary Options involves making just simple Yes/No investment decisions. However, a truly successful trader will use a variety of analysis tools at their disposal, both technical and fundamental, to help predict the way the markets will move.  Whilst fundamental analysis focuses on how macro and microeconomic forces can influence prices, technical analysis is the method of analyzing statistics and data of specific options to assist in ascertaining the future price direction.

There are a number of different methods used in technical analysis, but they can all be categorized into two studies – objective and subjective. The objective studies comprise trend following methods, momentum methods, and means reversion methods. Subjective studies comprise support and resistance and pattern recognition.

Binary Options Technical Analysis

Binary Options Technical Analysis is also referred to as the chart analysis which means that the price charts and the history of their movements are used to predict the future price movements.

The Binary Options Technical Analysis is a basic and very important stage of the analysis as it enables to identify the trend type which can be either ascending or descending. To figure out the tendency type and its duration, the financial experts use a great number of tools such as the basic patterns of the technical analysis or indicators. 

Usually Binary Options are marketed as a fast, easy and low-risk way of making money. “It’s easy” they say… just choose a direction and then trade accordingly. Ok, but that is similar to Felix Baumgartner – you know, the guy who jumped from the stratosphere – telling me “Look, guy, you just step off the platform and you are on your way. It’s so easy that everybody can do it”. Well, as you might have thought, choosing a direction in Binary Options and jumping from the stratosphere successfully are no easy feats and although I don’t know what preparations you need to make in order to jump with a parachute, I have a slight idea what Binary Options Technical Analysis is.

Chart Patterns

Charts are the basis of technical analysis, are a graphical representation of an asset’s price movement over time and can come in the form of candlestick charts, bar charts or the common line chart offered to you by almost all Binary Options brokers. The movement of an asset creates certain patterns that repeat themselves and people noticed this from the early days of trading. By analyzing these patterns and comparing them to similar ones that were created in the past, traders can make a prediction about an asset’s next direction. In other words, a Double Top pattern usually triggers a move down, so if the trader spots this pattern on his current chart, he can assume that price will behave as it did in the past and thus a move down is expected. A Double Bottom is a pattern that usually results in a move up so if you spot it on your charts, you know the asset has improved chances of moving north. There are a lot of chart patterns and I don’t want to go into all of them in this article so a good place for you to learn more about them and their predicted outcome is this article: Chart Patterns – Follow the Money. Of course, not all possible chart patterns are explained there – I would probably need to write a book for that – but the most important and common ones are there. Keep in mind that chart patterns are not some mystical way of predicting the market’s next direction with 100% accuracy, but they give us clues about the probability of a move. For example, if several indicators point to one direction and you see a chart pattern that agrees with that direction, the probability of that move occurring is higher. Nothing is 100% certain in trading and don’t believe anyone who tells you otherwise… well, charts move always to the right side, that’s 100% certain.

The Trend

With the use of technical analysis, traders can also determine whether the asset is in an uptrend or a downtrend. The generally accepted rule is that a chart is in an uptrend if Higher Highs and Higher Lows are printed and a downtrend is present if Lower Lows and Lower Highs are displayed. Of course, there are exceptions to this rule so take it with a pinch of salt. And one more thing: if you’ve identified a trend, don’t jump in immediately; look for retracements, weakness or strength, signs of exhaustion, etc. Correctly identifying the trend should be an important part of each trader’s analysis, so if you want to become better at it, I recommend reading The Trend is Your Friend, Simple Trend Line Strategy and Trend Line and Chart Patterns Strategy.

Support and Resistance

Another important part of technical analysis is Support and Resistance. If price rises to a level and bounces lower, failing to surpass it, that level is considered Resistance. When the level is reached again, considering that price bounced off it in the past, usually traders expect history to repeat itself and the asset to bounce lower again. The opposite is true for Support, which is a level that stopped falling prices in the past so traders expect a rise after an encounter with support. Both Support and Resistance (commonly referred to as S/R) are key elements of technical trading, in fact of trading in general. At first it can be tough for newbies to identify on their own S/R levels but some good ol’ indicators can do it automatically. You will find this indicator and a full explanation on how to use it here: Support – Resistance Custom Indicator: Doing The Hard Work For Me and if you are still hungry for more, check out Pivot Points Binary Options – Support and Resistance on Auto Mode.

Technical Indicators

Maybe the most important and complex part of technical analysis is represented by technical indicators such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Stochastic Oscillator, Moving Averages and a lot more. I won’t go into details about these indicators as they are thoroughly explained in standalone lessons but what you need to know is that all indicators are derived from price and they try to represent price action in a different way than candlesticks or bars. However, you cannot rely blindly on indicators to show you how to trade because as I said, they are derived from price and price can change direction when you least expect it. There are different ways of using them but be patient, it will all be explained in our School.

Objective of Binary Options Technical Analysis

Trend Following

One of the most commonly used strategies in Binary Options Technical Analysis is studying past prices to ascertain if a trend has formed in the price of an asset. This can be achieved by looking at the past moving averages of an asset.  A moving average (sometimes called a rolling average) is an average in which the most recent days are removed from the calculated average.  In a 10 day moving average, on the 11th day, the 1st day is removed from the calculated average.

Momentum

The 2nd most commonly used tool in following trends is the MACD – moving average convergence divergence.  This ascertains market momentum and indicates if the momentum is rising or dropping. It measures the daily movements in the moving average by comparing a shorter moving average change with a longer moving average change.  Should the changes of the shorter moving average be larger than the longer moving average change; the MACD will go up signifying increased momentum.  When the reverse happens the MACD is dropping.

Mean Reversion

Mean reversion is a theory that the price of an asset will eventually revert back to its average price (the mean) after moving away from it over an unspecified time period.  A commonly used technical indicator used to determine mean reversion is Bollinger Bands which makes use of a mathematical formula to calculate a certain standard deviation centered on a particular average.

Pattern Recognition

This is where the trader looks to identify a pattern which can be used to predict a future price movement. A good example is called the head and shoulders pattern; where 2 shoulders and a head are formed in the charts and typically the market will drop after the second shoulder has formed.

Support and Resistance

This is a popular tool in technical analysis and is used to determine at which level a price is likely to rise and at what level the price is likely to fall.

A support level is the level where the price is going down and finds support (investors buying). The price then rises from the ‘bounce’ upwards from this level. However, if the price ‘breaks’ this level,  the price  is likely to continue falling until another support level is found.

A resistance level is the other end of the scale. This is where the price goes up until it finds a resistance level (investors selling) and the price starts rising. However, if the price has ‘breaks’ this level, the price is likely to continue rising until another resistance level is found.

For the Binary Options trader, technical analysis should form an integral part of any trading strategy. Learning the techniques involved in technical analysis can prove essential to a trader when they enter and exit positions as well as keeping track of a positions’ risk. Combined with a sound understanding of the fundamentals, technical analysis can be invaluable tool to assist in trading success.

Trading the binary options, you need to do an analysis of the price movements.

Some inexperienced investors are sure that if the price goes up, soon it falls back.  But it’s not always like that. That is why, the successful traders adhere to the specific rules facilitating profit.

One of the main conditions of the successful investments is an accurate forecast of the price movements. Therefore, before you invest, you need to carry out a thorough analysis.  One of the most wide-spread ways is a technical analysis of the binary option trading which we consider below.

Advanced studies in Binary Options Technical Analysis

A great number of rules, criteria and laws have been added to the technical analysis for the past years.

The pattern in the technical analysis is a graphic representation of the price movement based a peculiar principle. Hence, if you see what pattern is forming, you can predict further price movement accurately.

The basic patterns of the technical analysis are as follows:

  • The Triple Tops
  • The Doji
  • The Pin Bar
  • The Triangle
  • The 3 Little Indians
  • The Head and Shoulders

To foresee future price direction, the experts have developed special indicators.

An indicator is a graphic model signaling when the price changes its direction.

The indicators are visualized in on-line charts, so you can just click Indicators and select the indicator you need in the drop-down menu.

You can see how it works in the real price chart on this website.

Any indicator is based on the trend and other algorithms enabling you to anticipate the short-time price trend accurately.

The most frequently used indicators in the technical analysis are as follows:

  •  Moving Averages;
  • William’s Volumes;
  • Alligator;
  • Stochastic;
  • Moving Average Convergence/Divergence;
  • Bollinger Bands

The above mentioned patters and indicators have become the basis of a great number of the binary option investment strategies including a tunneling binary option strategy.

Performing the binary option trading technical analysis by means of the price charts, you can sort out what is the current price trend. Also, you can anticipate its duration whether it’s a short-, medium- orlong-term trend. Using the main parameters of the chart such as the trend direction, its periodicity and volatility, you can figure out when you should sell or buy binary options.   

To make money trading the binary options, use the strategies based on the technical analysis. You can combine several strategies and signals to enhance the reliability of your forecast.

The rules of the market used in the past are still relevant today, and they will be the same in the future.  Therefore, if you use the technical analysis, you can predict the future market trends precisely.

Defining Technical Price Analysis

At its core, technical analysis is a way to evaluate the true value of an asset by analyzing historical price behavior as it is represented on a chart. A technical analyst is not interested in economic data, projections for future corporate earnings or even the identity of the underlying asset. All a technical analyst is watching is the way in which prices have behaved in the past, and this information will be used to forecast how prices are likely to perform in the future.

Since technical price analysts look at the historical performance of an asset (and believe that this performance will be replicated in the future), traders use this approach to define specific price levels that define trades place in active markets. When trading binary options, this essentially means that traders can use technical analysis to create a broad directional forecast (prices moving either up or down) and exact strike prices for executed positions. This information can be critical when defining your parameters for individual trades.

Gauging Supply and Demand

One of the ways Technical Analysis is most useful is in showing areas where basic levels of supply and demand are likely to present themselves in the future. As always, we must remember that excessive supply pushes prices lower, while excessive demand pushes price higher.

If we look at a price chart, see that prices are trending higher, and reach a plateau before reversing, we can see that excessive supply in hitting the market. If prices move upward toward this level again in the future, we would expect a similar market reaction (a downward reversal) and this would be viewed by technical analysts as a prime area for entering into PUT options for that asset.

Conversely, when prices are trending lower (and reach a major trough before reversing), we can see that excessive demand is entering the market as investors look to buy the asset at cheaper prices. If prices move downward toward this level again in the future, we would expect a similar market reaction (an upward reversal) and this would be viewed by technical analysts as a prime area for entering into CALL options for that asset.
Euro Trending Lower

Indicators and Oscilattors

The second way traders approach technical analysis is through the use of indicators and oscillators. In the most basic sense, these tools run prices through mathematical formulas in order to determine when an asset has become oversold (become overly cheap) or overbought (become too expensive). These tools are most useful for traders because they allow us to look at price activity in an objective way (without the human error that is associated with other types of forecasts).

Chart with RSI

Notice the Moving Average in Purple and the RSI in blue.

For these reasons, most active traders implement some type of indicator or oscillator analysis before any binary options positions are established. Some of the most popular examples of this include the Relative Strength Index (RSI), the Moving Average Convergence Divergence (MACD), or the Stochastics oscillator.

Past Price Performance to Forecast Future Direction

Technical analysis methods can prove to be a highly valuable when traders are looking to determine which ways an asset is likely to trade in the future and at which levels reversals will be seen. When traders focus on the historical price behavior of a single asset, it becomes much easier to assess the value of a stock, commodity or currency in an error-free manner. For these reasons, technical analysis has become an increasingly popular staple of the market trading community.

The bottom line: Binary Options Technical Analysis

As you can see, Technical Analysis is composed of more than one thing and the truth is that if you try to use just a single part of it, the success chances drop significantly. Experienced traders combine all the tools offered by Technical Analysis in order to find good trading opportunities and the infamous “Direction” of price. This article barely touches the tip of the iceberg called Technical Analysis because it’s meant to be just an introduction to what will come, so now you can probably understand that brokers don’t know what they’re talking about when they say: “It’s easy. Just pick a direction and trade”.

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Binary Option Collage

All Lessons in Part 1: Technical Analysis
Lesson 1: Technical Analysis in Binary Option Trading
Lesson 2: MT4 Binary option trading
Lesson 3: Binary option Trading tools
Lesson 4: Binary option Trading indicators
Lesson 5: Binary Option Charts and Analysis
Lesson 6: Choose the Right expiry time for Binary option trading

 

About the author

David Richard

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