The reason why trends are so important to traders is because they tend to persist for a period of time. This means when prices are moving in one particular direction, it is reasonable to expect that this movement will carry on for a reasonable length of time hence letting us plot a trading strategy which follows this movement. The end result is that we will have a higher chance of success. This is why traders are always recommended to trade with the trend rather than against it and hence the phrase “The trend is your friend”.
Simple Trend Line Strategy
This is a basic strategy good for beginners. It in fact used one (1) indicator, trend lines, and for that is fairly reliable. The idea is to utilize the trend lines to predict trend. Then use the line as a target entry for forex or binary options positions. In order to place a trade a trend must first be established, this is done by connecting peaks and troughs. If the trend is up, that is two or more consecutive higher troughs, then you trade bullish. If the trend is down, two or more consecutive lower peaks, you trade bearish. Once trend is established you must wait for the price to move back to the trend line and touch it. Once touched, when price begins to move away from the trend line you can enter a trade in the direction of the trend.
Simple Trend Line Binary Option Strategy
Trend lines are one of the oldest and most reliable technical indicators there are. What better way to follow a trend and profit from it’s movement than to use a trend line. It is good that Joseph posted this strategy because all to often traders neglect the simplest, and often most effective, methods of analyzing the market. One refreshing thing about this strategy, Joseph recognizes its limitations and is welcoming of suggestions and tweaks.
This simple trend trading strategy uses the EMA to identify profitable opportunities from the intraday price movements. The strategy requires the identification of crossover points between a shorter time frame EMA with that of a longer time frame EMA. The crossover signals that the market momentum is changing, specifically in the direction of the crossover.
How Trend Line Binary Options Strategy
Trends can easily be indentified on a price chart by averaging out the rate of the price change over a selected time frame. The result of this calculation is what is known as a “moving average” by technical analysis practitioners. There are 2 types of this kind of technical indicator used by analysts and traders namely “Simple Moving Average” (SMA) or “Exponential Moving Average” (EMA). Essentially they perform the same function except that EMA gives more weight to the more recent price changes.
To implement this strategy, you will need:
- A one hour time frame price chart
- A 5 days EMA
- A 10 days EMA
- A 20 days EMA
- Options contracts with “end of the day” expiry time
Although, we are setting the time frame at 30 minutes, this strategy is equally relevant with a shorter or longer time frame.
The trade entry signal will be when the 5 days EMA and the 10 days EMA crosses the 20 days EMA. If the crossover occurrs within the first 4 hours of the trading day, open your position to expire at the end of the day in the direction of the crossover. The main reason for trading only during the first 4 hours of the trading day is to take into account the fact that moving averages are lagging indicators. They only indicate how prices have moved and don’t determine their future movements. We can only infer how they will possibly move and we need to give the market sufficient lead time to correct any pullbacks before trading ends for the day.
The price chart above shows the 5 days EMA (blue) and 10 days EMA (green) crossing the 20 days EMA (red) at the entry point before 11am. You enter the market at this point with a call option set to expire at the end of the day. As we can see, we closed in the money as the option strike price was higher than the entry price.
There are no confirming indicators to help determine trend or to help pin point entry. Further, only using two peaks or troughs to predict trend is not enough for a real strong signal. There is a lot of room for this strategy to create false signals and whipsaws. Additionally, there is no talk of time frame with this strategy. While I think it could be used in nearly any time frame it is important to have an idea of which one to use in order to predict proper expiry time for binary options.
One reason is it’s simplicity. There are not a lot of indicators and esoteric analysis to cloud the screen, confuse traders and ultimately create bad trades. Using only one indicator is not something I often recommend but if you are going to trade that way then using trend lines is one of the better methods. As a basic strategy it is good for newbies. Trend and trend following are among the top ways to profit from trading. Starting with trend lines is the best place. As a tool it can be used in any time frame, the longer the time frame the stronger the trend. Incorporating multiple time frame analysis is one way to improve upon the basic strategy here. It also works well with other indicators. Adding another signal to confirm a trend bounce is a great way to prevent false signals.
The bottom line
If the market is trending strongly, this strategy should produce an overall positive result of around 80%. It is because of this high percentage of success that traders are always advised to trade with the trend. Of course, we cannot expect a 100% chance of success even if we follow every rule in the book and the overall result is still on the positive side with this simple trading strategy.
This is a good basic strategy, but it is a very basic strategy. For one, the trend is not confirmed by time frame or other indicator. Second, signals are not confirmed by any other indication either. In order to get really good, strong, profitable signals I like to see at least two indicator in confirmations. That being said it is a good place to start, especially for new traders. Use it in a longer term, and thereby slower, time frame and build upon it. Learn to predict trend in multiple time frames and add secondary indicators to help pinpoint the best entry points. Candle stick charts are one way, MACD, stochastic or both are another.
image courtesy: trading view