Lesson 6 - Binary options trading strategies TRADING STRATEGIES If you were attracted by binary options, you probably have heard about the trend and trading strategy based on it. Is that so simple? To start with, lets analyze what is the trend and what kinds of trends we can come across. The market is always dynamic; the price can go up or down. If the market goes up - such tendency called uptrend. A series of higher lows and higher highs tells us about an uptrend. Each next minimum must be higher than the previous one, as well as next maximum must be higher than the previous one. Don't be afraid, it is simple to determine the trend: if the line goes from the lower left corner to the upper right of the monitor, it means you see an uptrend.
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Series of lower minimums and lower maximums will tell us about a downtrend, where each next maximum will be lower than the previous one, and the next minimum will also be lower.
There are periods when it is hard to determine the trend and price moves within the corridor, without any trend. Such tendency called flat, range or a sideways move. TREND IS YOUR FRIEND? open in browser PRO version
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Usually a trend corresponds to a particular timeframe. And depending on a timeframe the trend can be divided on short, medium and long term. In the long term trend, there might be several short term trends in the opposite direction at the same time.
As a rule, it is recommended to open a trade in the direction of a trend. If the trend is up: open a buy trade, if the trend is down: open a sell trade. In regards to binary options and trading strategies based only on trends, it is not recommended using them. Since in binary options a crucial role plays expiry time and the entry point, especially on short timeframes. The price fluctuates, you can go with the trend, and at the end of expiration price will spike in the opposite direction and after the expiry will come open in browser PRO version
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back.If you decided to trade based on the trend, then don’t open trades lower than the daily or weekly expiry time. Buy options in the direction of a trend. If it’s an uptrend, you should buy a Call option, if a downtrend, buy a Put option.In any way watch the trend, but you count on it completely. Spend time watching charts, study the asset that you trade and its’ historical behavior.
SUPPORT AND RESISTANCE LEVELS Some traders successfully use levels to trade binary options and depending on what level price touches, they buy a PUT (below) option or a CALL (above) option. What is the level of support: This is the level where the price is more likely to reverse and go up. Support level is located below the current market price and is based on the price minimums in the past. What is the level of resistance: This is a price level located above the current market. It is based on the price maximums reached in the past. Price has reached such maximum, has tested it and most likely will go down. In binary options when the price reaches the resistance level, its a good time to buy a PUT option. How to apply this for trading binary options: When the price dropped to the level of support, tested it (tried to break through) and started to bounce in the opposite direction, is a good time to buy a CALL option, i.e. in the near future the price will go up. And if the price hits the resistance level, bounces back, it’s a good time to buy a PUT option.
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In the picture above you can clearly see levels of support and resistance. To better remember apply this analogy: The level of Support is a floor, price - is a ball. When the ball falls on the floor, it bounces up. The level of Resistance is a ceiling, and when hit, the ball bounces down. Support and resistance levels feature is that they can shuffle. This occurs after the price is testing support or resistance level and then breaking through. For example, the price broke the resistance level and continued to go up (it was a level breakout) then resistance becomes support level. Multiple bounces of support or resistance level indicates on higher significance of this level. PSYCHOLOGICAL OR ROUND PRICE LEVELS Now you know what support and resistance levels are. So let's get into another interesting topic: round price levels. The fact is that when the price reaches such level (multiple or a hundred - 1.300, 1.3500, 1.500), as a rule, this level becomes support or resistance level. The fact is that the human brain is designed so that tries to round everything. For example, when you see the price of 1498, you try to round it to 1500, as traders do. Therefore, at these levels there are a lot of buy and sell orders, which is a real battle between bulls and bears. It works for stocks, indices, currencies and commodities. open in browser PRO version
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On the picture below, round numbers are marked with red lines; look at the price action around these levels. I’ll let you make your own conclusions.
BREAKOUT STRATEGY It’s a simple strategy that successfully used by many traders. The main element of this strategy, is the ability to find support and resistance levels. It is re recommended to use this strategy when there is a clear trend, if it’s a flat (sideways) movement, it is better to use the reversal strategy. We will talk later about the reversal patterns. As mentioned above, before starting your daily trading, support and resistance levels should be marked on the chart. open in browser PRO version
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What is the essence of this strategy: When the price approaches support or resistance level, as a rule tend is expected to reverse (change the trend). The more often price is testing the given level, more reliable it is. But sometimes the price does not reverse but break through the level, followed by a slight pullback. Then movement continues in the direction of the breakout.
As can be seen on the picture, price was testing the resistance level (before the breakout), the red line. Then with a strong move it breaks through the resistance level. After that once again price retraces back to the resistance level that has been broken, but not for long. And finally after price tested level of breakout, it continued to move upwards. In a breakout strategy there are two options for entry. When the price has a confirmed breakout (without much resistance), buy an option in the direction open in browser PRO version
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which the price moves. If we take the example from the picture above, then we would have bought the option CALL. Do not enter a trade if the price moved too far away from the level. Upon expiry, watch the asset behavior in the past, how many candles after the breakout the price moved in the same direction before a pullback. Open trade for a period not more than one or two candles. To remind you, on one hour timeframe (1H), one candle reflects the price movement of 1 hour. If you are looking at 30 minutes chart, then one candle would reflect price movement of 30 minutes. If you missed to open a trade straight after the breakout, you will have another opportunity on a pullback. As you can see in the picture, after the breakout, the price returned back to test the breakout level again. Then it continued to move in the direction of a breakout. Such breakout patter is quite common and it is a good opportunity to open trade in the direction of the breakout. It’s also simple with the expiry time, because after that price usually moves in the same direction for a extended period of time. In the next lesson we will look at the reversal patterns: "Pinocchio" and "Doji" models
Home work: 1. Plot on the chart the support and resistance levels with different timeframes (hour, day, week...). Look at the history of how many times price bounces from these levels. This will help you quickly navigate when the price will get close to these levels. 2. Look at any chart for "round" prices and analyze the movement of the price at these levels. 3. Study the history of a chosen asset and how price behaved throughout the breakout of the important levels.
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examples, how to trade binary options.
Sincerely, Abe Cofnas Professional trader
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