Developing A Binary Options Strategy
A profitable binary options trading strategy can be unlocked using technical analysis, a technique that uses the study of historical market data to predict future price movements. This article will provide you with an understanding of the most commonly implemented technical analysis strategies for trading binary options, and will provide an introduction to some of the more advanced techniques you will become familiar with in time that build on the knowledge obtained from comprehensive beginners guide to binary option trading.
Before employing some of the key technical analysis techniques and formulating a comprehensive binary trading strategy, you will need to have a solid understanding of how to read financial market charts.
Reading Financial Market Charts
Candlestick charting was developed by the Japanese in the 1700s to track the movement of rice prices and has now evolved into a key modern day tool for interpreting financial market charts and the timing for the entry and exit of trades, including binary option trading. Candlestick charts are an efficient way of displaying a securities opening price, intra day high, intraday low and closing price for any given period.
It is this understanding of how the security has performed historically via the interpretation of candle stick charting which forms the basis for the formation of the best binary options strategy.
Binary Option Trading Strategies
Binary Option strategies created by technical analysis falls under the following types: trend indicators, momentum indicators and volatility indicators. Each of these types of indicators divulge different types of information for the binary option trader and at times may give conflicting signals. Successful binary options traders combine indicators to give powerful, profitable trading strategies that can be refined or condensed to form a 5 minute binary strategy for example. Types of each type of binary option trading strategy include:
Trend Indicator: Moving Averages
Moving averages smooth price action to allow the trader to more accurately determine when to enter or exit a binary option trade. The simple moving average indicator averages the past prices from a discrete time period and allows the binary options trader to determine if the current price is above or below the moving average. The binary option trade entry or exit signal arises when the security price crosses the moving average. For example, the binary options trader should buy a call when the price rises above a 50 day moving average, or buy a put if the price falls below the 50 day moving average. A more sophisticated implementation of moving averages is using short term averages crossing over longer term averages to signal a trade entry or exit. For example the 50 day moving average rising above the 200 day moving average indicates that the security is in a significant upswing and the trader should purchase a call option.
Momentum Indicator: Relative Strength Index
The Relative Strength Index indicator (RSI) measures the speed and change in price movements of a security and tells the binary options trader if a security is overbought or oversold and is a momentum indicator which compares the value of average gains and average losses over a timeframe, which is generally 14 days. You can read more about the RSI equation here, however as a trading signal or strategy the binary options trader would consider buying a put if the RSI is greater than 70, or buy a call if the RSI is less than 30.
Volatility Indicator: Bollinger Bands
A Bollinger band is the band that is created by a line that plots two standard deviations away from a simple moving average. Assets rarely trade for any extended period outside of their Bollinger bands, and any security outside of the Bollinger bands is generally prime for a reversal move which can be profited from by trading binary options.
Binary Options Strategy Video Walkthrough (With IQ Option)
Watch this video for a step-by-step walkthrough on how to apply the technical analysis techniques you’ve learned make a profit trading binary options with IQ Option.
If you’re interested in binary options trading with another broker aside from IQ Option why not read our list of the best binary options brokers. And, if you’d like to get some hands on experience trading binary options risk free, check out our post on the benefits of binary options demo accounts.
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