Trend Trading 101
With binary options, unlike other types of trading, you do not necessary have to wait for the market to make a move in order to make money, thanks to options like Range or Boundary trades. Even though this is the case, trends still offer you some of your best opportunities to make a lot of money trading. If you can learn how to identify trends as they are forming, you can get in on the action fast and reap the maximum reward. Let’s talk about the basics of trends and how to trade them.
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What is a Trend?
For any given financial instrument, there are a number of different ways that price can behave. When price has a general upward or downward movement which is easily identifiable, we say that there is a trend in that market. Price has a bullish trend if it is moving upward, or a bearish trend if it is moving downward. Note that there may be a bullish trend on one timeframe and a bearish trend on another when you look at your charts. Learn more about bullish vs. bearish here
Do you know what I am talking about when I refer to different timeframes? If not, I am guessing you have yet to download any charting software. What is great about trading is that you can set up with charts for free. Navigate here to find different charting platforms that we recommend for various financial assets. When you open these charting platforms up, you will discover that you can change the timeframe on each of the charts.
What does that mean? Each candle or bar on your chart represents a certain amount of time. So if the chart you are looking at says “4H” or “4 Hour” on it,” that means that each of the candles on the chart represents 4 hours of time. If you were to open a chart that says “1H,” then each of the candles would be equivalent to 1 hour of time. The daily chart has bars that each represent a day’s worth of data. The 10 minute chart has 10 minute bars. And so on.
This can be confusing for a beginner, but you will eventually be able to see multiple time frames at once by looking at a single chart, depending on what you focus on. For example, if you have the 1 hour chart, you will eventually realize that 24 of the 1 hour bars are what goes into forming a solitary bar on the daily chart.
It is a good idea to look at multiple timeframes. How many? Enough so that you get the “bigger picture” of what is going on, but not so many that you get confused. This is something you will figure out while you are testing your trades. You could see a bearish move on the 1 hour chart and think that it’s time to go short, but you might be missing the bigger picture if you never check the daily charts and notice you’re going right into a huge bullish move. That does not mean you cannot profit off of the smaller bearish move, but you should be prepared to get out when things turn around and follow the major trend which is forming.
Which trends should you trade? That depends on your trading style and also on your schedule. When you are starting out, or if you work a full-time or even a part-time job, you will probably find it easier to identify and trade the longer trends that are forming on the higher timeframes. That means taking binary options trades with longer expiry times, like those that close later in the day or even the next day (if your broker has them available).
Strategies for Identifying Trends
Literally thousands of different strategies are out there which can help you to spot trends and get in on the money as trends are forming. Some will get you in sooner than others, and some are more reliable than others. Any strategy is only as reliable as you make it, based on your skills, personality, and discipline testing and applying it. Here are just a few possible ways to spot new trends:
Price action signals that indicate reversals (more often) or continuations of existing trends (more challenging). Spotting these signals involves looking for specific patterns in the shapes of the candles, and then looking at context to make sure that the patterns are likely to be meaningful.
Moving average crossover systems. When a faster moving average crosses over a slower moving average, it may indicate a new trend is forming.
Economic reports and other events. Sometimes world events can cause a new trend to form on an asset. Other times they may simply cause a spike against the trend, and then the trend will continue on. The more you know about economics, the more reliably you can trade the news.
Oscillators. You can use oscillators to identify price reversals and other indications of a new trend forming. RSI and Parabolic SAR are both examples.
There are hundreds of variations on each of these, based on your entry and exit rules, any other indicators you use for confirmation, and your discretion as a trader. And these are just a few methods for spotting trends. There are plenty of others you will find out about as you research.
It is also worthwhile to make a quick note about something called “retracements.” Open up a chart of any trending currency, and you will notice that the movement of price is not fluid up or down. There are little ups and downs the entire way along the trend. Price regularly will fight against the trend, even as the momentum of the market continues to pull it along. Every time price goes back against the trend momentarily like this, it is called a “retracement.” After the retracement, it simply continues on. If it doesn’t, and it actually switches direction, then it is a trend reversal (something else you can trade if you know what you are doing; otherwise an opportunity to lose money).
How do you deal with retracements? Here are several suggestions:
Learn to spot trend reversal patterns and distinguish them from retracements. There are often giveaway signs. Some people have entire trading systems based around reversals. You can use these systems to trade reversals, or to get out of your existing trade before it goes against you.
When entering a new trade on a trend you believe is forming, wait for a confirmation. This might take the form of confluence through some other indicator, or you might even wait for an initial retracement to form and price to continue moving in the direction you want to trade, and then enter.
Test Your Trend Trading Tactics
Testing is key in trend trading for binary options. It is testing that will ultimately tell you what time frame(s) to look at or trade, what expiry times to choose to correspond with them, what to do about retracements, whether to trade trend reversals, and which indicators or trading systems you should use. The reason there are so many different methods for trading trends in binary options is because every trader is different, and each approach becomes unique when it is customized by the trader who is testing it. Once you have tested a strategy profitably and refined it until it is yours, you will be ready to use trend trading to make money from binary options.