Trading technical indicators with binary options can be a very profitable trading style – if you know how to do it right. Our article explains the basics and three examples of strategies you can use. In detail you will learn:

  • What are technical indicators?
  • Why are technical indicators and digital options a great combination?
  • Three examples of strategies for technical indicators

With this information you will be able to trade binary options with technical indicators immediately.

 

 

What are indicators?

Technical indicators are useful trading tools that allow price action traders to understand what is going on in the market and make predictions about what will happen next.

Some indicators pull their results directly into the price chart, making it easy for analysts to compare it to the current market price. Other indicators use a separate window to display their results. The most famous example of this type of indicator is oscillators. These indicators create a value that varies between 0 and 100. With this value and its change over time, you can understand what happened in the past and what will happen next.

There are thousands of indicators, but these are the most important types and some examples:

  • Support and Resistance: These indicators predict support and resistance levels at which the market is likely to reverse. If it breaks through such a level, it is likely to create a strong move away from the price level. Examples: Bottom, Fibonacci retracement, pivot point (PP), top.
  • Trend: These indicators help you evaluate the strength and reliability of trends. Examples: Average Directional Index (ADX), Commodity Channel Index (CCI), Price Oscillator (DPO), Version Thing Oscillator (KST), Ichimoku Kinkō Hyō, Moving Average Convergence / Divergence (MACD), Mass Index Moving Average (MA) ), Parabolic SAR (SAR), Smart money index (SMI), Trix Vortex Indicator (VI).
  • Momentum: These indicators help you understand the momentum of a move. Examples: Money Flow Index (MFI), Relative Strength Index (RSI), Stochastic Oscillator, True Strength Index (TSI), Ultimate Oscillator Williams % R (% R).
  • Volume: These indicators use the trading volume (the number of assets that are sold or bought) to evaluate whether investors are bearish or bearish. Examples: Congestion / Spread Line, Ease of Movement (EMV), Power Index (FI), Negative Volume Index (NVI), Balance on Balance (OBV), Put / Call Ratio (PCR), Volume Price Trend (VPT) .
  • Volatility Indicators: These indicators measure the strength of a move, helping traders make a variety of predictions, especially for types of binary options that use target prices, for example one touch options, limit options or ladder options. Examples: Average True Range (ATR), Bollinger Bands (BB), Donchian Channel, Keltner Channel, CBOE, Market Volatility Index (VIX), Standard Deviation (σ).

It is not necessary to learn all these indicators. Check out each category, pick the one you like best, and take it from there. It is best to start with an indicator that you really understand and like. Later, you can add more indicators to your strategy, allowing your trade to evolve naturally.

Why do indicators fit into binary options?

Most binary options traders rely heavily on technical indicators. There are mainly three reasons for this strong relationship between binary options and technical indicators:

  1. Technical indicators facilitate the analysis of the price action . Price action is the only way to predict what will happen on such short time frames as you use within binary options. However, just looking at price movements can be confusing. Technical indicators can filter the most important information from a price chart and display it in a way that everyone can understand immediately. This simplification makes your trading faster and easier.
  2. Indicators secure your trade. When analyzing the market without help, there is a lot of information to take in. Complexity leads to mistakes and bad decisions, both of which cost you money. Technical indicators eliminate these mistakes, so they help you earn more money in a simpler way – an excellent combination.
  3. Indicators can reveal things that no trader can . Within seconds, technical indicators analyze hundreds of data sets, filter out the most relevant information and display it in a way that everyone can understand. Without the help of technical indicators, most of this information would be inaccessible. It would take years to calculate the Bollinger bands for fifty assets with ten periods each. Technical analysis adds layers of information to your trade that would otherwise be hidden.

These points are the reasons why technical indicators and binary options are such an excellent combination.

What are the leading indicators?

Leading indicators are a special form of market indicators. Market indicators are anything that helps you understand whether the price of an asset will rise or fall in the future. It provides an important, useful and easy interpretation tool for binary options traders. With the right strategy, they can help you anticipate new market movements and find the ideal timing to invest.

These indicators can be categorized into two types:

  1. Leading indicators. This type of indicator predicts what will happen to the price of an asset.
  2. Indication of deterioration. This kind of indicator tells what happened to the price of an asset. Although this information is supposed to help you predict what will happen next, the indicator itself focuses on the past – this is the big difference between both types of indicators.

The purpose of leading indicators is to give you an idea of where the price of an asset is headed. A good example of a leading indicator from another field is the business climate index. Business managers report their expectations for the future, and the index creates an aggregate value that can be easily compared to previous months and years. Its value and its change over time help you predict whether the economy will improve or worsen.

Leading financial indicators do the same thing. It measures something, and the resulting value tells whether things will get better or worse.

Why should I use leading indicators?

Leading indicators serve a very important purpose: they can help you understand whether an existing move is likely to continue or end soon. With this indicator, you can find great trading opportunities and avoid bad ones.

For example, suppose you find an upward movement.

  • If your leading indicator tells you that the move is likely to continue, you know it is the right time to trade a high option.
  • If your leading indicator tells you that the move is likely to end soon, you know that now is not the right time to trade a high option. You must either stay out of the market or trade an option that predicts the imminent end of the move.

For any trend follower, swing trader, and almost anyone else, leading indicators add important information to their trading style. This can help filter out bad signals, find new trading opportunities and win more trades.

Popular examples of leading indicators

There are hundreds of leading indicators. Some of them are similar, some very different. To help you better understand leading indicators, we will now look at three different examples of leading indicators that will allow you to get a good feel for the different types of leading indicators.

Example 1: The money flow index (MFI)

The Money Flow Index (MFI) is such a popular leading indicator because it helps traders quickly assess the strength of a trend.

As the name suggests, the MFI compares the money flowing into an asset with the money flowing out of it. For this purpose, it multiplies the average of the high, low and closing prices of each period by the volume of the period, and then divides the sum of all periods with rising prices by the sum of all periods with falling prices.

 

The result is a value between 0 and 100.

  1. When the MFI read 100, all the money flowed into an asset – with all rising periods.
  2. If the MFI reads 0, all the money has flowed out of an asset – with all falling prices.
  3. If the MFI reads 50, the number of assets sold and bought were exactly equal.

Any value above 50 indicates that more people sold than bought the asset, any value below 50 indicates the opposite.

Reading the MFI and its change over time allows for two predictions about future market movements:

  1. Extreme values. If the MFI is too high (usually above 70) or too low (usually below 30), the market enters the extreme areas. Traders assume that such extreme values indicate that too many traders have already bought or sold an asset and that there are no more traders left who can buy or sell the asset and keep the movement going. As a result, they predict that the movement is in trouble and that they will soon turn around or go through a consolidation before it can continue. Some traders use this signal to stop investing in the movement; some are already investing in the opposite direction.
  2. Convergence / divergence. When the market forms a new extreme in a trend (a new high in an uptrend or a new low in a downtrend), the MFI must reflect this movement and also create a new extreme. When the MFI does not reflect the new high/low market with its own high/low, traders stop pushing the trend. While this was still sufficient to create a new high, a continued decline in momentum would end the trade. Some traders use this signal to stop investing in a trend, others to invest in the opposite direction.

Of course, you can also interpret the MFI in the opposite way:

  1. If the MFI reads between 30 and 70, there is plenty of room for the market to continue its current movement. Most traders will predict that the move will continue for a while and invest accordingly.
  2. If the MFI reflects the current trend, the trend is intact. Most traders will predict that the trend will continue and invest accordingly.

The MFI is a leading indicator because it predicts that a trend or movement will continue or end soon. Indication of indicators will only tell you what has happened to a movement in the past.

Because the value of the MFI oscillates between 0 and 100, it is called an oscillator. Most other oscillators are also leading indicators. If you like the idea of simply basing your investment decisions, check out the other oscillators that technical analysis can offer.

 

 

Example 2: the Commodity Channel Index (CCI)

Don’t let the name fool you – the Commodity Channel Index (CCI) works with all types of assets, not just commodities.

Simply put, the CCI calculates how far an asset has deviated from its statistical average. The theory is that when an asset has strayed too far from the average price, it will soon have to come back. As with MFI, the CCI assumes that when too many traders have bought or sold an asset, there is no one left to push the market further in this direction. It needs to turn around and consolidate.

 

 

In detail, the CCI multiplies the average of the last, complete period with a high, low and closing price by 0.015 and puts the result in relation to a smooth moving average.

  • Value over 100 indicates that the asset is trading higher than 1.015 times the moving average’s value.
  • Values below -100 indicate that the asset is trading below 0.985 times the moving average’s value.

In both cases, the CCI predicts that the market has moved too far from the moving average and that the movement will soon reverse.

Some traders also wait before investing.

  • If the CCI has risen by more than 100, they wait until it starts to fall before investing.
  • If the CCI has fallen below -100, they wait until it starts to rise before investing.

These traders use the CCI more as a trailing indicator. To use the CCI as a leading indicator, you should invest when the market crosses the +100 / -100 lines – then you are investing in anticipation. When you trade the changing direction, you invest in reaction and use the CCI as a downside indicator.

Sometimes the line between rear and front indicators can be thin. As long as you know the difference and trade accordingly, you should be fine.

Example 3: the relative strength index (RSI)

At first glance, the Relative Strength Index (RSI) appears to be quite similar to the Money Flow Index (MFI). Both are oscillators, create a value between 0 and 100 and use an overbought and an oversold area.

The difference between both indicators is that the RSI focuses exclusively on price change, while the MFI also considers the volume of each period. While the RSI treats each period equally, the MFI places more weight on periods with high volume and less weight on periods with low volume.

 

 

Other than that, you can use the RSI just like the MFI. Trade differentials and the oversold areas above 70 or below 30. If the RSI is between 30 and 70, the current move should still have room; if it reflects a trend, the trend is good.

Neither the MFI nor the RSI is always better. Which indicator you should use depends on your strategy, your personality and your beliefs about the market.

  • Some traders argue that they trade the price, not the volume, and therefore should ignore the volume. They also say that the volume is too much on the short time frames of binary options to have an effect. These traders should use the RSI.
  • Some traders argue that the volume does have a significant effect because it tells you which direction more traders are supporting. These traders must use the MFI.

How to trade leading indicators with binary options

All the leading indicators can be the sole basis of your trading strategy or an additional function to your current strategy to filter out signals. We will present strategies that use leading indicators in both ways.

Strategy 1: Trade MFI variances with high / low options

We have already pointed out that the MFI reflects an intact trend.

  • When an intact rise creates a new high, then the MFI also creates a new high.
  • When an intact trend creates a new low, the MFI also creates a new low.

If the MFI does not reflect the new extreme of a trend, the trend is in trouble. The trend is losing momentum, and while it still had enough strength to create new extremes, it appears that this was the last extreme of the trend.

High / Low options provide you with the perfect tool to trade this prediction.

  • Invest in a low option if the MFI differs.
  • Invest in a high option if the MFI deviates in a downward trend.

The most important part of this strategy is getting the expiration date right. Although it is very likely that the market will follow an MFI divergence by changing direction or entering a sideways movement, these movements take time to develop. It is important that you choose your expiration date long enough to provide this time to the market.

For example, if you find a deviation from the MFI in a 5-minute chart, the 15-minute expiration is insufficient. It will take at least ten periods to turn, and an expiration of 15 minutes is only the equivalent of 3 measures. Choose an expiration of one hour, and you increase your chances of winning the trade.

You can also trade this strategy with the RSI. You would just switch indicators without changing anything else.

Furthermore, you can replace high/low options with low-risk learning options. Ladder options work just like high/low options, but allow you to use a price other than the current market price as the reference point for your prediction.

  • After a deviation from the MFI in an uptrend, you predict that the market will trade lower at a price that is higher than the current market price.
  • After a deviation from the MFI in a downtrend, you predict that the market will trade higher than a price below the current market price.

This is the safer version of the strategy. Instead of using the current market price as a reference point for your forecast, you use a price that is further in the direction you expect the market to move away from. This strategy will win you a higher percentage of your trades, but also a lower payout. Decide for yourself which strategy you want to use.

Strategy 2: Filtering trends with the RSI

A trend following strategy follows a simple principle:

  • Invest in a rising price in rising prices.
  • Invest in falling prices.

Despite this simplicity, many traders fear that they may be investing in a trend that will soon end. These traders can use the RSI to filter signals.

  • Invest in the trend when the RSI reflects.
  • Do not invest in the trend if the RSI deviates from the trend.

Adding the RSI to a following strategy can help traders win a higher percentage of their trades and earn more money with a simple check.

Keep the rest of your strategy unchanged. Use the same expiration as before and invest the same percentage of your total account balance per trade.

Strategy 3: Trade the extreme areas of the MFI with high / low options

Besides divergences, the MFI also creates a forecast when a movement ends up in extreme territory. This prediction allows for a simple trading strategy:

  • Invest in a low option if the MFI enters the overbought area.
  • Invest in a low option if the MFI enters the oversold area.

The success of this strategy depends on your ability to choose the right expiration. The market will need some time to turn, so you should avoid choosing an expiration that is too short. If you choose your expiration too long, the move on the other side may be over once your option expires.

Experience will help you find the right expiration date. The perfect setting depends on the situation, the period of your card and the characteristics of the asset. If you’re looking for a rough number to start with, try around 5 periods, then take it from there.

Just like the first strategy, you can also trade this strategy based on the RSI or with low-risk learning options.

Leading indicators – summary

Leading indicators are an important, useful and easily interpretable tool for market analysis. Binary options traders can use leading indicators as the sole basis of their strategy or to filter signals. This is especially useful for finding the right timing and avoiding bad trading opportunities.

 

 

What are indicators?

Lagging indicators are an important aspect of any market analysis strategy. This article explains everything you need to know to trade binary options based on trailing indicators. You will also understand their advantages, disadvantages and ideal areas of use.

The difference between leading and trailing trading indicators is the same.

  • Running trading indicators tell what has happened to the price of an asset in the past in a way that helps you predict what will happen next.
  • Leading indicators analyze another factor and predict how it will affect the price of an asset.

This difference is why lagging indicators are especially useful during trending periods. If the market is in a trend, lagging indicators can help you make great predictions; but if the market is not trending, many trailing indicators use their predictive properties.

Lagging indicators serve an important purpose and form an important part of any market analysis strategy. Let’s look at three popular examples of trailing indicators to see how you can use a trailing trailing trend.

Popular examples of indicators

There are hundreds of lagging indicators, but let’s keep things simple. Here are the three most popular trailing indicators that every trader should know.

Example 1: Trends

The trend is the most popular example of a decline indicator. The trends are the zig-zag movements that take the market to new highs and lows.

The trends are zig-zag movements because the market never moves in a straight line. Every move every move must take a break to create new momentum. It is simply impossible for all traders to buy continuously.

 

 

Therefore, trends take two steps forward and one step back. The resulting zig-zag movements are easy to identify and allow for accurate predictions.

  • Upswings constantly create higher highs and lows.
  • Downtrends constantly create lower lows and highs.

A trend strategy predicts that the current trend is likely to continue.

  • If the market is in an uptrend, trend traders invest in rising prices.
  • If the market is in a downtrend, trend traders invest in falling prices.

Some traders also trade in a trend every time. A swing is a movement from high to low, and by trading multiple swings during a trend, swing traders hope to increase their profits.

Of course, no trend will continue indefinitely. But even with high/low options, you would only need to win 60 percent of your trades to make money. A well-executed trend strategy should easily accomplish this goal.

A trend is a lagging indicator because it tells you that the market has been in a trend lately. Although this knowledge also makes predictions about what will happen next, the most important indicator of a trend is based on past price movements.

Trends are also the most important indicator of deterioration. Most other lagging indicators lose their predictive power if the market is not trending, so a trend analysis should be preceded by the use of other technical indicators.

Example 2: moving averages

Another popular example of a lagging indicator is the moving average. A moving average calculates the average price of the last periods and plots it in your chart. It then repeats the process for all previous periods and connects the dots to a line.

 

 

The position and direction of a moving average can tell you a lot about what the price of an asset has done:

  • When a moving average is pointing upwards, the market must have risen in recent periods. If it points downward, the market must have fallen.
  • If the market is trading higher than the moving average, the market must have risen in recent periods. If the market is trading below the moving average, the market must have fallen.

If both of these indicators point in the same direction, you’ll get a good indication of what’s happening.

  • If the market is trading above a moving average and the moving average is pointing up, the market is likely rising.
  • If the market is trading below a moving average and the moving average is pointing down, the market is likely falling.

These pointers help you make a better investment decision.

Example 3: Bollinger Bands

Bollinger Bands are a popular indicator because they create a price channel in which the market is likely to remain. This price channel consists of three lines or bands:

  1. A moving average of 20 periods as the center line.
  2. A top line is twice the standard deviation above the mean line.
  3. An underline is twice the standard deviation below the mean.

The market never leaves the outer two lines of the Bollinger Bands. The center line acts as a weaker resistance or support depending on whether the market is currently above or below it.

 

 

Bollinger Bands can help you understand whether the price of an asset is likely to rise or fall.

  • If an asset is trading near the upper range of the Bollinger Bands, there is little room left to climb further. As a result, it is likely to decline.
  • If an asset is trading near the lower range of Bollinger Bands, there is little room left to fall further. As a result, it is likely to rise.
  • If an asset approaches the center line, it is likely to take a break. Sometimes the market will break through the center line; sometimes it will turn around.

These indicators provide you with many trading opportunities.

Bollinger Bands display indicators because they only tell what happened in the past. The moving average and the standard deviation are both based on the last 20 periods. Although it is likely that the market will meet similar confidence in the current period as well, Bollinger Bands are unable to predict the trading range from now 50. Then the market environment will have changed, and the trading range will be different.

Despite this limitation, Bollinger Bands can be a valuable part of your trading strategy. We will see later how.

Why should I use an indicator?

Some newbies in binary options doubt that the declining indicators cannot help them at all. They point out that any trader must predict what will happen next, and argue that indicators that tell you what has already happened are of very little help in this task.

These traders are wrong. Deterioration indication can make valuable predictions and help you gain deeper insights into the market. There are two main reasons why traders use lagging indicators:

  1. Indication of deterioration is based on proven facts; leading indicators are not.
  2. If you understand what happened, you can predict what will happen next.

Let’s look at these three advantages of lagging indicators.

 

 

Advantage 1: Indication of deterioration is based on proven facts, and leading indicators are not

When a 50-period moving average points up, you know that the price of an asset has risen more than it has fallen over the past 50 periods. This result is indisputable. Likewise, if the market is currently trading below the moving average, you know that the market has recently picked up some downward momentum.

This knowledge sets your trading strategy in motion. Conservative traders in particular will like lagging indicators because they provide a certain base from which to make their decisions.

Leading indicators are different. For example, the volume is a leading indicator. A volume strategy predicts that declining volume signals the imminent end of a move. This may be true, but it is not certain, and it is impossible to prove this connection – you have to believe it. While the volume is falling, the price movement may even accelerate. Sometimes a reduced volume indicates an end to movement; sometimes it doesn’t.

Simply put, lagging indicators focus on the past price movements – which are known. Leading indicators imply that some other factor will influence future price movements – you may believe there is a correlation, and there may be, but there are many other factors influencing the market, so it is impossible to say whether this relationship affects the market. not at all and whether it will influence the market more strongly than other compounds.

Benefit 2: If you understand what happened, you can predict what will happen next.

Long-term indicators also allow for predictions about what will happen next – they only do so indirectly.

Leading indicators imply that a certain factor will decide where the market will go. Indication of deterioration is not of that nature. They simply predict that what has happened before will continue.

If the market crosses a moving average, the decline indicators tell you just what happened – the market has recently changed direction. The implicit assumption is that this movement will continue.

  • If the market has fallen in recent periods, it is likely that the same factors that have depressed the market in the recent past will also soon depress it.
  • If the market has been rising for recent periods, it seems likely that the same factors that have pushed the market up in the recent past will soon push it up.

Both predictions are tradable.

In general, trading binary options requires you to understand what is happening in the moment. Since there are so many factors at work at the moment, it is impossible to speak with absolute certainty. But understanding what happened is an essential part of achieving a marketable forecast that will be right in enough cases to make you money.

How to display indicators

Let’s get specific. Here are three strategies on how to trade lagging indicators with binary options.

Strategy 1: trade swings in a trend with one touch options

Every trend consists of many swings. Each single swing provides an excellent trading opportunity for one touch options because it combines strong indications of direction and length of the combination.

Every movement in the main direction is followed by a movement in the opposite direction and vice versa. This simple ratio makes predicting the direction of the market simple once you recognize a swing.

Now you can simply trade this signal with high / low options, but with swing you can also trade one-option options, which offer much higher payouts, but require you to predict the length of the move.

In a trend, swings in the main direction will always move as far as the last extreme.

  • In an uptrend, the next upswing will reach at least the price level of the previous high.
  • In a downtrend, the following downward moves will reach at least the price level of the previous low.

Swinging against the major trend direction follows the same clear rules. The market usually reverses a third or two thirds of the previous movement in the major trend direction.

  • In an uptrend, a downswing will reverse about one-third to two-thirds of the previous upswing.
  • In a downtrend, an upswing will reverse about one third to two thirds of the previous down moves.

With this knowledge, you get the clear price target you need to trade a one-push option. Here’s what you do:

  1. Wait for the swing to end.
  2. Determine the range and direction of the next swing.
  3. See if your broker offers you a one-push option with a strike price within range of this move and a realistic expiration.If so, trade it. If not, then trade a high / low option in the direction of the movement.

At this point, it is important to mention that movements against the main direction of the trend are usually more volatile and take longer to develop. Many traders avoid reversals with one touch options and use high/low options instead. Decide for yourself how you want to trade reversals.

Strategy 2: trade the market crossing the moving average with high / low options

If the market crosses a moving average, it appears to have changed direction. You can predict that this new movement will continue and invest in a high / low option in the direction of the movement.

  • Invest in a low option if the market crosses your moving average downward.
  • Invest in a high option if the market crosses your moving average upwards.

The important aspect of this strategy is that you choose the right expiration date. For example, a 9 period moving average can never predict what will happen to the price of an asset over the next 50 periods. 50 periods and 9 periods are simply too different time frames.

To avoid making predictions that are impossible to make based on your moving average, always keep your expiration shorter than the amount of time that is the basis of your moving average. Ideally, you would use an expiration shorter than half of your moving average.

Likewise, you should avoid using an expiration that is too short, or in the short term, the market volatility may cause you to lose your trade, despite the correct forecast. Use an expiration that is at least a quarter of the time that is the basis of your moving average.

For example, if you use a moving average based on 20 periods and a price chart with a 5-minute period, your moving average is based on 100 minutes (20 times 5). Ideally, you would trade this moving average with an expiration of 25 to 50 minutes. You can also go a little longer or shorter, but an expiration of 60 seconds is too short and one of 4 hours is too long.

Strategy 3: Trade Bollinger Bands with a Low-Risk Ladder Options

Bollinger Bands give an indication of the trade’s range, and with the help of ladder options you can predict which prices are out of the market’s range – this is an excellent combination.

The success of this strategy also depends on choosing the right expiration. Bollinger Bands are trailing indicators, therefore they cannot predict what will happen ten periods down the road. By then, the market will have changed, and the Bollinger Bands indicator will have changed with it.

To make sure that the Bollinger Bands in your chart create valid predictions for your option, you must set the period of your chart to the same value as your expiration or longer. The important point is that your option expires within this period because the Bollinger Bands only create predictions for this period.

If you are considering trading an option with a 15-minute expiration, you should at least use a 15-minute chart. If ten minutes have expired within the current period, you must switch to a 30-minute card to ensure your option expires within the current period.

All you need to do to execute this strategy is the following:

  1. Set the period of your char to the length of your expiration.
  2. Analyze the upper and lower price ranges of your Bollinger Bands.
  3. Find a learning option with a strike price outside these limits.
  4. Predict that the market will not be able to reach this price level.

For example, assume an asset is trading at £100. The upper Bollinger Band is £101, and the lower band £99.5. Your expiration and your card period is 30 minutes and there is no time in the current period.

  • If your broker offers a ladder option with a strike price of £101.5, you know that the strike price is outside the range of Bollinger Bands. Consequently, you should invest in a low option based on this strike price, thereby predicting that the market will not be able to reach this price level.
  • If you offer a broker a learning option with a strike price of £100.5, you know that the strike price is within range of the Bollinger Bands. Based on this strategy, this strike price would be a bad investment.

With this strategy you get relatively low payouts. Since you need to be able to win the vast majority of your trades, you need to be able to make a profit nonetheless.

summary

Lagging indicators are an important aspect of any market analysis strategy. It provides some indication of what has happened and allows for quality predictions about what will happen next. Strategies based on trends, moving averages and Bollinger bands have helped many traders create successful trading strategies.

Three examples of strategies for technical indicators

Here are three examples of strategies you can use to get started with binary options and technical indicators.

One: trade with the extremes of the MFI / RSI

The Money Flow Index (MFI) and the Relative Strength Index (RSI) are easy to interpret technical indicators based on similar ideas. Both indicators are oscillators, and both calculate the strength of a move by relating current momentum to past momentum. The difference is that the MFI also takes volume into account, while the RSI only focuses on price action. Choose the indicator you like better; it will make little difference to your final strategy.

Both the MFI and the RSI define an overbought and an oversold area.

  • If traders have been buying an asset for too long, the MFI and RSI assume that there are not enough buyers left to keep driving the price up. The market is overbought and a reversal likely.
  • When traders have sold an asset for too long, the MFI and RSI assume that there are not enough sellers left in the market to continue to drive the price down. The market is oversold and a reversal likely.

Based on this simple prediction, you can trade a binary option. If your indicator of choice reaches an extreme value, you should invest in the opposite direction and predict that the market will turn around soon. Some traders also invest when the market exits an extreme area, arguing that it is better to invest in a reversal that has already occurred (as indicated by the market exiting the extreme area) than an imminent reversal (such as indicated by the market entering the extreme area). Some traders also wait a few periods before investing and see if the market stays within the extreme territory.

Two: Trading Bollinger Bands

Bollinger Bands are an excellent technical indicator for binary options traders because they clearly indicate the price levels at which you should expect price action.

 

 

Bollinger bands create a price channel consisting of three lines. Those are:

  • A moving average. The center line of Bollinger bands is a moving average, usually based on 20 periods.
  • A top line. By adding twice the standard deviation to the moving average, Bollinger bands create the upper line.
  • A lower line. By subtracting twice the standard deviation from the moving average, Bollinger bands create the bottom line.

The result of this process is a price channel that surrounds the current market price. Each line acts as resistance or support depending on the direction from which the market is approaching the line.

  • If the price rises above a line, it acts as a support.
  • If the price approaches a line from below, it acts as a resistance.

Traders can trade these lines in two ways:

  1. Trade the impending turnaround. If the market reaches a line, it will likely be forced to turn, at least briefly. Traders can trade this prediction and invest in a movement in the opposite direction of the preceding movement. When using a high/low option, remember that this is a short-term forecast and use an expiration of the duration of one period. You can also use a one touch option. In this case, make sure to use a hit price no more than half the distance to the next line.
  2. Trade the market’s breakthrough through the center line. The center line is special because it can act as a resistance or support depending on the current position of the market in relation to the line. If the market breaks through the line, it changes its meaning. What was a resistance now becomes a support, or vice versa. Traders can take advantage of this important event and invest in a binary option in the direction of the breakthrough.

This simple way to earn money is ideal for newbies. Experienced traders can also add another indicator to confirm the prediction of the Bollinger bands, for example a moving average.

Trading the average true reach (ATR)

The average true range (ATR) is a technical indicator that is perfect for traders with border options. Border options are a special type of binary options because they are the only type that do not require you to predict the direction of the market, which is perfect for traders who find this prediction difficult.

Border options define two strike prices in the same distance from the current market price. One above the current market price, one below it. Two wins your option; the market must either trigger the target price before your option expires. It does not have to stay at the price level, and it only has to touch one strike price. Border options are one touch options with two strike prices.

With frontier options, your job is not to predict which direction the market will move. Your job is to predict whether it will move far enough to reach one of the two target prices. The ATR is the perfect indicator to make this prediction.

The ATR does one simple thing: it calculates the average range of previous market periods. If the ATR has a value of 10 and you are looking at a chart with a period of 10 minutes, the asset has moved on average 10 points every 10 minutes in the past.

You can adjust the number of periods you want the ATR to analyze. Most traders use a setting of 14 periods, which means that the ATR calculates the average range of the last 14 periods of your chart.

To trade limit options based on the ATR, you only need to compare the reading of the ATR with the strike prices.

Let’s return to our earlier example: in a chart with a 10-minute period, the ATR has a value of 10. If your broker offers you an option with strike prices that are 30 pips away and expires in an hour, know u that there is a good chance that the market will reach one of the target prices. Your reasoning would look like this:

  • The market moved by 10 points per period.
  • To reach a real price, the market must move 5 points per period. (The option has a 60 minute expiration and you are looking at a 10 minute chart. This means you have six periods until your option expires. The target prices are 30 points away. Divided by six periods, you get that the market would have to move an average of 5 points per period to get straight to the market price.)
  • The average movement in the market per period is twice as high as the necessary movement to reach the strike price.
  • In general, the market will never move in a straight line, but if it moves in the same direction for two periods in a row, it’s almost there. So there is a good chance that it will reach the strike price.

As you can see from this example, you will always have to discount the maximum reach of the market. If the market moved in the same direction for 60 minutes, it would have a range of 60 points. This will never happen, which is why many traders use a discount factor. For example, they multiply the maximum reach by 0.5, and if the strike price of a limit option is closer to the result of this comparison, they invest.

You can choose the discount factor according to your risk tolerance and experience. We recommend using a factor of 0.5 or lower. Higher factors are too risky.

Also consider the payoff you get for your option. Some brokers offer high-risk limit options (distant target prices, higher payout) and low-risk limit options (close strike price, lower payout). Higher payouts allow you to trade profitably when you win fewer trades, therefore allowing you to take more risks and use a higher discount factor.

Some traders also use the Average Directional Movement Index (ADX). The ADX indicates the trend strength on a scale of 0 to 100. 0 indicates a complete lack of direction, 100 that all periods point in the same direction. You can calculate your discount factor by dividing the value of the ADX by 100.

  • If the ADX reads 40, use a discount factor of 0.4.
  • If the ADX reads 70, use a discount factor of 0.7.

With this strategy, you adjust your discount factor to the current market environment.

Final word on technical indicators

Technical indicators and binary options are a great combination. Technical indicators allow you to make short-term predictions in any market; Binary options allow you to trade these predictions more profitably than other trading types.

Like our examples of the MFI / RSI, Bollinger bands, or the ATR show, there is an indicator for any strategy. Find the right indicator for you, and you have taken a big step towards becoming a successful trader.