Following trends, using technical analysis, is the simplest strategy that a binary options trader can learn. In this beginners Binary Options trading strategy we examine how.

A trend following system waits for a major movement in price in any direction and then places a put option or a call option in that direction .

A trader uses the historical data of a particular asset to decide the price direction of the asset in the future. The direction is only normally regarded as a trend if it continues in the same direction for a certain period of time. The length of time can vary, but in binary options trading this can typically involve a single hour through to a seven day time period.

It is worth noting that short term trends are part of much larger trends which can exist for periods of weeks and even months. This is why the trader should identify the larger trends as well as the smaller ones when making a trading decision. The recognition of larger trends is perhaps seen as more relevant in forex trading, but it is just as relevant when trading Binary Options.

A trend in the market is usually known as being one of two states -

• Uptrend –  This is when the price action of the chart shows a sequence of higher closing positional highs and higher closing positional lows. Within an uptrend there will be price action pulls pack and consolidations, but overall the dominant directional price movement will be upwards

In the above picture the up trend is indicated by the diagonal red line.

• Downtrend – Put simply, this is the reverse of the uptrend. In the downtrend the price action on the chart will display a series of lower closing positional highs and lower closing positional lows.  As with the uptrend, there will be times where the price rises and periods when there will be market consolidation, but overall the dominant direction in price will be downwards.

The above picture shows the vertical line indicating a downward trend.

Although as the investment warnings always tell us – that past performance is not necessarily a guide to future performance, probably the most successful method of using trend following is to research the moving averages of a particular asset and identify the directional movements that the asset has taken in the past.

It is true that a trend following strategy will generate signals that are not always 100% correct, but the success rate of a correctly applied strategy will far outweigh the losses that are borne when you are wrong. It is a strategy that can be successfully employed by both experienced and new traders, as historical data of asset movement is easily available to almost anyone trading binary options through a variety of in-house or readily available charting packages, free of charge.

SUPPORT AND RESISTANCE

The application of trend following is made simpler by being able to identify support and resistance levels on a chart. These levels act as a floor and a ceiling to force the price back when it goes above or below support and resistance.

Support is the level where traders are buying an asset.  It is usually defined by low price points within a market where traders bought an asset in the belief that the market has ‘bottomed-out’ and will not go any lower.

Resistance is the price level where supply is typically strong and the trader believed that prices cannot move further upwards.  Once the resistance level is breached, prices generally move in the direction of that the break moves in.

From the above picture, it is possible to identify the two points where the price went up and stopped at a specific level thus creating a resistance level and the four points where the price came down and bounced creating the support level.

It is possible to use the levels of support and resistance on any time frame and can especially be useful in periods of low volume trading like at night when the markets are much slower with much less unpredictability. These levels of trend line support and resistance make good reliable pivot points reflecting the break out price action in a market.

TREND IDENTIFICATION

The simplest method to identify a trend within a chart is with the use of a technical indicator known as the ‘moving average’. This ascertains the average rate of price change in a selected time period. E.g. the 5 day moving average gives us the rate of price change over the last five trading days, whilst the ten day moving average provides the rate of price change over ten days and so forth.

The two most popular types of this indicator are the ‘Simple Moving Average’ (SMA) and the ‘Exponential Moving Average’ (EMA). Different calculations are used to give us the rate of price change between the two methods.  When trading Binary Options the EMA is used more because it provides a greater weighting to the latest price changes in its calculation. However, there isn’t too much actual difference between the SMA and EMA over the time frames involved.

CONSIDERATIONS

Probably the best time period to use is daily price points, but for binary traders the trend following strategy can be effective on an hourly basis. These are normally not regarded as being reliable nor as vigorous as price points on a daily basis, as lower timeframes are subject to noise (fluctuations that are less easy to explain and monitor).  Similarly, should the chart time frame be too high it increases the chances of the signal coming too late into the trend.

Fundamental news and the release of economic data can sometimes bring about a sharp change in the daily trend. For this reason, it is recommended to add some sort of filter to avoid going into a position if important news is expected to be published whilst the contract is open.

CONCLUSION

The trend following strategy is a binary options trading strategy that can work at its best when the markets are trending over higher time periods. For the binary trader, this strategy aims to utilize the daily intra-day movements so prevalent in Binary Options trading within a wider dominant trend. The intra-day approach to trend following can produce a success rate of between 60-85%, which compares very favourably to the dual outcome only possible in binary option trading. If the outcome can only be a yes or no, and you are predicting the correct answer 6 out of 10 times, you are making profit. Becoming more experienced in recognizing and identifying trends will increase your success rate and profit even further.

A close eye on the economic calendar, a good understanding of reading historical charts and a binary options platform offering different timed contracts will mean a trend following binary options strategy can be a very profitable means of investing in the financial markets.