Anyone who has already been involved in some form of financial trading previously will no doubt have heard reference made to the market ‘trend.’ For those who haven’t, let me explain.
Trends are one of the most important things to consider when trading on any asset. Of all the various trading strategies and methods you will find, probably 90% of them make some reference to the trend in their calculations.
Like many strategies for binary options that work, this approach looks to profit from intra-day trends and moves within larger trends.
First I will cover off a little about trends and why they are so important when trading.
Understanding The Trend
The term ‘trend’ refers to the dominant direction that the price of an asset has been moving. It can be set over a number of time periods. Short term trends frequently exist as part of much larger trends. These may run over days, weeks, months or even years.
It is important is that you note the trend over the time period that you are trading. All recognize and take into account the larger trend when making your decisions.
A trending market is normally referred to as being in one of two states -
- Uptrend - The textbook definition of an uptrend is when the price action of the chart shows a series of higher closing highs and higher closing lows. There will be some periods where the price action pulls pack and consolidates, however the dominant directional movement of price will be upwards.
- Downtrend - This is the reverse of the above. Here the price action on the chart will display a series of lower closing highs and lower closing lows. Again there will be periods where the price rallies and times when the market consolidates. The dominant direction will be downwards.
It is important to note that you can only yield profits when the price of an asset shows clear directional movement. When a market is showing no specific directional movement it is considered to be ‘non-trending’.
Why Trends Are Important
The key thing to understand when trading trends is that they tend to persist. This means that if the price of an asset is moving higher, the odds on it continuing to move higher are significantly greater than a reversal taking place.
For this reason trend trading is often said to be ‘trading with the backing of the market’. Think of it a little like a summers day. The odds on the following day being sunny are far greater than a forecast for rain. Every now and again a shower may appear but the long term forecast of hot weather will eventually continue.
These strategies can be used on any asset class be it a stock, currency pair or commodity. They can be as complicated, or as simple as you want to make them. This system forms the basis of a very simple approach that you can get started with straight away. It can be used on any asset and uses end of day Call/Put contracts.
Identifying Trends
The most common way in which to identify a trend on a chart is by the use of a technical indicator called the ‘moving average’. While I call this the trend trading strategy, it could easily be called a binary options moving average strategy due to it’s reliance on this indicator.
The moving average calculates the average rate of price change over the selected time period. So for example, the 10 day moving average works out the rate of price change over the last ten trading days, the 20 day moving average over 20 and so on.
The two most commonly used forms this indicator are known as the ‘Simple Moving Average’ (SMA) and the ‘Exponential Moving Average’ (EMA). These use slightly different calculations to work out the rate of price change.
You can read a full explanation here. For my trading I tend to use the EMA as it provides a greater weighting to the the most recent price change in the calculation. However there is little practical difference between the two given the time-frames involved.
Simple Binary Options Trend Strategy
The strategy uses the EMA and looks to profit from Intraday moves. Essentially what we look for is a crossover of a lower time-frame moving average with one from a higher time-frame This signals a change in market momentum in the direction of the cross.
This strategy works well with hourly strategies although it could equally be applied to both shorter and longer term time-frames.
The specific approach used here targets any moves in the first few hours of trading. Contracts are placed to run until the the end of the same day.
To set yourself up to trade this strategy all you will need is the following:
- A chart of your asset set to a 30 minute time-frame
- Moving Averages on chart set to 5 day, 10 day and 20 day (EMA or SMA)
- Account open and set to ‘end of day’ contract for the asset you want to trade
The Entry Signal
The signal to enter the market comes when both the 5 day and 10 day EMA have crossed over the 20 day EMA. When the signal occurs a contract is opened in the direction of the move to expire at the end of the trading day.
Trading positions are only opened if this occurs within the first four hours after the market session opens. For trades taken on the Forex market the last point at which I would enter a position would be four hours before the close of the US Markets.
Trade Example
The above example shows a trade take on the Gold market. The 5 day EMA (light blue), 10 day EMA (green) and 20 day EMA (dark blue) have been plotted.
The signal was given at around 6.00am when both the 10 and 20 day EMA had crossed over the 20 day EMA. A CALL contract was then purchased (in the direction of the break) and set to expire at the end of the day (20:30). As you can see the contract expired in-the-money.
Performance
This binary options trend trading strategy works best when markets are trending over high time-periods - essentially it aims to tap into the daily intra-day moves of a wider dominant trend.
When a market is trending strongly on the daily or weekly charts then I would expect this intra-day approach to produce anywhere from a 65-85% rate of success.
Points To Consider
The moving average is a ‘lagging’ indicator. This means that it will only show you where the market has been and not necessarily where it will head. This is one of the reasons why I look to only place trades if the signal is given in the first few hours of trading. This helps to ensure that that their is sufficient time for the market to work through any pullbacks before the end of the day.
Many traders will use this strategy on higher or lower time-frame charts - 15 min, hourly, 4 hourly. You can also adjust your moving average time-frames. However I have found that lowering the chart time-frame can often lead too false signals. Conversely if the chart time-frame is too high then the signal will often come to late to get into the move.
This is why I recommend sticking with the 30 minute time-frame and 5, 10 and 20 day moving averages.
It is also worth looking out for any upcoming news due for release in the trading session. News flow in the form of financial data and economic figures will frequently disrupt the daily trend upon release.
You may therefore want to add a filter to avoid entering a position if significant news is due for release while the contract is open. Alternatively you could chose to enter a position only once news has been released and the markets have settled.
Ultimately any trend trading strategy for binary options requires strong, trending markets to offer its full potential. The secret to succeeding with this method is to stick to seek out the busiest market times when volume is high.