How To Use Technical Indicators To Improve Your Binary Options Trading Strategy
Binary options trading is a very simple yet risky investment option. To overcome the risks of losing money to binary options trading, many experienced traders develop various strategies to ensure their wins. One such strategy is the use of technical analysis.
Technical indicators are powerful tools used in addition to other trading strategies to maximize traders’ wins and make informed trading decisions. Technical indicators are mathematical or statistical calculations based on underlying assets’ historical prices or volume data. Binary options traders often use them to predict asset price movements based on market patterns and trends. These patterns can be observed through graphs, charts, and other statistical calculations.
Benefits of Technical Analysis
Some of the most popular technical analysis benefits are:
- They are data-driven and reliable in making better-informed decisions.
- They help to maximize winnings.
- They help to minimize losses by indicating exit points.
Common Uses of Technical Indicators:
Technical indicators are used for various reasons, some even beyond the binary options space. For example, technical indicators are commonly used for:
- Identifying Trends: A trend is a general direction in which the market is moving. Technical indicators can be used to identify trends and determine whether it is a good time to buy/sell or not. A popular technical indicator for identifying trends is the Moving Average indicator.
- Measuring Momentum: Momentum is the speed at which an underlying asset moves in a particular direction. Momentum indicators are used to show how strong a trend is and signify possible points of reversal.
- Measuring Volatility: Volatility represents how quickly or predictably(or unpredictably) the price of an underlying asset fluctuates. It is a statistical measure of the dispersion of the price of a given asset. Volatility indicators are used to know the extent of market movement or how much the prices of an asset are changing.
- Identifying support and resistance levels: Support and resistance levels are points on the chart where an underlying asset will likely encounter buying and selling pressure. Technical indicators that identify support and resistance levels can determine whether an underlying asset will likely break through a particular price point or not.
Top Three Technical Indicators for Trading Binary Options
The following are some of the most popular technical indicators for trading binary options:
- Moving averages
- Relative Strength Index (RSI)
- Bollinger Bands
Moving Averages
Moving averages are technical trend indicators. They are used to help traders verify a trend using historical prices. The moving Average is calculated by averaging the price of an asset over a certain period, e.g., 30 days. When you compare the current price of an asset to its moving Average, you can tell if it is an uptrend or a downtrend.
Moving averages can either be:
- Simple Moving Average: This is a simpler version of the moving Average. It uses the mean Average of a set of historical price data(the closing price of a market).
or
- Exponential Moving Average: Although this also relies on past data, it gives more weight to the most recent price data. Since the latest data get the greater weight, they account for a higher percentage of the Exponential Moving Average.
Relative Strength Index (RSI)
RSI is a momentum trade indicator. The RSI calculates the ratio of upwards price movement to downward price movement over a period. If you compare the current RSI to its historical range, you can confirm whether a market has been overbought or oversold. This helps you as a trader to decide whether to buy or sell in case of a trend reversal. In addition, it helps to make informed decisions about whether to buy or sell a contract and pick the expiry time you want.
Bollinger bands
Bollinger bands are volatility trend indicators that create a price channel around the current market price. The relation between the market price and the price channel helps to predict what happens next. The bolling bands are made up of three lines:
- The middle Moving Average(MA) line: Appearing in the middle, this is a MA of about 20 periods (recommended value). When the market price is above this middle MA line, it works as a support line; when it is below the line, it works as a resistance line.
- The upper and lower Standard Deviation (SD) lines: Most traders prefer to use a value two times the standard deviation for both lines. The upper line is the support line, and the lower is the resistance line.
Bollinger bands predict that the market price should stay within the upper and lower lines, and the middle line is simply a support or resistance line. They indicate the possible range of price movement and support and resistance lines.
Conclusion
There are several other trading indicators that you can explore as a beginner trader. Using any of these indicators or a combination of two or more indicators can help increase your chance of having more profitable trades. However, you should note that no trading indicator has a 100% success rate, and you should always put appropriate risk management measures in place.
