Trading Guide: Trend Following for Binary Options

Tuesday, 28/10/2014 | 19:34 GMT by Vasil Velev

Binary Options can be used to take advantage of the trend following strategy for all instruments. Timing and direction are the key points that have to determined correctly, in order to achieve success here.

Trading Guide: Trend Following for Binary Options

Trend following is a term used to describe a type of trading where order placement is based on correctly reading the chart in front of you. In contrast to range trading where one would normally place trades opposite the recent swing and where the market tends to move between two areas of support and resistance, trend following requires placing orders in the general direction of the market.

Of course traders need to differentiate between trending and ranging markets to be able to follow the trend. The simplest way to identify a trending market is if the chart starts and ends on diagonally opposite sides on the monitor. For example, if the charts starts from the top left corner and ends on the bottom right corner, the market is in a bear trend and this means that putting is preferable to calling.

Downward trend example — Example of a downward trend with 15 minute bars

Trading binary options is generally simpler to trading other financial instruments. The only thing that a binary options trader needs to do is correctly analyze the direction of the market for the next one to several candles or bars depending of the type of chart. He does not (except for very rare cases) care by how much the market is going to move with or against him.

This is very important to understand because trend following is not just a trading strategy, it is the practice of utilizing the fundamental imbalance between the forces that drive the market up and down. Using our example above, when a market is in a bear trend, putting is always the better choice because the chance of the market going down rather than going up is always more than 50%. And since binary options traders do not care by how much the market moves in their direction, trend following is a safer bet for novice and skilled binary options traders alike.

Upward trend example — Example of an upward trend with 15 minute bars

Placing orders with the trend is better when we can recognize strength in the most recent move. If we are looking at a 15 minute chart and are using a candlestick chart it is also important to wait for the last candle to close before analyzing its strength. The strongest candles have closes that are near or at the high or low of the candle. We also need the candle not to be too big or too small, but just the right size when compared to the candles before it. And once again, using the bear trend example, it is a good bet to put after the close of a strong candle that closes on its low.

Apart from using specific techniques to place orders on the market, it is a good rule to remember that when the trend is strong and clear, placing an order with the trend for any reason is a good strategy.

Of course trend following is a subject for many discussions and there is no bulletproof strategy that can guarantee winning all the time, but following it is a strong foundation for traders who want to further develop their skills.