Trendline Trading in Binary Options
Trendline trading in binary options involves the use of trendlines to identify optimal entry points in the market. Trendlines are the most basic technical analysis tool and they have proven effective for traders over the years in the financial markets. When drawn correctly, trendlines can be as good as any trading strategy and traders can find profitable setups using them.
How to Draw Trendlines Correctly
Trendlines are drawn by connecting two or more swing highs or swing lows and projecting it into the future. A good and valid trendline will have prices on only one side of it; if the asset price breaks through any part of the line, the trendline becomes invalidated.
In the above chart, although the line has been connected between two swing lows, there is a point where prices are outside the trendline and this invalidates it.
The same chart could utilise a sound trendline as the one below. In the chart below, the line has been drawn to connect two swing lows and it can be projected into the future as a valid trendline.
Important Things to Note about Trendlines
It is important to draw trendlines correctly if one is to utilise this strategy effectively. After drawing trendlines, it is vital to note that:
It takes at least two swing lows or swing highs to draw a valid trendline. However, it takes at least 3 for the trendline to be confirmed or validated.
After drawing a trendline, traders should take note of its slope. Generally, the steeper the slope, the less reliable the trendline and the more likely it is to be broken. Steep trendlines usually represent a sudden spike in price and usually, such a move is never sustainable in the market.
The more times the asset price bounces off a trendline, the stronger the trendline becomes. As the asset price continues to test and bounces off a trendline, it would mean that the trendline is increasingly being respected by the market and it would continue becoming stronger.
When drawing trendlines, traders should avoid forcing them to fit the market. If there are no clear swing highs or lows, or the trendline does not fit right, then the trendline is invalid and traders should not utilise it to identify trading opportunities in the market.
Applying the Trendline Strategy
In order to apply the trendline trading strategy to your trading, you will need to first sign up with a binary options broker. Banc De Binary is recognized in the market as a leading, regulated and reputable broker. In addition, Banc De Binary offers an intuitive and easy to navigate trading platform from where a trader is able to make their trades. The added benefit is that Banc De Binary offers a wide choice of assets to trade as well as a variety of trade options which will enable a trader to apply their trendline strategy with ease.
The trendline strategy is designed to be used to trade price bounces off the trendline. When applying this strategy, it is expected that prices will respect the trendline and not go past it; instead, they will bounce off it. This strategy is very versatile and can be applied in any market condition.
In an Uptrend
An uptrend is a market condition characterized by the asset price making higher highs as well as higher lows. In such a market, a trendline is drawn from one particular swing low, connecting it another successive but higher swing low, and projecting the line into the future. The strategy in an uptrend is to look for opportunities to place Call orders on the Banc De Binary trading platform. The trendline acts as a dynamic support line and optimal price points to place Call orders are identified when the price is at or near the trendline.
In a Downtrend
A downtrend is a market condition characterized by the asset price making lower lows as well as lower highs. In such a market, a trendline is drawn from one particular swing high, connecting it to another successive but lower swing high, and projecting the line into the future. The strategy in a downtrend is to look for opportunities to place Put orders. The trendline acts as a dynamic resistance line and optimal price points to place Put orders are identified when the price is at or near the trendline.
In a Range-bound Market
Binary options markets do not trend all the time. In most cases, markets are range-bound; prices are moving sideways. In a range-bound market, prices usually oscillate between defined areas of support and resistance.
In such a market, the strategy is to place Call orders at support and Put orders at resistance. Trendlines in range-bound markets are drawn as horizontal lines. One line is drawn connecting highs along a clearly identified resistance area and another is drawn connecting lows along a clearly identified support area. Call orders can then be placed when prices are at or near the lower trendline whereas Put orders can be placed when prices are at or near the upper trendline.
The binary options market is known for its dynamism. A prevailing market condition can change at any time and catch traders off-guard. Traders using the trendlines usually have the advantage of spotting a potential change of the prevailing market condition early enough to adjust their trading strategy. Using trendlines, traders identify such a change when prices breach the line. This is also referred to as a breakout, and when it occurs traders who use the trendline strategy can begin placing trades in line with the new market condition.
For instance, if a market is in an uptrend and prices break through the trendline, it would mean that a new market condition (a downtrend) has formed. Traders can then begin to look for opportunities to place Put orders at or near the upper trendline which acted as support but will now act as resistance before a new valid trendline is drawn.
The trendline strategy is a simple but versatile strategy that can help traders spot high quality trade opportunities in any market condition. This strategy can also easily be applied to binary options trading.