Top Binary Options Indicators – When it comes to understanding the philosophy of trading, one of the more important challenges is to understand which indicator or combination of indicators to use under various scenarios. Understanding this , is part of the challenged of being a successful trader. In practice though here are tons of Binary Options Indicators that are available. So many that in fact traders will often end up confused as to which Binary Options Trading Indicators should be used and under what context. To overcome this challenge traders need to understand what the theory is behind the indicator they are attempting to use and in what context can it be used safely . This in part is where most retail traders fall short. It is the lack of this information that leads most traders to use the wrong set of indicators when it comes to trading.
Top Binary Options Indicators Everytrader Should Know about
“Your capital may be at risk. This material is not investment advice.”
Although most trading indicators are primarily built for the Forex or stock markets, they can easily be tweaked and be used for trading binary options as well. If you are confused about what indicator to use, then read this article to gain a correct factual understanding about binary options indicators. At the end of this article, the reader will have a good understanding of the various indicators for trading binary options.
Binary Options as we identified in our article http://binaryumpire.com/binary-options-an-introduction/ are estimates of underlying assets performance during a given time frame.
To understand this more comprehensively and to be successful, one needs to understand how the market works. Markets tend to move in patterns, understanding these patterns is a fundamental part of the game.
Analysts use trading indicators to ascertain and identify these patterns to make an informed decision as to which direction a given currency pair, commodity or stock would move within a given time frame.
Binary options trading indicators are nothing but mathematical values that are plotted on the chart. The formulae used to derive these values are based on price. Price, as we know has four distinct levels. The Open (or opening price), Close (or closing price), the High Low; often referred to as OHLC for short. Based on these four values, the indicators are developed accordingly.
As you can start to understand by now, all indicators are derived out of price and there is nothing magical about using indicators.
Types of Trading Binary Options Indicators
Many options traders have difficulties in determining when exactly to pull the trigger and enter into new trade. To start, we must have an understanding of the various indicator types and the signals they are sending with respect to price activity in the markets.There are different types of binary options trading indicators and any indicator you come across can be mainly classified into any one of these following types.
In theory there are two types of indicators
Leading indicators or oscillators ( e.g. stochastic, RSI and Parabolic SAR)
A leading indicator gives a signal before the new trend or reversal occurs.
Lagging, trend-following, or momentum indicators
A lagging indicator gives a signal after the trend has started.
I shall now go through some popular indicators and how we can use them in trading.
Trend Indicators: The trend indicators are usually plotted on the chart and overlaid on price. The most famous example for trend indicator is a moving average. What is a moving average? A moving average (MA) is a trend-following or lagging indicator because it is based on past prices. The two basic and commonly used MAs are the simple moving average (SMA), which is the simple average of a security over a defined number of time periods, and the exponential moving average (EMA), which gives bigger weight to more recent prices. The most common applications of MAs are to identify the trend direction and to determine support and resistance levels.
In essence is nothing but the average price plotted on the chart. The basic premise with trend indicators is that when current price is above or below the average price, it is determined that current price is in an uptrend or a downtrend.
Volatility Indicators: Volatility indicators mostly make use of high and low and in some cases the Open or close prices as well. Volatility based binary options indicators are plotted on the chart and overlaid on price. The most famous example for volatility indicators is the Bollinger Bands. Other volatility indicators are usually envelopes or bands based indicators, plotted on chart.
Bollinger Bands, a chart indicator developed by John Bollinger, are used to measure a market’s volatility. During market sessions, or news events a particular currency will cause the band to expand. During markets closed sessions the markets tend to contract.
Bear in mind that when trading forex there are two currency pairs in action. So even if one currency is less active the other may still be running.
Bollinger Bands are basically support lines in themselves. Generally when a candle touches a band it bounces back down back into its given range unless a breakout is about to happen in which case the band will go from horizontal to vertical.
Oscillators: The oscillators are those indicators which oscillator between fixed levels. They are usually plotted in a separate window and commonly denote overbought or oversold conditions in the markets. In other words, Oscillators are used to identify retracements in the price. Oscillators are also plotted by calculating the price and it could be any of the four price points. The most common and famous oscillators include the MACD or Stochastics oscillators
While MAs are useful enough on their own, they also form the basis for other indicators such as the Moving Average Convergence Divergence (MACD) which is the premise of this basic concept.
- MACD: These are basically two lines one fast and one slow. The bars (also called histograms) represent the variance between these two lines. See below example.
- The Stochastic Indicator
By definition, a Stochastic is an oscillator that measures overbought and oversold conditions in the market. The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.
When the Stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought. When the Stochastic lines are below 20 (the blue dotted line), then it means that the market is oversold.
As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.
What binary options indicator to use and when?
Indicators are based on price movements but the timing of each indicator maybe different due to the calculations, the periods used or even the factors that determine the makeup of the indicator.
Therefore traders always make use of two or more indicators (preferably a trend indicator and an oscillator) so that both these indicators can help the traders to trade in both trending as well as sideways and ranging markets.
With the above information, let’s move on to the next step and identify the some of the best binary options indicators and how you can apply these indicators into building a strong and a robust binary options trading strategy.
Top Trading Binary Options Indicators
All binary options indicators are categorized into the following types. It is therefore important to understand the types of indicators rather than focus on tons of endless indicators that promise to make you rich.
- Moving Average: The Moving Average indicator is probably one of the best trend based indicator that is available. It is flexible as it allows traders a lot of modifications such as setting the period to Close or Open, High or Low as well as changing the period and not to forget the different moving averages such as Simple, Exponential, Linear Weighted and Smoothed.You will use a moving average indicator for binary options trading, primarily to figure out the trend in the prices. If the prices are above the moving average, it indicates that the price is in an up-trend and vice versa. Also pay attention to the slope of the moving average as it usually signals a strong trend.
- Bollinger Bands: Bollinger Bands are versatile as the bands are squeezed and expanded based on the impending market volatility. You will use Bollinger Bands to capture break outs or for trading high momentum markets, example, before a major news release, Bollinger Bands tend to contract indicating a volatile move in the markets is approaching. The mid Bollinger Band is nothing but a moving average, so this indicator gives you two-in-one: Trend and Volatility
- Stochastics Oscillator: The Stochastics oscillator is a great indicator to use especially when you notice that prices are moving within a range. Besides using the Stochastics oscillator for just trading the sideways price action, it can also be used to identify retracements within the trend by simply following the oscillator when it crosses above or below 80 and 20 levels. You should ideally use the Stochastics oscillator alongside a trend or a volatility based indicator
- Pivot Points: Pivot points are a trading tool and they technically fall into the category of an ‘Indicator’ Pivot points basically calculate and give you 7 price levels based on the Open/High/Low and close from the previous day. The mid line is noted as the Pivot point followed by 3 resistance lines drawn above the pivot and 3 support lines drawn below the pivot midpoint. When price reaches the extreme support or resistance level, termed S3 or R3, it indicates either a continued trend or a reversal. Conversely, when price fails to reach the first support or resistance level, it indicates a potential reversal in the trend.
- Price Action: Price action is probably the least understood and most confused trading concept. It is not an indicator but is an important tool for binary options traders and normal traders alike. Price action combines the use of candlestick patterns, support and resistance and chart patterns. It is not usually suited for the beginner of traders, but having an understanding of price action makes an important addition to your trading success. Price action is an entirely different school of study that requires a lot of time and experience putting it into practice. The added advantage with price action trading is that it compliments any indicator based trading strategy.
Binary Options Indicators – Build your own trading system
Now that you have an understanding of the various trading indicators which can be used in binary options trading, readers can start building up their own binary options trading strategy by make using of the various indicators pointed out in this article. By correctly identifying the indicators that you are using, binary options traders can combine the various types of indicators into building a strong and a robust binary options trading strategy.
Remember that if an indicator is not giving you the results that you desire, it is either that you are using the wrong indicator or perhaps you need to tweak the settings of the indicator. When it comes to trading, there are tons of indicators that are available. So many that in fact traders will often end up confused as to which indicator should be used or for that matter, fail to understand what an indicator does. It is the lack of this information that leads most traders to use the wrong set of indicators when it comes to trading.
Generally no one specific indicator is conclusive in-fact far from it. A mix of indicators would be better to guide you in making an investment decision as to whether to call or put. A trader will should not base decisions on just indicators. There are other factors to consider such as fundamental news, support and resistance and price action.
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