A binary option is an investment that traders do by predicting the price movement of an asset. As a trader, you must analyze whether the price of the asset will be above or beyond its strike price before it reaches the expiry time.
For an accurate prediction, you can win a better payout. The profit gets better if you are trading a risky asset or if the trading condition is unfavorable. Also, certain brokers offer better payout. But if you have incorrectly predicted the price movement, you will end up losing all the traded amount.
As binary option is an all-or-nothing trading market, at certain times, traders avoid entering the market. But the tools available for this trading make it easy to understand the price movement.
Among the available tools, the trend line is getting popular because it helps create a winning trading strategy. In addition, this technical analysis trading tool can be used for knowing the market behavior.
So, if you want to enhance your chances of winning, use the trend line indicator. But for that, you need to know about different types of trend lines. Also, you must learn about winning trading strategies. Fortunately, this guide has got you covered.
What is Trend Line?
The trend line is one of the widely used technical indicators that help in analyzing the market. Ideally, this indicator is used for up/down trading.
Moving further, the trend line has two lines, which run parallel and close to each other. The two lines show higher and lower prices of an asset in the market. Also, one can easily draw it to abstract relevant information.
The line in the chart which connects higher highs and higher lows is the trend line. The higher highs trend line is the resistance level, and the higher lows trend line is the support level.
You must remember that if the two lines are running away, they create a broadening wedge pattern. However, if the line crosses each other, a simple wedge pattern is created.
Trend lines can be easily recognized. If you want, you can apply a single trend line to get a clearer picture of the data.
Different types of Trend Line
Trend lines are further divided into three categories to make it easy for traders to understand the market.
An uptrend in trend line indicator tells that demand for an asset is more than its supply. It’s a situation when the price of an asset moves in an upward trajectory. An uptrend also suggests that the price is likely to continue moving upwards.
One interesting thing about the uptrend is that every successive peak and trough is higher than the previous one, showing a continuous upward movement. One can easily notice an uptrend in the market by identifying higher lows and higher highs in the market.
It can last in the market till the price is making higher swing highs and higher swing lows. That means the uptrend can either last a couple of weeks or a year.
Certain market participants, like long-term investors, enter the market only when there is an uptrend. It’s because this trend offers them an opportunity to gain profit from rising asset prices.
In this situation, the price of an asset moves down. It suggests excess supply, which shows that market participants are more likely to sell an asset instead of purchasing it. This trend is not ideal for long-term investors. That’s why they avoid entering the market during a downtrend.
Also, you should refrain from holding a long position because the chances of the price moving upwards are unlikely. The only way a downtrend becomes an uptrend is when the market does not meet specific conditions.
Lastly, you can encounter a sideways trend in the market. It’s a financial situation that indicates a slight change in the price of an asset. You can notice this trend when the demand and supply are the same.
It’s also called horizontal trend that is established before a price trend starts or during price reversal.
To safely enter the market during the sideways trend, you should look for breakout or breakdown. Or you can place a stop-loss when the price is around the resistance level.
How can one draw Trend Line?
The trend line trading technique has become quite popular because it’s an easy concept. But one thing that is not easy is drawing trend lines. The difficultly of drawing trend lines is the inability of locating highs and lows in the trading chart by traders.
One interesting thing about trend lines is that you can draw them anywhere in the chart. In case it’s a bearish trend, you need to find the highest high and the next highest high. After that, you can draw a line. Similarly, in a bulling trend, traders need to draw a line between the lowest low and the next lowest low.
After creating lines, identifying inner and outer trends gets easier. The inner trend in the chart is the signal and momentum. Whereas the outer trend is the boundary. The price of any asset that you are trading breakthrough at this boundary.
If you are drawing a trend line on a candlestick chart, you can cut through the wick but do not cut the body.
How to use Trend Line for trading?
No matter what asset you are trading, you can easily use the trend line for doing market analysis. You can begin by finding the asset on the chart. Then track its movement and draw a trend line accordingly.
While this step is easy, most traders end up losing their money because they assume that the price won’t change. But the binary option is a volatile market. So, price change is natural.
There are two important aspects of trading binary options using trend lines, i.e., support or resistance and trend line break.
Trend Line break
It’s one of the most effective ways of using trend lines in binary options. For this method, the actual breakout is required for determining entry points in the market. Once the asset’s price breaks through the trend line, it continually moves in the reverse direction.
In this situation, you can use one of two ways to get in the trading market, i.e., conservative entry and aggressive entry.
To make a conservative entry, you must wait till the time price of an asset breaks through the trend line. After that, place a stop loss for limiting the risk and increasing your chances of winning.
Similarly, for an aggressive entry, it’s important to get into the market quickly after there is a candle breakthrough. This citation requires you to place a stop loss above the trend line.
Support or resistance
Another way of trading binary options using a trend line is through support or resistance. Here, support is the level where one can expect a downtrend. On the other hand, resistance is the level of the uptrend.
Support level arises due to buying interest, and resistance level arise due to selling interest. Using support and resistance for entering the market, you should place a stop loss.
Different trend channel trading strategy
No matter how well you have understood the concept of the trend line but if you are not using a strategy, things might not work in your favor. That’s why it’s important to create a better trading strategy.
But instead of coming up with a strategy, you can use one of the three trading strategies mentioned below.
To trade using the trendline flag, you must look for an established trend. And once the price of the asset has broken the trend line into the direction of the trend, get into the market. This way, you can win a huge payout.
Break and retest
Another popular trend line trading strategy is the break and retest. Here, you need to spot an active trend and wait till the price breaks out. After breaking, the price either returns into the trendline or travels in the same direction and never comes back.
In case the price returns, you can win a huge payout. Also, you can place the stop loss at the entry point to limit risk.
It’s the last trading strategy that can be used when the trendline acts as support or resistance levels.
How to spot a trend?
Now comes the main question- how can one identify trends in the binary options trading market? It’s pretty simple. You can either use historic data, charts, or indicators like Moving Averages to understand the market and identify the trend.
Besides the indicator and chart, big financial news related to the asset can also bring a trend in the market.
Binary options are a profitable market to trade in, and by using a trend line indicator, you can enhance your chances of winning a huge payout.
While using trend lines for trading, it’s important to properly draw the lines. That’s because inappropriate lines might not offer accurate data. Also, this can lead to you making inaccurate assumptions.
A trick to never lose money while using trend lines is remembering that price reversals are real. It can happen at any given time. Thus, you must create a trading strategy accordingly.