Trend Analysis Strategy

In order to achieve success as a binary options trader, you need to be able to correctly predict how the price of an asset will evolve. New traders might find this hard, if not impossible, to do. For such novices the market can appear to be moving on random without adhering to any sort of pattern. Price movements go up, then down, altering course for no discernable reason.

The importance of a trend analysis strategy

An asset’s price can move either up or down. This, however, never happens in a straight linear fashion. The price moves in a zigzag pattern. This is because there are two driving forces that determine the price. They are supply and demand. It is the shifting balance between these two forces that determine the price of any asset.

Because of the constantly shifting dynamic between supply and demand, price movements appear erratic. There are investors who will want to sell an asset even when market conditions are promising. This can happen because this investor needs to free up money to make a different investment or pay back debts. At the same time, investors can buy an asset despite poor performance. This can happen because they have a hunch, or simply like the asset in question for personal reasons. The lesson here is this: the relationship between supply and demand – and the price movements it causes -cannot always be predicted.

Inexperienced traders will find this bewildering, and ask themselves how the price can move for no observable reason? What new traders need to accept is that market forces are difficult to detect. None the less, you have to be able to predict what will happen next. Read on to find out how.

Trust the trend

The solution is essentially to ignore the details of why the price moves, and instead focus on where it is going. You do this by keeping your eyes on the trend. It is the same principle as driving a car without knowing exactly how a combustion engine works. You simply trust the motor to do its job without caring how it transforms fuel into energy.

A trend displays the overall direction an asset’s price is moving in. This allows you to make predictions about where it will head next. That’s all you need in order to make a successful binary trade. Trend-based trading strategies rely on the assumption that every factor that influences the price is expressed through the price. Thus, all you need to know is the price and how it has been moving, in order to make your predictions about future performance.

A trend has three points: a starting point, a top and a bottom. Whereas there is just one starting point, a trend can have numerous tops and bottoms. When a trend is moving upwards, it is called bullish. When it is going down, it’s called bearish. A bullish trend is ongoing as long as each bottom is above the previous bottom. A bullish trend is ongoing as long as each top is beneath the previous top.

Trading with a trend analysis strategy

Though the market appears to be moving arbitrarily, when you analyze trends you will discover certain patterns. In this chart you see the development of the Volkswagen share price. The candlesticks each represent one day of trading. The chart covers the time span October 2011 until June 2014.

Trend Volkswagen Binary Options

The red trend line you can observe across the whole chart represents the main trend of the price. The shorter red line represents a separate trend that is more short-lived and also more bullish than the main trend.

That the main trend is interrupted in this fashion by a more dynamic trend is commonplace. After some time, such trends will end once the price breaks through the trend line. Commonly, a consolidation period will ensue, and the price will go back to the main trend line again.

In the above chart, this is the most probable future occurrence. When the market next approaches the main trend line, you can assume that it is likely to turn around, and continue to rise. This sort of knowledge pertaining to the general direction of the market, can help you make sense of price movements and become a more successful trader.

Based on the price chart above, you can make a number of useful predictions. For instance, you know that until the VW share price reaches the trend line, the market will probably move a little here and there in opposing directions without any major, sudden movements. This tells you that a boundary option would not be a wise investment at this time. Furthermore, you can assume that once the share price reaches the trend line, it will most likely begin to go up again. This means that you should not invest in binary options that predict that the price will fall.

These types of trends show up within all kinds of timeframes. A candlestick can represent a day’s trading, or just a couple of seconds. In either case, you will always be able to see trends that indicate the direction in which the market is headed. This is knowledge you can base your binary options trading on.

Naturally, assets will go through periods when the price is not moving in a trend. Such periods will need to be approached differently. On the whole, it is recommended that inexperienced traders avoid such conditions.

You will find information about how to combine candlesticks and trend analysis in order to develop some solid strategies elsewhere on the site.

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