In the previous post ‘The Differences…Fundamental & Technical Analysis’ we uncovered the basics of what these two forms of analysis are and why they are used by traders. We also learnt why Binary Options traders preferred using technical analysis tools and indicators when trading. Yet in this lesson, I think it is time that we look at technical trading!
And as you may recall, technical trading is essentially the study of an assets price and if it has gone up or down in value in the past.
And as we also learnt, proponents of technical analysis believe that the rising and falling in price of an asset doesn’t just happen randomly but due to the supply and demand of the asset in question.
Fortunately as Binary Option traders we don’t have to worry too much about the how and why of technical analysis, rather we just need to be aware of the patterns which an asset price can exhibit over time.
As such, we can therefore spot if the price is going through another pattern and by doing so, we can build a probable hypothesis on how the price will go in the future!
So let us now look at a few of the main price-movement patterns which Binary Option traders look out for.
This is probably one of the simplest yet major patterns which every Binary Options trader tends to look for.
Whilst an asset’s price is always going up or down all the time and over a certain time span (like few minutes) it may look pretty random, look at the price over a long enough time period and you will nearly always find that the price is on some sort of trend.
In fact if you were to look at the history of an assets price over the last few years, you would notice it has several up or down trends.
One could say that the price of any asset is nearly always in some sort of trend, though unfortunately it is hard to always say whether it is an upwards or downwards trend due to the fact that the trend is interspersed with brief trends heading in the opposite direction.
As Binary Options traders who are trading within a specific time limit (usually hours or maximum one day) we are not really bothered whether the asset has been in an upwards or downwards trend over the last several years.
Instead we are only concerned as to whether it is currently in an upwards or downwards trend within the last few hours, etc. (depending on how long our Binary Option trade is set for).
Having identified a trend, many Binary Options traders will proceed to immediately place a trade in the direction which the trend is heading in, i.e. if the price is going up, than placing a trade saying that within the next hour, etc. the price will be higher than it currently is.
Unfortunately this in itself doesn’t guarantee ones Binary Option will end in the money (win) for as many successful traders will inform you, a trend will never last forever and will finally come to an end.
Usually this will be replaced by a new trend where the price will ultimately end up going in a different direction from what it has been.
So is there any way of knowing if a trend is coming to an end and subsequently, about to start heading off in the other direction aka if it had been going in a downwards trend, is about to switch into an upwards trend, etc.?
Regrettably there is no guaranteed way for otherwise all of us Binary Options traders would be making a profit on all our trades and subsequently become mega-rich, mega-quickly.
Yet there are two patterns which successful Binary Options traders look for to help indicate whether a trend is still in its infancy or if it is nearing the end, once and for all.
The first pattern one should look for is:
On coming across a trend, one thing which astute traders will often look is to see the steepness of the trend; is the asset price increasing (or decreasing) quickly or gradually?
For if the trend were represented as a line across a chart, how steep the line is would indicate the speed at which the asset price is moving.
However fast the price drops, etc. during the midst of a trend, often when the trend is reaching the end of its life, the price will begin to slow down in the direction it is heading in.
If represented on a chart (see picture below) we can see that the trend just doesn’t stop but rather curves like the top of a hill as the speed in which the price is moving is slowing down.
The same could also be said if the trend was heading in the other direction whereupon the price was now beginning to slow down its quick descent, whereupon whilst in theory there is still a downwards trend, the price isn’t falling as quickly as it was before.
When represented on a chart, this saucer can be said to look like a valley (or upside down hill).
Whilst a quick falling (or rising) trend where the price is beginning to not fall as fast as it was beforehand doesn’t necessarily mean the trend is about to fall; sometimes the price is just slowing down before it produces another sudden drop, usually this is an indicate that the trend in question is coming to an end.
As such if the price trend you have spotted is beginning to slow down, you may be advised not to place a Binary Options trade in the direction of the trend as you could be in for a disappointment.
I should add that in such a scenario, I WOULDN’T place a trade on the price going in the opposite direction from this trend, for;
- We don’t exactly know how long it will be before the new reversal trend kicks in
- The trend might not be coming to an end but merely slowing down for a brief period of time before the trend suddenly resumes again at full speed in its current direction.
If you believe you are witnessing a saucer pattern occur right in front of you when making your analysis, take it as a warning to not place any Binary Options trades on that asset until the pattern has ended!
As well as saucers, the other pattern which Binary Options traders look out for is;
HEAD & SHOULDERS
The previous saucer pattern is very good for identifying when a trend is gradually coming to the end of its life and as such, is about to start moving in a new direction.
Now if all trends were to end in a saucer like fashion, than life as a Binary Options trader would be a lot easier; unfortunately this isn’t actually the case.
For many times a trend can come to an end abruptly and subsequently, start a new trend going in some other direction (either up/down or sideways).
Fortuitously there is another pattern which we Binary Options traders can use to help identify if a pattern is about to come to its natural end; this pattern being the Head & Shoulders pattern.
So what exactly is this pattern? Well often when a trend is about to come to an abrupt end, what we’d find is that the price will reach a certain level, upon which the price will revert back to what it was previously.
Having gone back on itself, the price than proceeds to go back on its initial trend, this time going even higher than it did previously, only to head back again in a different direction, usually ending up somewhere near the price it went back to previously.
Usually the price will then make one more exerted effort to head back in the direction of the original trend, though it will not reach the same level it previously reached the second time the price went back on the original trend.
Upon reaching this third high, the price will usually proceed to start heading back down in the opposite direction of the original trend – if not moving in a completely different trend altogether.
If this pattern sounds confusing, then imagine for example we were trading some shares, say IBM shares.
Well assuming the price was increasing very quickly, on a line chart this would be plotted as a line heading upwards.
However on reaching a specific value, say $15 per share, the IBM share price suddenly drops in value away from the previous trend, and drops to say $14.50 per share.
Yet on reaching $14.50, the price of IBM shares suddenly rallies upwards again and this time reaches $15.50 per share, only to quickly fall back in value to $14.55 per share.
Than as to be expected with the Head & Shoulders pattern, the share suddenly goes up in value again but this time only reaches $15.10, before it starts dropping off again and losing all the previous momentum it had, starts falling to $14.50 or lower (depending if the new trend is sideways or downwards trend).
This pattern of 3, shoulder-head-shoulder (because the second time the price goes up it reaches the highest point the trend will reach) looks like a head and a pair of shoulders!
I have also heard the reversal of this pattern been referred to as the dead cat bounce (no offense to animal lovers) for the price will go down a certain distance, only to increase in price again (1st shoulder or bounce).
Than the price will go down in value once again to a new low before heading back up in price (head or second bounce).
It will subsequently repeat this one more time but as to be expected, the price will not drop down in value as much as it did previously, and then the price start rising again in value (2nd shoulder or bounce).
This pattern (along with the saucer pattern) is a very good method to work out if a trend (which you are hoping to back a Binary Options trade on) is actually nearing or in the end of its life!
GO FORTH & TRADE
Whilst there are a vast array of technical analysis tools and as such, many good books around on the subject of technical analysis, the patterns which we have uncovered so far are very effective ways to working out which way the price is heading in.
So with this knowledge attained within binaryoptionstips.co.uk, would I recommend you are ready to become a full time Binary Options trader?
Well maybe not full time but you certainly have the knowledge to start trading Binary Options in a small fashion, (perhaps risking double digits rather than triple digits per trade).
Yet like any sort of trading, it is never a case of learn once, do repeatedly and make a living from it.
Instead trading is a continuous learning experience where you learn new technical (and fundamental) skills, apply them to your on-going trading and as such, you’d get better at it.
Now I would like to show you which Binary Options Brokers platforms I use specifically and why I trade Binary Options on these two platforms in particular!