Technical Analysis and Charting:
The premise of technical analysis is that price and volume are the only pieces of information necessary to analyze trading assets. All of the other information is processed by the market and the price and volume represent the output. Technical analysis is the study of price and volume and how they evolve over time in order to predict future movements. For binary options trading, it is very important that we learn to predict future movements. In particular, we can simplify the analysis because we only need to predict the DIRECTION of where the asset is going. We don’t need to be concerned with how much it will move in that direction, or what action we will take if we are wrong initially (for example, profit target levels and stop-loss).
At the core of a technical analysis is a typically a candlestick chart. Each bar, red or green, represents one period in the price history of the asset. Each bar, or candle, is a neat way to show the open, close, high, and low of the asset during that period. The body, or thick part of the candle, represents the open and close. There are typically two colors of candles in a chart, either red and green or white and black. In each case, the color indicates whether the close is higher or lower than the open. The lines above and below the body are typically called the shadow or the wicks, and these represent the high and the low. As you can see, there is a lot of information wrapped up in each little candle. You can see more than just the closing price during the period, you can begin to get a sense of the momentum behind the asset, and whether the buyers or sellers were driving the price action during that period. We are always looking to figure out whether buyers or sellers are dominating because that will drive the momentum over the next few periods.
Single candles are useful, but the real use comes in when looking at the candle chart that contains multiple candles. I want to draw your attention to a few candles that I think are important here on the chart below.
The first one is this long red candle on the left that is circled in blue. Red color means the close is lower than the open, and the size means the asset went down significantly during the period. The wick is small, meaning the close was near the low for the session. In this candle, sellers dominated the price action. The bulls were nowhere to be found. This is a bearish indicator that the asset will continue to decline. For a binary options trade, I would bet on this asset going lower. And sure enough, the price action continued lower for the next few candles. If I had a 5-10 minute binary option, I would have made money. After that, the buyers came back and staged a bit of a rally but it failed to go beyond the top of that first long red candle. That is another bearish signal, and sure enough the currency pair moved lower.
The next one I want to draw your attention to is this pair of candles near the center of the chart, also circled in blue. The first is a red candle with a relatively long wick below the body. This means to me that sellers dominated the first part of the period, but then buyers came back in and drove the pair back up to close significantly above the low. It seems the buyers are starting to show up to the table. The next candle is green, indicating that the buyers actually won the battle in that period. Sellers initially pushed it lower but buyers were able to take over and push the asset higher, to close above the open. At that point I would be looking to buy binary call options, betting that this option is going higher. And sure enough, I would have been right for just about any expiration time during the rest of the day.
Let’s look at another currency pair. This chart is USD/JPY, and again it is 5 minute candles over a 1-day period.
In this chart, the first candle that I want to point out is the small candle near the left side of the chart. Here the bears have dominated the last few sessions. This green hammer shows that the bears may have dominated this period initially, but at some point the bulls took over and pushed the pair back up above the opening level. This again indicates the buyers are back at the table, and I would buy a binary call option after seeing that candle. And as you can see, the pair traded higher.
Another candle I want to point out is the red one near the center right of the chart. This one is kind-of the opposite of the one we just looked at. Here it looks like buyers had been dominating for 2 sessions, took the lead and pushed the pair up to the highs of that session. At some point, sellers came back in and brought the pair back down to close below the open. This is a bearish sign, and I would have at that point bought binary put options. And you can see I would have made money since the pair continued lower the rest of the day.
Those are some basic charting strategies you can use. Again, the idea is to get a sense of whether the buyers or the sellers are dominating the price action, and then bet on the direction of the price movement. The great thing about binary options is that you don’t have to worry about the magnitude of the move, you just need to get direction right.