To prepare a chart for a high probability trading setup, technical analysis of chart patterns is important, irrespective of the time frame, for every binary options trader. Day traders, swing traders and medium-to-long-term position traders should incorporate chart analysis into their trading strategy in an effort to maximise their trading profits.
Depending on the type of information a binary options trader is seeking, reflects they type of price chart they may choose to use. There are four key price charts: a line chart, bar chart, candlestick chart and a point-and-figure chart, all of which can display distinct chart pattern formations which traders use to identify current trends and reversal patterns which, along with technical indicators, can trigger buy and sell trading signals.
Chart Patterns and Indicators
Reversal and continuation chart patterns are used to either signal the completion of a trend (and warn of a price reversal) or indicate the continuation of a prior trend over a given timeframe. Technical indicators measure price action trends, volatility as well as momentum and are used to confirm the price movements and quantify the chart patterns. Primarily, binary options traders use technical indicators to form buy and sell trading signals.
Technical Indicators and Chart Strategies
Used to improve trading performance, binary options traders should utilise technical indicators to identify unique trading opportunities which may otherwise be overlooked by viewing price charts alone. To capitalise on using a technical indicator as a trading tool, the trader is required not only to consider the assets recent price action but also their own personal trading experience and risk tolerance.
Classified as either leading or lagging in nature, a leading indicator precedes price movements, giving a predictive quality and are considered most useful in a sideways or non-trending market. A lagging indicator is a confirmation tool because it follows price movement and should be used during periods whereby price is trending. Price and indicator crossovers as well as divergences are used to signal buying and selling opportunities.
Trading Strategy Using Divergences
Divergence occurs when there is a disagreement between the indicator and price (or moving in opposite directions). That is, divergence in an uptrend occurs when price is making a higher high, but the indicator does not make a higher high. In a downtrend, divergence occurs when price makes a lower low, but the indicator does not make a lower low. When divergence between price and the indicator occurs, there is a high probability of a price retracement.
There are two types of divergences: positive and negative. Positive divergence occurs when the price of an asset makes a new low while the indicator starts to climb upward and often foreshadows a bullish reversal. Negative divergence occurs when the price of the asset makes a new high, but the indicator fails to do the same and instead closes lower than the previous high and signals a bearish reversal.
Chart Strategy: Ultimate Oscillator
Developed by Larry Williams in 1976, the Ultimate Oscillator is a technical indicator used to measure buying (and selling) pressure. The Ultimate Oscillator combines short-term (usually 7-period), intermediate-term (usually 14-period), and long-term (usually 28-period) price action into one oscillator and measures the buying or selling pressure and its relationship with the true range of the market. Plotted on a sub-chart below the main price chart between 0 and 100, the Ultimate Oscillator generates price action trading signals based on divergence which can warm of future price reversals.
For a high probability binary options trade, two conditions must be met with both Call (buy) and Put (sell) signals. When there is positive divergence between the Ultimate Oscillator and price, and the oscillator falls below 30 and then rises above the previous high established during the divergence, a Call (buy) trade is signalled.
Conversely, when there is negative divergence between the Ultimate Oscillator and price and the oscillator rises above 70 and then falls below the previous low established during the divergence, a Put (sell) trade is signalled.
Responsible money management ensures that the losses don’t mitigate the profits.