You must accurately speculate the price movement of assets to win a binary options trade. If your predictions are incorrect, you will lose the entire trading amount. That’s because binary options are all-or-nothing trade.
Incorrect speculations result from flawed trading market analysis, unreliable strategies, and inaccurate trading tools. And the multiple tools available for trading, which isn’t making things easier.
However, there is one trading instrument that you can use to generate accurate results, i.e., trendlines. It is one of the popular tools that you can use for binary options trading. Trendlines are technical analysis trading tools that you can use to develop a detailed trading strategy.
If you want to use trendlines for trading binary options, you need to understand the basics of this technical analysis instrument. Also, you should learn about different trendlines strategies and the right way of drawing trendlines.
In this guide, you will find all the answers.
What you will read in this Post
What is a trendline?
A trendline is a technical tool that you can use to analyze the binary options trading market. It is mainly used for traditional up/down trading. Additionally, the trendline is easy to draw and gives relevant trading information.
Trendline consists of two lines that run along with the price of a given asset. It shows the price high and price low in the market. Usually, trendlines run close and parallel to each other.
The line that connects higher highs and higher lows are called the trendline. Here, the higher highs trendline is also called the resistance line, and the higher lows line is the support line.
On the trading chart, if the trendlines cross each other, it creates a wedge pattern. However, if the lines are running away, it shows a broadening wedge pattern.
Different trendlines explained:
A trendline indicates the movement of an asset in the market. It’s divided into three categories, i.e., downtrend, uptrend, and sideways trend.
An uptrend in the trendline is defined as a situation when the price of a commodity moves in an upward trajectory. In this trend, the bottom and top value of an asset keep increasing.
You can quickly identify an uptrend in the trading market by identifying higher highs and higher lows. An uptrend in the market indicates that there is a positive sentiment. Moreover, a long-term investor can gain huge profitability from the uptrend.
An uptrend in the trading market can last for as long as a year and as short as a few weeks. This trend also shows a bull market because you can buy commodities to make more profit.
Traders who want to gain profit from rising asset prices like to trade in an uptrend.
A downtrend is the complete opposite of an uptrend. It’s a financial situation where the value of a given asset moves down over time. In this trend, the bottom and the top price keep falling.
The down-term trend is not profitable for long-term investors as one can lose all the traded amounts. This trend indicates lower price lows and lower price highs.
The downtrend can reverse back to an uptrend if the market does not meet the required conditions. Also, during the downtrend situation, traders like to sell to make a profit.
The last kind of trend is the sideways trend. It is described as a financial situation when there is a slight change in the price movement of an asset. The sideways trend does not require enough explanation.
It’s also known as the horizontal trend, and it takes place when the supply and demand in the market are equal. You can spot this trendline when during price reversal or before a price trend starts.
As a trader, you can profit from a sideways trend. You can either place a stop loss when the price of an asset is around the resistance level or look for breakout and breakdown.
How to draw the best trendline?
While trendline is an easy concept to understand, drawing a perfect and accurate trendline can be a little tricky. That’s because most traders don’t know how to draw it and locate highs and lows in the chart.
Every trader draws a trendline as per their analysis. So, it’s safe to say that you can draw a trendline anywhere in the trading chart.
In a bullish trend, you can locate the lowest low and the next lowest low. Then you can draw a line between two points. Similarly, in the bearish trend, you can spot the highest high and the next highest high. Lastly, draw a line between them.
Once you have created the line, you can easily identify the outer and inner trends. Here, the outer trend is the boundary at which the price of the asset struggles to break through. And the inner trend indicates the momentum and signal in the trading market.
When you are drawing trendlines, it’s OK to cut through the wick. However, you should never cut through the body of a candlestick. Also, if there are three touchpoints, that means you are dealing with a dynamic trendline.
Using trend line for trading
You can use the trendline when trading binary options. For doing this, you can follow a few steps. You can start by finding an asset. After that, focus on the asset that moves rhythmically. Now, draw the trendline and notice the price movement of the asset.
Remember that the binary options market is volatile as the price changes quickly. So, you should not assume that the value of an asset will stay within the trendline as it can result in poor trade.
When trading binary options with trendlines, there are two predominant methods, i.e., support or resistance and price break.
Support or resistance
Once you have identified the trendline and its holding as support or resistance, you can enter the market. You can do this by using the trendline after the asset comes to its original value.
You can also put a stop loss on the other side of the trendline, depending on your trading strategy.
A trend line break is another way to use a trend line for binary options trading. When you use this method, you are supposed to use real breakout to determine the entry.
When a price breaks through the trend line, you can assume that price of the asset will continue to move in the reverse direction. You can use one of the two ways to enter trend line break, i.e., aggressive entry and conservative entry.
An aggressive entry means entering the market as soon as the candles break through. Here, the stop loss is placed above the trendline. Also, once the candle closes on another side of the trend line, you can enter the trade.
A conservative entry into the market means you have to wait till the price has broken through the trend line and tested. After the trend line has been tested, you can place a stop loss and enter the market.
Trend channels trading strategy
Trading binary option with a trend line is simple. All you have to do is find an asset, draw a trend line, and wait till the price moves in the direction of the trend line.
But to successfully trade in the options market, you need a trading strategy. Without a well-planned strategy, you might not accurately predict the market.
Here are three of the best trend line strategies.
Break and retest
One of the most popular trendline trading strategies is break and retest. This trading strategy says that you can wait for the price to break out after identifying an active trade.
The price either moves in a particular direction and never returns, or it can return into the trendline. If the latter happens, you can trade reset for high profitability. Here, the trendline acts as the entry point. Also, it helps to place stops.
Trendline flag can be seen as late or regular trend following.
For this trading, you must spot an established trend. After that, you should wait for a pullback. Once the price has broken the trendline into a trend direction, you can trade the flag.
The last trend line trading strategy is trendline bounce. This strategy is used for identifying situations where trendline acts as support and resistance.
Using the trendline bounce strategy, you can either place a stop loss below the resistance level or place a stop loss below the trendline.
How to spot a trend?
When you are using a trendline for trading binary options, it’s essential to spot a trend as it can result in huge profits. You can find a trend in options trading by either analyzing the historical chart, examining all-time highs, using trend indicators, moving averages, or using Bollinger Band.
Significant financial news events and change in management act as a catalyst in changing trends.
A trend line is an excellent tool that you can use to trade binary options. But to trade correctly, you must know the right way of drawing a trend line and using it for trading.
You also need a detailed strategy for trading binary options. Additionally, you should never assume that the price will get reversed. Instead, you should wait and then trade to avoid losses.