Binary options can be a highly profitable, but many traders are scared to perform market analysis for this form of trading. This articles shows you how to perform your own market analysis and find trading opportunities for winning trades.
You will learn:
With this information, you will be able to analyse the market for yourself.
Performing market analysis for binary options requires understanding the entire picture. You have to start on a long period and work your way down to shorter periods. While you will never directly trade these long periods, it is important to understand their effects, as they can override the effects of shorter periods.
When the market is nearing the 200-day moving average on a daily chart, for example, this moving average will provide strong support. Even if the 5-minute chart shows a downtrend, this trend is weaker than the chart event on the longer time frame and will override its effects. Traders that invest in a down option based on the short trend have made a bad prediction and will likely lose their trade. To avoid such mistakes, it is important to start your analysis with the longest relevant time frame, the daily chart.
We explain market analysis in four steps, and we will use the Dow Jones as an example. Let’s get started.
For the Dow Jones, the daily chart looks like this:
This chart uses a 50-day moving average (purple line), a 100-day moving average (bright pink line), a 200-day moving average (white line), and Bollinger bands (green lines). As you can see, we will rely on pattern matching strategies for the first part of our analysis. We will later add a technical indicator, but for now, there is no need.
You can, of course, use different indicators. The important point is not the type of indicators which we use, it is the approach from big to small and the relating of different time frames.
With that being said, let’s analyse the chart. There are a few things we should note:
This market analysis paints the big picture. Let’s see what we can learn about shorter periods.
The one-hour chart Dow Jones’ one-hour chart looks like this:
This chart looks very similar to the daily chart, but it is only the last part of it. The moving averages are stacked in just the same way, and there is a strong upwards trend that has entered a sideways movement.
We already know that the daily chart shows a movement near the top of its trading range. The fact that the hourly chart paints a similar picture is a strong indication that the market is on the verge of deciding what it will do next.
Monitor the daily chart.
Until one of these trends develops, your options are limited. Your best option is to search for gaps that are accompanied by a low trading volume. These gaps are likely to close, which provides you with a clear prediction for a high/low option, one touch option, or even a well-timed ladder option.
For other strategies and further market analysis, we have to zoom on to the next shorter time frame.
The 15-minute chart shows a sideways movement with a clear trading range.
In this chart, we have also added the Money Flow Index (MFI). As you can see, the MFI has failed to reach an extreme area during the entire sideways movement. Apparently, traders are unwilling to push the market in either direction and back off every time before a movement can develop. This is an important indication that can help you find trading opportunities.
We now know two ways of creating trading signals:
For both strategies, use an expiry of around 1 hour. This equals four periods.
Let’s take things one step further and zoom in one more period. We will find another possible trading strategy.
The 5-minute chart offers us another opportunity to win a binary option.
As you can see, the market has become significantly more volatile over the last candlesticks.
In this environment, trading a high/low option is difficult. It is, however, great for a boundary option. Boundary options define two target prices in equal distance from the current market price – one to the top, one to the bottom. The market only has to touch either target price, and you win your option. In the current market environment, this is a highly likely prediction.
When the market is near the middle of the 21040 to 21070 trading range, and your broker offers you a boundary option with both target prices within these limits and an expiry of at least two periods (10 minutes), you have a high chance to win this option and get a good payout. With a little luck, you might even be able to trade a high-yield boundary option and get a payout of 250 to 300 percent.
These trades have already passed. Nonetheless, the reasoning behind them holds true and still applies to your current market environment. They offer an example of market analysis, or technical analysis, that can provide trade opportunities.
To perform a market analysis for binary options, start on a daily chart and work your way through shorter and shorter periods. Understand what is happening in each period and relate it back to what you have learned in longer periods. Then invest in the period which you consider the most profitable.
You have also seen the versatility of binary options. We have seen periods with very different market environments, but we have always found a way to trade these environments with digital trades. There will be times in which you are unable to find a profitable investment, but those times will be rare.
If you still need a broker with which to trade binary options, take a look at our list of the best brokers in the market: