Volume is highly relevant to binary options traders. It can help you identify profitable trading opportunities and avoid bad ones. This article explains how binary options traders can use trading volume for their trading.
In detail, this article will answer these questions:
With this information, you will immediately be able to add these values to your strategy and trade binary options with added confidence.
The volume defines how many units of an asset changed hands during a period. For example, when you are looking at a price chart with a period of 10 minutes and the last period had a volume of 1,000, 1,000 stocks swapped hands during this 10-minute period.
There are two important things to point out here:
Some traders would argue that it is unimportant whether the overall volume is the result of one large trade or many small trades. What matters is the overall relationship between demand and supply, and nothing else.
Also, it is important to understand that it only measures traders who buy or sell an asset. Binary options traders only make predictions about what will happen to the price of an asset, they neither buy nor sell it. Therefore, the volume ignores binary options. Some newcomers try to use this value to understand which assets are popular with binary options traders. That is not what the indicator does. Unless your broker specifically provides an extra indicator for binary options, the figure always indicators classic buy/sell supply and demand.
To understand why this is important, consider these two scenarios:
In both situations, the market has shown a strong movement. In the first example, it jumped by 10 percent, in the second example only by 3 percent. Nonetheless, the second example would offer the better trading opportunity. The volume helps you understand why:
Of course, most real-life trading situations will be less black and white than this example. But the volume can nonetheless help you understand the importance of each single period. When a period has a high volume, its movements are usually more important to future price action than the movements of periods with a lower volume.
Simply put, remember this relationship:
Even during trends, periods in the main market direction often show a higher volume than periods against main trend direction. By monitoring this, you can understand what is happening.
There are many ways in which you can measure volume. The two most important of them are:
Let’s take a closer look at each of them.
The simplest way of measuring volume is direct. Most chart software offers a tool that can draw the volume directly into your chart. Sometimes, the tool is active by default, sometimes you have to add it manually but is almost always there.
In the chart below, the volume is symbolised by the thin upwards bars at the bottom of the chart. The length of the bars indicates the volume of the period.
As you can immediately see, the figures vary heavily. To understand how the volume can help you trade, take a look at the last two candlesticks. After a sideways movement with relatively low volume, the market started to fall in the second-to-last period but eventually closed in the plus.
Experienced candlestick analysts will immediately recognise this candlestick as a hammer. The hammer indicates upwards momentum because the market apparently turned from a strong downwards movement to a strong upwards movement during the period. This movement is likely to carry over to the next period.
The problem with the hammer is that it is unreliable when traded alone. During the previous sideways movement, the market formed quite a few hammers but always failed to act to continue to rise. The last hammer was different, but how are traders supposed to distinguish false signals from good ones? That’s where the volume comes in.
When you look at the previous hammers, you will see that they all featured a low trading volume. This is why their implications were weak – not many traders backed the movements, they might be the result of just a few errant trades.
The hammer in the second-to-last candlestick featured a much higher trading volume. Its bar is more than twice as long as the previous bars, which implies that something motivated traders to buy during this period.
Backed by many traders, the implications of the last hammer are much more significant than those made by the earlier ones. Once you see this hammer, it would be a great time to invest. The following large upwards candlestick is the likely outcome of the high volume.
This is why this analysis can help you to filter signals and understand the importance of single candlesticks. A sudden rise in volume very often indicates that a candlestick is of high importance and that the market will continue to move in the direction it implies. Often, it starts a strong movement.
Some technical indicators create volume based predictions about what will happen to the price of an asset. There are too many technical indicators that consider the volume to present them all at this point, so we will focus on the most popular of these indicators: the Money Flow Index (MFI).
The MFI compares rising to falling periods. It multiplies the length of each period with its volume and multiplies it with the volume. It then puts the sum of all rising periods in relation to the sum of all periods with falling prices. The MFI displays its result as a value between 0 and 100 that indicates the percentage share of volume-weighed rising prices.
The volume is the weighting factor that determines the importance of each single period of the MFI. Periods with a higher volume are more important to the MFI’s result than periods with a lower volume.
This is why the MFI can open your eyes to completely new insights about what is going on in the market. While you can analyze the price action and the volume on their own, it is difficult to combine them. There is simply too much data to make sense of it.
The MFI probably is the most popular volume-based technical indicator. There are many other technical indicators that use the volume, too. For example, you could consider trading one of these indicators:
These and many other volume-based indicators can provide a solid basis for a binary options trading strategy.
For binary options traders, there are two ways of trading the volume that relate to the two ways of measuring the volume:
Let’s look at each of these possibilities individually.
This is the simplest and most direct way of trading the volume. You can trade two kinds of signals:
As you can see, this strategy is simple. Identify the direction that shows the higher volume and invest accordingly – that is it.
This strategy largely depends on the indicator that you choose as the basis, but we will once again stick with the most popular volume-based technical indicator, the MFI.
As we already explained, the MFI creates a value between 0 and 100. You can find profitable trading opportunities when the MFI drops below 20 or rises above 80. These areas are considered overbought (over 80) or oversold (below 20), which makes a return into the normal area likely.
As soon as the MFI crosses the back into the normal areas, you know that there must be momentum and potential for a long movement, which is why now is a great time to invest.
Typically, you would use a high/low option for this trade. You could also use a one touch option, but this would be a very risky strategy you should only trade with the help of additional indicators that can predict the length and the strength of the movement.
The volume is highly relevant to binary options traders. It can help you identify profitable trading opportunities and avoid bad ones, which can combine to significantly increase your profits.
You can trade volume directly, by analysing single candlesticks or multiple candlesticks, or indirectly through technical indicators such as the MFI. Either way, the volume should be a helpful addition to your trading strategy.
If you still need the right broker to trade this strategy, take a look at our broker top list.