Follow-The-Trend Binary Options Trading Strategy & 5 Ways to Identify Trends
Follow-the-Trend is maybe the most popular strategy to trade any financial market using any financial instrument. As they say, the trend is your best friend.
In this article you can find information about how to “Follow-the-Trend” using binary options but also 5 different ways to identify trends using technical analysis.
Follow-the-Trend Strategy Outlook
Financial markets tend to follow certain trends. Actually they constantly follow a certain trend until that trend is temporary disturbed by a short-term price pullback or it is fully reversed and a new trend is emerging at the opposite direction (reversals).
Trend Continuation is the Best Strategy to Trade High / Low Options
When you trade High / Low binary options it is better to seek for trend continuation than for trend reversal. On the contrary when you trade Touch Options or Range Options reversals can prove a successful choice.
Follow-the-Trend strategy is the best strategy to profit from 60-second binaries trading. This strategy has a proven record of success while it is really easy to be implemented by any trader. The power of this strategy relies on statistics.
Statistics have shown that there is always a better likehood that a trend will continue than a trend will be reversed.
In order to apply 'Follow-the-Trend' Strategy with success you certainly need a basic understanding of technical analysis and charting. In this article you will be able to find all the basic information about how to recognize and to use trends.
The ‘Follow-the-Trend’ Trading Strategy Implementation
When the existence of a trend is confirmed the only thing you have to do is to execute a trade in the same direction. Here are some easy steps to apply the strategy.
Easy Steps for Implementing this Strategy on 60-Second Binary Options
Here are some easy steps to apply a Follow-the-Trend Strategy on 60-second binary options:
(1) First of all you need to find an asset that is moving on a strong trend and open the 1-minute chart. In order to identify a trend you may use Eliot Wave Theory or other technical analysis methods and tools presented below on this article.
(2) After you have confirmed the existence of a price trend you execute the trade.
◙ Call Option for an uptrend
◙ Put Option for a downtrend
(3) If your trade proves profitable you keep on opening trades until a loss is occurred
(4) When a loss is occurred you must wait and re-evaluate the trend:
◙ either the trend will continue after a temporary pullback, or
◙ either the trend will be fully reversed.
(5) If it is a pullback, continue in opening positions in the same direction. If it is a reversal, stop trading immediately and seek for another asset or another time to trade.
The Right Entry Levels
It is very important to chose the right entry level each time you trade. When a trend is confirmed most of the times you should wait for a small correction to execute the trade.
Examples on charts
If you look at the following charts you may see the best entry time for three different trades:
→Chart-1: the best entry occurs at each local Low
→Chart-2: (Eliot Principle) the best entry level is at Point-4
→Chart-3: the best entry level is at Break-Point
Five (5) Different Ways to Identify the Existence of a Trend
As it was mentioned before, financial markets tend to follow certain trends. The easiest way to identify those trends is by using chart analysis. In this article you will find information about:
1. Chart Formations using Highs and Lows
2. Eliot Waves
3. Support & Resistance
5. Technical Analysis Indicators
(1) Identifying Bullish and Bearish Chart Formations using Highs and Lows
The easiest way to identify a trend is by using this simple Highs / Lows trending rule:
(i) Up-Trend Formation Recognition
A market is up-trending when the latest high is higher than the previous high and the latest low is higher than the previous low (as in the case of chart-1).
(ii) Down- Trend Formation Recognition
A market is down-trending when the latest high is lower than the previous high and the latest low is lower than the previous low.
Chart-1: High & Low Uptrend
(2) Eliot Waves
The Eliot Waves theory is one of the most fundamental theories of technical analysis. According to Eliot, every market moves upon a particular pattern containing an uptrend phase (1,2,3,4,5) and a downtrend phase (a,b,c) as you can see in the chart-2.
Here is the basic explanation for each point:
Wave-1: The market starts to rise and at the end of wave-1, it reaches a local high
Wave-2: Basic Correction of wave-1 (pullback)
Wave-3: Stronger wave than wave-2 as the uptrend is now confirmed and more traders open long positions
Wave-4: Correction of wave-3 as the last bullish wave is expected (usually the wave-4 follows the ‘Flag Formation’)
Wave-5: Strong but usually not as strong as wave-2. When it ends the trend is fully reversed
Wave-a: First price correction, a new downtrend is emerging
Wave-b: The downtrend is now correcting upwards, known as the ‘Bear Market Rally’
Wave c: The downtrend is now confirmed and the market moves faster. The wave-c is stronger than wave-a as many traders close their long positions and open short positions
Chart-2: Eliot Wave Principle
(3) Using Support & Resistance to Forecast Upcoming Trends
An easy way to identify short-term trends is by analyzing price action upon close support and resistance levels. Short-trends are often generated when the price of an asset has reached but not break-through a support / resistance level. Note that when the price of an asset reaches strong support / resistance levels for the first time it is almost certain that there will be a pullback. The second time that the same level will be reached there is 50% likehood of breaking through.
◙ First-time reach → 1st Pullback
◙ Second-time reach → 2nd Pullback or Break-Through
-If 2nd Pullback then probable “Double-Top” formation and then trend reversal
-If Break-through then resistance level turns into support (and vice versa)
Chart-3: Support, Resistance and Trendlines
(4) Using Trendlines to to Forecast Upcoming Trends
Trendlines (/ or \) are often signaling trend continuation or trend reversal. Trading via trendlines is very difficult as trendlines are extremely dynamic and they are constantly changing over time. Usually the price of an asset reacts on trendlines as it is reacts when it reaches support or resistance levels.
◙ First-time reach → 1st Pullback
◙ Second-time reach → 2nd Pullback or Break-Through
Trading short-term binary options by using trendlines is maybe not a good idea. Trendlines are most effectively when they are traded on long-term charts.
(5) Using Technical Indicators to identify Trends
Another tool that can be deployed for the identification of a trend is technical analysis indicators. Here are some popular trend indicators:
◙ Moving Averages (MA) –Usually 50 periods
◙ ADX (Average Directional Index) –Check Below
◙ DMI (Directional Movement Index)
◙ Parabolic SAR
The ADX Indicator (Average Directional Index)
The ADX is a widely used indicator for the identification of a trend. ADX can inform traders about the strength of a trend:
(i) If the ADX indicator line is rising then the strength of a trend is rising
- ADX between 20 and 30 is signaling that the trend is forming
- ADX between 30 and 50 is signaling that the trend is strengthening
- ADX above 50 is signaling that the trend matures
(ii) If the ADX indicator line is declining then the strength of a trend is decreasing (upcoming price consolidation).
Important notes for profitable trading using the ‘Follow-the-Trend’ Trading Strategy
Here are some basic rules:
- Expertise your understanding of chart analysis and price trending (basic resources are presented on this article).
- Combine some trend-identification methods and test the results. Don’t use more than 2 methods at the same time because if you do you will not be able to trade fast.
- Be very selective when you are choosing assets to trade. You need a strong trend. If you can’t find an asset that is really trending avoid the market.
- Apply some money management rules and follow them with discipline. For example stop trading the day that you have lost 3 trades in a row.
- Adjust your trading budget in a way that you will be able to afford some losses (set an upper limit to the value of a single trade).
- If you are a beginner, test your strategy hard on a demo account before trade it for real money. Becoming an expert on charting and trending is a difficult task and needs time.
□ Follow-The-Trend Binary Options Trading Strategy and 5 Ways to Identify Trends
George Protonotarios for ForexExperts.net