Trend Trading Strategy Binary Options

Trend channels are a highly useful technical analysis and trading tool. Trend channels are easy to draw and provide trade ideas and entry signals, with the proper strategy. Hither I’ll evidence yous what these technical tools are and a simple and useful trend channel binary trading strategy.

Trend Channel

A trend channel is 2 lines that run along the price highs and price lows of a trend. Typically these lines should run pretty close to parallel of each other. If lines are converging on each other this is likely a wedge pattern, and if the lines are moving away from each other, this could be a broadening wedge. These are different patterns altogether, so ideally nosotros want the trendlines running pretty much parallel to each other. Figure ane shows a trend channel in General Electric (NYSE:GE) stock. The lines are pretty close to parallel with each other, and the lines are touching nearly all the major toll peaks and troughs.

Figure one. Trend Channel – General Electric Daily Nautical chart

Drawing a Trend Channel

A tendency aqueduct is a guideline, therefore, I adopt it to run forth multiple high and low points, instead of running along only the extreme high and depression points. I like this method because usually markets don’t move in perfect trend channels anyway. Rather, the price may move merely above or below it before reversing course and heading back to toward to the other side of the trend channel.

Therefore, I use “lines of best fit” when drawing trend channels. Don’t worry if the lines don’t perfectly contain all the price activity, considering it isn’t necessary to get quality trade signals.

Trend Channels Trading

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Trading trend channels, when you find them, involves a surprising simple strategy. The get-go step is to find a trending asset. Then focus on assets which are moving in a relatively rhythmic fashion, such as General Electric in figure 1. Once the trendline are fatigued the price seems to gravitate toward these lines; moving into the vicinity of the line and and then reversing form.

Most traders make an error in that they leap into trades likewise before long. They assume the toll will stay within the tendency channel, but as figure i showed oftentimes the price will overshoot the tendency channel resulting in a loss or a poorly timed merchandise. Another problem is that traders wait for the price to touch one of the trendlines before buying (lower trendline) or selling/shorting (upper trendline). As figure 1 showed though, markets don’t move perfectly and it is highly improbable that the toll will movement correct to the trendline and then reverse.

The post-obit tendency aqueduct trading strategy takes intendance of these two issues. Information technology requires that you’re patient and permit the market determine when you lot make your trade, and not the other way effectually.

Tendency Channel Trading Strategy

The rules for tendency channel trading are unproblematic. One time you’ve found an asset you want to trade and drawn your trendlines, look for the price to motility toward one of the trendlines.

The simplest trades are when the price comes very close to one of the trendlines, or the price moves through it. When either of these scenarios occurs, as soon equally you see 1 bar moving in the contrary direction (back toward the reverse side of the trend aqueduct), take a position.

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For example, if the price is dropping and comes very close to the lower trend line wait for the cost to outset moving higher (toward the upper trend channel line). When it does, take a long position (buy call). Same for if the toll pierces one of the lines. For instance, if the price rallies slightly above the upper trendline, watch for the aforementioned reversal pattern. You want to see the price reverse, for at to the lowest degree one bar, and when information technology does you take a curt position (buy put).

Figure two shows a zoomed in shot with a couple examples in General Electric stock.

Figure 2. Trend Aqueduct Trading Examples – General Electrical Daily Nautical chart

When the price doesn’t reach one of the trendlines the strategy can however exist used, but with a few cautionary notes. If you are going to trade reversal signals inside the trendlines, ideally these signals should occur within about ii% of one of the trendlines.

Figure 3. Trend Channel Trading within the Channel

Figure 3 shows an case where the price didn’t accomplish the upper line, but was still a tradable reversal, since it came with a few per centum of the trendline. In this case, the trendline at the time of the bar was intersecting at 24.75. Then ii% of that is roughly l cents. That means the price must reach at least 24.25 (24.75-0.l) in guild to take the trade. The cost reached 24.45, which is closer to the trendline, so the trade is taken.

Past only taking the trades that reach close to the trendlines, bear on the trendlines or slightly penetrate the trendlines we avoid much of the whip-saw like movement that occurs toward the middle the aqueduct. While it won’t always be the case, the reversals are quite decisive near the trendlines.

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If trading binary options your exit is straight forward: exit two to three bars after your entry. For case, if y’all are trading on a five minute chart, y’all’d want to choose an decease that is roughly 10 to 15 minutes away.

If trading traditional markets such as forex or stocks, go out your position at lxx% of trend channel. For example if the tendency channel is $3 wide and you get long about the lesser y’all’d go out at $3×0.lxx=$2.25 from the low of the range. Figure 4 shows an example of this, as well as where to identify a terminate loss. A stop loss should be placed below the contempo swing depression for long trades, and above the recent swing high for short trades.

Figure four. Trend Channel Trading Leave Signal

Final Discussion

If the trend aqueduct is upwards, ideally focus on long trades which will position you in alignment with the uptrend. If the tendency is downwardly, ideally focus on brusque trades which will position yous in alignment with the downtrend. As well, watch for reversals that occur near the trendlines, and don’t worry almost what happens toward the heart of the tendency channel. Don’t assume a reversal volition occur. Instead, await for the toll to “bounce” off a trendline for at to the lowest degree 1 bar before taking a trade.