Trend following: the trend is your friend

Many traders are probably familiar with the old wisdom from technical analysis called “the trend is your friend”. It follows the logical reasoning, not to oppose the mass in trading, but to take the path of least resistance. The probability for a trend continuation is higher than the probability of a trend reversal. Based on this fundamental knowledge, a simple but effective binary options trading strategy can be implemented.

Why binary options?

Experienced traders know about the timing issue on entry and exit from a trading position in forex trading. One identifies a trend in a currency pair and wants to benefit from it. Entry and exit are planned and the position is opened. A stop-loss is placed below the latest low in the chart, which is intended to minimize the risk of loss. The forex market is very volatile and therefore prone to large fluctuations, especially when important news, such as interest rate decisions of the central bank or the publication of labor market data are pending.

Forex trade loss scenario: the beginning upward trend in AUD / USD was identified correctly but nonetheless the trade was stopped out therefore the profit target could not be achieved. In forex trading, it can easily happen that the position is wiped out by a short but fierce fluctuation and thus the trade is closed at a loss. In worst case, extreme slippage (the stop order is filled at an unfavourable price due to an abrupt price movement)  results in an actual loss much bigger than the one pre-calculated in accordance with risk management.

AUD/USD – speculative forex trade on developing uptrend – stopped out (chart by etoro)

Binary options: risk and return clearly defined

Binary options solve the problem described above elegantly by the fact that the risk is defined precisely in advance. In the traditional call/put-binary option trade, only the direction of price is determined according to market estimates. Therefore, a call option is bought to bet on rising prices whereas a put option gains on falling prices. A loss occurs only if the option is out of the money at the end of the pre-defined option period. A call option is out of the money if the price of the underlying asset at expiry time (end of option period) is lower than the entry price. With a put option it is exactly the other way round.

The beauty about binary options is that price fluctuations during the option period are irrelevant. The risk can be defined solely by the trader. With most binary brokers, only a minimum trading amount is required, which may range between $10 and $25.

In the case that the market assessment of the trader at the end of the option period is correct, so the price of the Australian Dollar in our example has risen and the trader bought a call-option, he receives a predefined return on his initial stake, which may vary between 65% to 85%, depending on the broker. A list of the possible returns can be found in our broker comparison.

AUD/USD – binary option trade successful (chart by etoro)

Binary options: same setup as in the forex trade but with positive results. No stop-out during the option period, the option is in the money at expiry time and the trader makes a profit. A big advantage of binary options trading is that you can not be wiped out the position by a sudden market movement, such as with major news announcements. With binary options, settlement only takes place at the end of the option period, also called the expiry time.

Practical implementation

First, this requires an account with a binary options broker. With anyoption an account can be opened from $200 euro, trading starts at just $25 minimum amount per trade. anyoption offers a wide range of tradable assets, such as various currency pairs or international stocks. Very active traders may also consider to open an account with different brokers to be more flexible.

anyoption trading platform

Now it is time to identify an existing trend and to define an entry point. Trends are always based on a series of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend), which should be clearly visible on any chart. In addition, the plotting of trend lines by connecting the low points and high points is recommended in order to identify trend reversals early. Longer sideways phases can be used for an early entry because they often precede a trend continuation or reversal of a trend.

Also moving averages (SMA or simple moving average) can prove very useful in trend analysis. In general, focus should be kept on the essentials rather than combing many different indicators in trading. Keep it simple stupid is probably better than complicating things that are pretty straightforward.

Charts for trend analysis

Often the available charts at binary options brokers are not particularly detailed and lack basic functionalities. Therefore, we recommend opening a free demo account with a forex broker in addition to make use of more professional charting software for trend analysis. Some brokers offer both binary options and forex including professional chart software.

Additional functions increase flexibility

Some binary options brokers offer useful additional features that support effective risk management. E.g. the “early closure”-function allows for premature closing of binary options in order to secure profits. In addition, the option period may be extended with the “rollover”-function to give the trading position more room for development or just ride a very strong trend and maximize profits.

reviewbinaryoptions.net wishes you good trading!

 

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