Trends are the most popular type of trading strategy used for binary options trading. There is no trading strategy which does not utilize trends, because trends show traders the possible movement of market forces that will affect an asset, thereby helping them to fine-tune their trading decisions. A trend trading strategy aims to capitalize on the trends set by an asset in the short term and long term. But like every other trading strategy, trend trading is also fraught with many risks, and traders should only base their trading decisions on the trends that have the least risks. We will discuss how to identify reliable trends that will boost your chances of making the best trading decisions. Let’s begin by having an understanding of what a trend is.
A trend is the predominant price behavior of an underlying asset. It shows the general direction of an asset’s price over a given period. Trends can be in the short term and long term, but the short-term trends are usually components of a broader long-term trend.
The market trend can move in two directions; upward and downward. As a trader who intends to use trend trading strategy, it is essential to be able to identify the type of trend before making your decision.
Uptrend: An uptrend occurs when the dominant price movement of an asset is upwards. During an uptrend, the trading charts show the price of the asset with a larger proportion of higher closing highs and lows, even though there will be few consolidations and downward movement of the price.
Downtrend: In this case, the market charts will show a price behavior of the asset with predominantly lower closing highs and lows, although the price will move upwards and consolidate at some given period. Here, the general direction of the price is downward.
A market is non-trending if it does not show a distinct directional movement of the asset price, and no trading can yield any profit in such a situation.
Trends are so essential to binary options trading because they have the tendency to persist on the charts. What this means is that an asset whose price is moving up on the charts tends to continue in its upward movement, and vice versa. Trend trading applies to any underlying assets, be it commodities, indices, forex pairs, or stocks. Trend trading is used in “End of Day” Call/Put contracts and is simple and straightforward.
Trends can be determined by using price action or the ‘moving average’ technical indicator on the binary options chart.
Price action is a type of technical analysis that uses the past prices of an asset to forecast the future price of the asset. Price action is one of the most reliable indicators because it says the truth always, as its results are based on events of the past, not trying to predict the future.
The moving average is used to determine the mean rate of change in the price of a commodity over a specified period. You can either use the ‘Exponential Moving Average’ or the ‘Simple Moving Average’ to identify the prevailing market trends for an asset.
When trading with the trend strategy, traders should look for a crossover between a shorter timeframe moving average and a longer timeframe moving average, which indicates the movement of the price towards the direction of the trend.
After identifying the direction of an asset’s trend. Next is to choose an entry point. Various technical indicators can be used to determine an entry point, but the commonly used tools are the Relative Strength Index (RSI) and the Commodity Channel Index, which helps to grade the trend on the longer timeframe chart with price action. For best results, the lower timeframe trades such as 15 and 30 minutes time frames are ideal.
No matter how strong the trend, it will still falter eventually, and you need to protect your investment from getting lost by picking the right exit position. If you have the option of “Take Profit’ or “Stop Loss”, you can safeguard your profits by exiting your position when the trend starts moving against you.
For a trend trading strategy to be successful, the trends must be strong, and the markets should be highly active. It is, however, important to note that no trading strategy is perfect 100 percent, and trading with the trend can also result in the loss of your investments if misused.
This article may also be interesting: Fundamental Analysis as a powerful tool in binary options.