Choosing Indicator Types

Choosing the right indicator type for your strategy is crucial to your success as a binary options trader. This article will explain the different types of signals indicators generate and which type of trader should use which signals.

The different indicator types

As a binary options trader you have to decide whether you want to become trend-following trader or a swing trader. Depending on your choice, there are several specialized indicators that will work well for the strategy you are trading. If you use the wrong kind of indicator for your strategy you will generate the wrong signals. These signals will conflict with your other indicators and can possibly cost you a lot of money.

Here are the types of signals technical indicators can create for you:

1) Crossovers

In its most simple definition a crossover refers to two lines crossing each other. A crossover can happen when:

  • The market crosses a significant price level such as a trend line or a resistance or a support level.
  • The indicator and the current price cross each other.
  • One indicator line crosses another.

All of these three events are likely to create a significant change in market sentiment that will lead to a breakout. Crossover indicators are therefore good instruments for breakout traders and any trader with a trend-following approach.

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2. Oscillators

Oscillators put the current price in relation into the market’s trading range over a defined amount of periods. Most indicators use a value from 0 to 100 or from -100 to +100 to show you the current relative position of the market. When the oscillator approaches its extremes, this is a sign for an overbought market (upper extreme) or an oversold market (lower extreme).

Oscillators can work for both trend followers and swing traders. Trend followers can use oscillators to find weakening trends. When the oscillator creates a new top without the market creating a new top, this divergence is usually a strong sign the trend is in trouble.

Trend followers therefore know that they should no longer invest in binary options predicting the continuation of this trend, and instead should start searching for signs of an impending reversal.

Swing traders, on the other hand, can interpret any movement by the oscillator into overbought and oversold areas as a sign of a weakening movement. They therefore know that they should no longer invest in this movement and instead start looking for the beginning of a movement in the opposite direction.

3. Convergence and divergence

Convergence generally describes the event of two lines getting closer to each other. These lines can be price levels, such as resistance and support levels, or two indicator lines, such as two different moving averages getting closer. In general, convergence is no trading signal by itself. Convergence neither predicts rising nor falling prices. Convergence does, however, predict a narrowing trading range.

When a resistance and a support level converge on each other, for example in a continuation pattern, the market will be trapped between both levels. As the trading range narrows, the chances of winning a touch or a boundary option get smaller. A trader has to adjust his trading accordingly.

Divergence, on the other hand, describes two lines moving apart. When two moving averages, for example, are moving from each other, this indicates a strengthening, fastening movement.

The same applies to the market moving further away from a moving average. Both swing traders and trend followers can use this kind of divergence as an indication of a strong trend or movement and know that they should not expect a turn in market direction any time soon.