Trend lines are one of the most important indicators that can help traders make money with binary options. To understand how to draw a trend line and draw the right conclusions from it, there are a number of things you have to know.
Drawing Trend Lines
Of course, you can create any trend line you think is right and draw it into a price chart. There are, however, a number of rules when creating text book trend lines.
These trend lines guarantee you three advantages:
- You can be sure that other traders that follow the same rules recognize the same trend lines and therefore multiply the effect of this type of indicator. This increases your chances of winning a trade based on that trend line.
- Strict rules allow no room for personal judgment. This helps to take human aspects, such as emotions, feelings, and hunches, out of your trading and make it more reliable. Over time, this will make you a far better trader and increase your winning percentage tremendously.
- It lets you know when a trend line is definitely broken. A trend line based on personal judgment can always be adjusted to give the market more room, once it threatens to break the trend line. A line based on strict rules, on the other hand, cannot be adjusted. It is where it is. When it is broken, you have to adjust your trading accordingly.
How to draw a trend line
In an uptrend, there is a simple three step process to draw a trend line:
- Start the line at the lowest low, the starting point of the trend.
- Connect the line with the next low.
- Extend the line into the future.
In a downtrend, the process is somewhat similar:
- Start the line at the highest high, the starting point of the trend.
- Connect the line with the next high.
- Extend the line into the future.
This simple three step process will give you a first idea of where the trend will go and how fast it will get there. You can use it as a first indication of what you can expect during the near future. It will, however, not be a definite prediction that will be valid for the entire trend.
How to adjust a trend line
As the market evolves, you have to come up with a number of different trend lines. Some events will make the market pick up momentum and make the trend move quicker, others will the market move slower and make the trend move slower. In both cases, you have to adjust your trend line.
A trend will continuously gain and lose momentum, which leads to different trend lines. There will be a number of smaller trends in the main trend that move at a faster speed, and sometimes the entire trend will slow down.
A trend line remains valid, until it is broken. Should the market accelerate and leave a slower trend line for a while, this trend line is still intact. After the market breaks through the faster trend line, it will likely return to the next slower trend line.
After a while, however, one trend line will emerge as the most accurate. This is the main trend line. In a long lasting trend, you will find that the trend will stray from this trend line a number of times, but usually get back to it after every period of accelerated movement.
For a binary options trader, it is important to understand that the breaking of a steeper trend line does not necessarily mean that the entire trend is in trouble. If there is a less steep trend line, most of the time, this less steep trend line will pick up the market. Therefore, trend lines work much like resistance and support levels: If one level is broken, the next trend level becomes the trend line to watch.