A trend based trading strategy is a highly effective instrument to help you trade binary options. However, to use the full potential of a trend based strategy, you have to combine different time frames, thereby creating especially valid predictions.
This article will take you through one example of a trade. Seeing how to trade a strategy like this first hand will help you understand and apply this strategy, and become a more successful trader.
How do I trade a trend-based trading strategy
This is a weekly chart. One candlestick represents the entire price movements of one trading week. As you can see in this chart, the market obviously is in an uptrend. Unfortunately, weekly charts cannot make predictions we can trade with binary options. Binary options work with much shorter expiration dates. Weekly charts are, however, important to understanding the market’s basic direction. In this case, it is important to note that the market is currently moving up. This movement has been intact since August 2011, and has obeyed the red main trend line.
Now, let us switch to a daily chart:
In this chart, every single candlestick represents one trading day. This allows us to examine the market’s movements more closely. One candlestick from the weekly chart is now split into five candlesticks. Therefore, we are looking at a zoomed in picture. The market movements you can see in the picture above are only the last part of the movements you saw in the weekly chart.
In this case, the chart starts around April 2013.
As you can see in this chart, the market is currently going through a reversal. It is, however, already close to the trend line (red line) and the 200-day moving average the trend has followed previously. As an experienced trader, you would expect the market to turn around soon and resume its main direction.
As you can see in this picture, what seemed like a clean, straight forward trend in the weekly chart has now become more erratic price movements. Many smaller trends in both directions are already showing through and can easily distract traders. That is why we started with the weekly chart: We have seen the big picture, we know what is happening, and we will not allow these little distractions to confuse us: We know prices are currently falling but will most likely turn around soon.
This hourly price chart provides us with an even more detailed and zoomed in view of current price movements.
As you can see, it seems to confirm the prediction made by the daily and weekly charts. Prices have hit the current price level multiple times and were unable to break through it. This support level could be the exact sport where the main trend we saw in the weekly and daily charts starts to turn around and follow its main direction again.
As you can see in this 5 minute price chart, prices haven recently fallen. With the very last candlestick, however, they have turned around. You can combine this knowledge with what you learned in the other charts. You know that prices in a daily chart indicated an impending change in price direction because of the nearby trend line and the 200-day moving average. You know that prices in an hourly chart showed a resistance level at roughly the current price level.
These facts, combined with the change in direction by the last candlestick, are enough good reasons to assume the current support level might be the price range that forces prices to resume the main trend direction again.
You can invest in this prediction by either buying a no touch option with a trigger price below the current price or a high option. Keep the expiration time short. Since we are making this prediction based on 5 minute chart, you should keep it under one hour, if possible.
Evaluating the trade
As you can see in this chart our prediction was exactly right. A binary option predicting rising prices with an expiration time of under an hour would have expired around the time prices were in the red circle. This means, you would have won a no touch option or a high option easily.