Using the trading range to predict future price movements is a quick, easy, and uniquely effective method that will help you make a lot of money with binary options. The trading range of each period is visualized by the length of the candlestick from high to low and measures the maximum distance prices have moved during this period. The trading range can give you an indication of current developments in the market.
If the high of a period is usually one dollar from the low for an asset, but the range has recently increased to three dollars, something significant has happened. Although many ignore these changes, they can indicate important events in the market that could create many excellent trading opportunities.
How to interpret the trading range
The biggest advantage of paying attention to the trading range comes from earning the ability to predict future price changes very early.
In general, a widening trading range indicates a strengthening movement and a narrowing range indicates a weakening movement long before any other indicator. To understand why, imagine a stock in a downtrend. When big, surprising positive news hit the market, such as a record profit or increased sales, there is a good chance this downtrend will stop and change direction to become an uptrend.
For this event to unfold, however, some time needs to pass. At first, the trend has to break its trend line, which will likely take a few periods. A trader ignoring the trading range could think that the market is going through a normal correction, and that the downtrend will soon continue. After the market broke the trend line, it will take another few periods until it breaks the previous point 2 and the trend is officially over.
Depending on the significance of the news, however, the trading range will change immediately in one of two ways: Either the trading range of the downwards movement will get narrower, or an upwards movement with an unusually wide trading range will start developing. Both events are significant signs the downtrend is over.
All in all, the trading range has indicated the changing market for a number of periods, maybe 10 or even 20, until technical analysts that ignore the trading range catch up with what is going on. These traders have wasted a lot of time and money making the wrong investment decisions.
How to use the trading range to invest in binary options
As a binary options trader watching the trading range can give you an early indication of a trend’s or a movement’s health.
As a general rule, you can remember that the wider the trading range of a movement is, the stronger is the movement. Therefore, in a healthy trend, the trading range should be wider during a movement in the trend’s main direction than the trading range during a reversal.
When the trading range during the reversal starts to widen and the trading range during a movement in the trend’s main direction gets narrower, this is a sure sign the trend is in trouble. In the near future it will at least enter a continuation pattern or even reversal.
During a sideways movement you can use the trading range to figure out in which direction the market will continue. The direction that has the wider trading range is the direction the market is likely to break out in. All in all, watching the trading range can provide you with great insight into what is currently going on in the market. You can find out which movements and trends to invest in and which to ignore.
Watching the trading range with technical indicators
To keep an eye on the trading range, you can use technical indicators such as the Average True Range. The Average True Range calculates the average true trading range for the last periods and plots the results as a graph. If the trading range gets narrower, the graph will fall. If the trading range gets wider, the graph will rise.
While the Average True Range is a good instrument to never lose attention of the current trading range, its averaging mechanism delays the indication of significant, sudden changes, and makes no difference between upwards and downwards movements, which is one the biggest advantages of analyzing the trading range. Therefore, it cannot completely replace the trader’s alert attention to every new bar.