Trend following is a trading approach that can help binary options traders to make relatively accurate predictions they can trade with a high payout or a high winning percentage. Either way – trend following will enable you to make a lot of money with binary options.
What is trend following?
As any trader, a binary options trader has to decide whether to become a swing trader or a trend follower. While both trading approaches use the trend as the basis of their investment decisions, trend followers try to trade as a whole. Swing traders, on the other hand, try to benefit from each swing from high to low and vice versa in a trend.
A trend follower should try to find trustworthy trends as early as possible and then invest in a binary option predicting the continuation of that trend. Since technical analysts get very good at recognizing trends after a while, once you get used to it, this approach allows for more secure predictions than a swing trading approach.
Advantages of trend following
Each trend provides a trend follower with only one trading opportunity, while a swing trader can easily find ten times that many trading opportunities in the same trend. While this might seem as a sure reason to trade swings with binary options, trends have certain distinct advantages that makes trend following a suitable trading style for many binary options traders:
1) Trends are more predictable
Trading trends allows for more accurate predictions about how far the market will move than trading swings. This enables you to trade touch options which generate a higher payout than high / low option.
Indicators such as Bollinger Bands and resistance or support levels allow for fairly accurate predictions on how far a trend will move. Using the same indicators with a swing trading approach: It is hard to predict whether the trend will reach these barriers with the current swing or the next.
The higher payout a trend following approach can create can easily make up for the fewer trades you get with a trend following approach.
2) Trends are less volatile
Price movements on small time frames are erratic and hard to predict. Still, once you found a trustworthy trend, it is likely to keep moving in its current pattern until it hits the next resistance / support, or until an event makes it stop. Therefore, you can use a trend-following approach to make more reliable predictions and trade binary options with a higher winning percentage.
How to follow trends with binary options
As a trend follower, you can use binary options in a number of ways to benefit from trends:
1) Trade the trend with high / low options
If you can safely predict how long a trend will last, you can use high / low options to benefit from this prediction. You can either use past trends in the same asset to make this prediction, or use a combination of resistance / support levels and momentum indicators. You could, for example, use bollinger bands to predict how far the trend could move and then use a volatility indicator such as the average true range to predict how long it will take the market to get there.
While accuracy is important to win this kind of trade, do not worry much about getting it exactly right. You will win your binary option as long as the market closes in the direction you predicted once your option expires. This means, even if you predict the length of the trend not to the point, you can still win your binary option as long as your prediction is going into the right direction. Therefore, you should be able to trade this trend-following approach with a relatively high winning percentage.
2) Trade the trend with touch options
A possibility to trade trends with a higher payout is to use touch options. With touch options, you have to predict how far the trend can move. A number of indicators such as bollinger bands and resistance and support levels can help you with this prediction.
While this trend-following approach allows you to generate a high payout, you will probably win fewer trades than when trading trends with high / low options. Since market movements on small time frames are erratic and your prediction has to more accurate than with a high / low option, there is more room for something to go wrong with your prediction.
Therefore, in the end, you should choose the trading style you feel the most comfortable with, as this is probably the trading style you can trade most successfully.