Trend lines are one of the most valuable and effective tools for a binary option trader as proper observation of trend lines can be incredibly helpful in defining price movements. This article contains a key strategy of trading binary options working with trend lines.
Applying Trend Line Analysis In Binary Options Trading
The prices of assets on the financial market are constantly in flux. The upward and downward movement of prices forms a trend — when prices rise there’s said to be an upward trend and when they fall, there’s said to be a downward trend. An uptrend occurs when the price reaches new highs as it rises, and when it falls manages to stay above former price lows. A downtrend occurs when the prices reaches new price lows as it declines, and stays below former highs when it rises.
Trend lines are powerful tools of price movement analysis. Using these lines, you can define price movement and determine when to make the right trading move. Trend lines will show you when there is no significant movement of the price and when there is a price reversal, when there is an upward trend or a downward trend.
How to Draw a Trend Line?
For a downtrend line (Bearish trend)
- Find the recent high
- Draw a line next to the immediate lower high.
- Extend the line to the right end of the chart beyond the latest date and into the future
The diagram shown above illustrates what an downtrend looks like in a conventional market chart. The blue line represents the downtrend, running diagonally across the chart from left to right.
For an uptrend line (Bullish trend):
- Find lowest low.
- Find the next higher low following the lowest low.
- Draw a line from the lowest low to the higher low and continue into the future.
The diagram shown above illustrates what an uptrend looks like in a conventional market chart. The blue line represents the uptrend, running diagonally across the chart from left to right.
How does a trend line work?
First, a trend line is simply a line that highlights the support or resistance areas for a specific asset. A powerful indicator of the trend’s reliability is the number of times that the price has tested support and resistance lines (that is trying to break them), but it did not stand their power and come back. The more frustrated breakdowns, the stronger is the trend.
With the help of trend lines, you can easily define the upward and downward trends and how they impact each other. In other words, trend lines show you resistance and support areas where there could be an anticipated breakout on the price.
Therefore, when there is an upward trend in prices, you can use the trend line to determine when the prices will stop declining. Alternatively, the trend line can be used to predict when the prices will stop rising.
Trading call and put options with trend lines
Prior to taking a call or put option position, you need to define the short-term price trends of the underlying asset. You would have to draw a trend line that is horizontal, ascending or descending depending on the price movement.
A descending line is indicative of a downward trend, necessitating a put option trade; an ascending line shows an upward trend and trading call options would be appropriate. Meanwhile, a horizontal trend line is indicative of a ranging price, allowing you to trade both call and put options.
Proper observation of trend lines can be incredibly helpful in defining price movements and in turn profiting from your binary options trades.