Any trading platform comes with multiple types of indicators but there are mainly two categories: trend indicators and oscillators. Of course, the first category deals with the most popular ones as the very definition of a trend extremely appealing to traders.
Everybody heard the now-famous expression “The trend if your friend” as, after identifying one, we should only follow the price action and buy call or put options depending on the nature of the trend. In order to make sure the market is still trending, one should use the trend indicators. However, it is well known the fact that markets are spending most of the time in consolidation areas, and this makes trending quite rare. What to do then? Well, using oscillators is the thing to do, but more on that on the next educational series we have here.
In the category of trend indicators, the most popular trading platform in the world, the Metatrader, is offering the Bollinger Bands (we have here on Binary Options Academy one special project regarding trading binary options using the Bollinger Band indicator), the CCI (the Commodity Channel Index), the Parabolic SAR, only to name a few. Of course that there are many others, including custom made, but these are the ones offered on the default settings by the Metatrader trading platform. All of them show the same thing: a trend is in place and we should only look to buy call options when the trend is bullish, or to the upside, and put options when the trend is bearish, or to the downside.
Trend is Your Friend with Trend Indicators
There is a saying when trading that the trend is your friend and this is absolutely true. All traders in the world want to “ride the wave” or stay with the trend but there is a big problem in doing that: trends are not that common as many think. When looking for a trend first thing to do is to start with the currency pair you’re analyzing. If it is a cross and not a major, then trending is not likely to occur.
Under the category of trend indicators we can find the indicators that are applied on the chart and not below it like it is the case of oscillators. Trend indicators have no values in the sense that the oscillators are traveling between specific ranges, while indicators are traveling with price. Another thing to consider is that trend indicators cannot be used if one is looking for strategies that involve a divergence. However, they can be used in much more visible strategies and one way to trade with them is to add to a trading position by the time a specific level is broken. In FOREX trading that is called trailing stop order and it means that by the time market is moving to the upside in a bullish trend let’s say fifty pips, the trailing stop is moving automatically to the upside too with the same distance.
Ichimoku, Kinjun, Tenkan Lines
In binary options trading that is not possible but it is possible to add to your position and this means taking another trade. One of the best and famous trend indicators that exist out there is the Ichimoku as the cloud together with the two averages, the Kinjun and Tenkan lines are showing the perfect trending conditions.
In a bullish trend, the Tenkan line is always above Kinjun and the cloud is green, signaling a bullish trend and the need to trade call options. Any dip into the Tenkan and Kinjun lines, without them to cross, should be an opportunity to trade call options. The opposite is true in a bearish trend and any spike is the opportunity to trade put options. However, all these and more are visible and presented in the article dedicated to the Ichimoku Kinko Hyo in this Binary Options Academy project. Binary options trading is a bit different than FX trading as we need to put the expiration date at the end of the trade but this does not makes it impossible for profitable trading to exist.
Moving Average Trend Indicators
Another important trend indicator is represented by the moving average as traders are using multiple moving averages to define a trend. By the time the moving averages are crossing, it means that the trend is changing. Of course, the bigger the period the moving average is taking into consideration, the stronger the resistance or support price is having when it is meeting it.
Therefore, in a bearish trend that has moving averages aligned, put options should be traded by the time the average is tested, while in a bullish trend that has moving averages aligned, call options should be traded.
The recordings that are coming with this mini-project will show you how to trade binary options using the Parabolic SAR indicator as the CCI and Bollinger Bands were already covered here on the Academy so just make sure you look for them on the dedicated page.