Similar to traditional trading, binary options allows you to utilize a wide range of trading tools to improve your chance of success. These instruments typically include charts, technical analysis and indicators which you can use in your favor to predict the market direction of an asset. Although most of these “trading vehicles” aren’t specifically designed for binary options, they work well with digital options.
Here’re the best binary options trading tools and instruments, you can use to stay in the money.
- Technical Analysis
- Bar Charts
- Candle Charts
- Line Charts
- Open Interest
- Scales: Arithmetic vs Logarithmic
- Wedges: Rising and Falling
Technical analysis involves analyzing statistical information and data about specific assets, in order to predict the direction in which they will move. There’re copious methods used in technical analysis such as tracking momentum, means revision, trend following, moving average convergence divergence (MACD) and pattern recognition.
Used worldwide by traders and investors, technical analysis is one of the best tools for prediction of the prices movements in markets. Thanks to its simplicity, usability and high predictive value technical analysis can significantly boost your chances of profit through binary options.
Now, let’s take a closer look at the methodologies used in technical analysis.
What is Technical Analysis
Technical Analysis focuses mainly on the market’s price history. Unlike fundamental analysis, where micro and macroeconomic forces are taken into consideration, technical analysis deals with fundamental factors like a price’s behavior, trends, supply and demand. This information is displayed in a price chart, making the need to study balance sheets, financial events or individual companies obsolete.
Traders who use technical analysis in their endeavors rely on a number of mathematical tools. These instruments are called “Lagging indicators” and they generate specific values which are calculated from the previous price data. There are two major types of lagging indicators:
- Trend-identifiers – they’re displayed on top of price data and through them you can see the direction of its trends more clearly
- Oscillators – positioned at the bottom of a price chart, oscillators are designed to measure short-term investment swings by displaying overbought and oversold signals
One of the most fundamental tools in the arsenal of binary options traders are the charts. When used appropriately, charts can help your make successful market predictions. On the other hand, if you lack the knowledge required to understand these information-packed instruments, you risk staying out of the money. As a trader, you must learn to read and use price charts.
Charts are among the best binary options trading instruments you can get your hands on. Furthermore, they’re available for all trading assets including Stocks, Commodities, Currency Pairs and Indices. Let’s review the most commonly used charts, their pros and cons.
Time vs Price
In most cases, charts display the price of an asset versus time. They can be visualized as histograms, bar charts, line charts, candlestick charts and dots charts.
In the typical Time vs Price chart, you choose a time interval, which will be the basic unit in the evaluation. For example, in a five-minute chart, each line represents price data for trading which occurred within the five minute interval. In a weekly chart, each candlestick represents price data for trading within a one-week interval.
If you’re a short term trader, you’ll most likely rely on 60-minute or less intervals in your Time vs Price charts. In case you’re interested in long-term investing, you’ll use mainly daily, weekly and monthly intervals. The time periods you choose depend solely on your trading methods and investment goals.
Generally, Time vs Price charts have four distinctive characteristics – open, high, low and close. These four features of Time vs Price charts are commonly referred to as high-low-open-close, or HLOC.
- Open – the price at which a time interval begins
- High – the highest price in the time interval
- Low – the lowest price in the time interval
- Close – the price at the end of the time interval
Volume vs Price
Another powerful and effective digital options tools are Volume vs Price charts. As their name implies, they’re based on volume, not time.
A candlestick chart which used the volume vs price model, displays new candles whenever a certain volume of shares or contracts has been reached. These chart types are usually utilized by futures traders. The use of volume-based charts enable them to compress low-volume trading into a couple of candlesticks, preventing over-representation of unimportant information.
Now, let’s review some of the most used charts in financial analysis
A bar chart is another simple yet powerful trading instrument, used for data displaying. Although bar charts are not as comprehensive as line charts, they offer lots of price-related information and are quote useful to traders who require high data resolution for short-term trading goals.
A bar chart consists of an x-axis and y-axis. While the former represents time, the latter displays price. For example, a 10-minute bar chart contains bars which show 10 minutes of trading. A 24-hour bar chart consists of bars which display one day of trading.
The bar in bar charts consist of a vertical line which spans over the entire range of prices at which an asset was traded. The top of this vertical line shows the highest price. The bottom – the lowest price during a specific timeframe.
In the typical bar chart, bars are positioned side by side and they move up and down, left to right to indicate changing prices and trading activities that occurred within a specific time interval. In addition to these features, bar charts include HLOC information as well.
Most bar charts can be easily tailored to a trader’s needs. In case you don’t need to analyze the highs, lows or other types of prices you can customize the bar and set it to display only the data you want it to show.
In terms of application, candle charts are very similar to bar charts. They primarily display price-related information and are generally used for short-term trading. Although slightly more complex than other chart types, candle charts offer far more information regarding market prices. Once you get used to their visual style, you’ll realize that these charts are king when it comes to price analysis.
Candle charts are one of the more visually-distinctive charts you’ll use as a trader. Their main symbol is the Japanese candlestick. Developed centuries ago by Japanese rice traders, they still amaze financial analysts with their accuracy.
Each candlestick is made of a vertical rectangle which indicates the highest price on top and lowest on the bottom. The color of the candlestick shows the price direction of an asset. “Up” candles are displayed in green, while “down” candles are colored in red. An “up” candle indicates a net price increase and “down” candle represents a net decrease.
Another important feature of candlestick charts is the wick. Wicks are short vertical lines which extend up and down from the body of the candle. Top wicks indicate the highest price within the candle’s time interval. Bottom wicks show the lowest price during the interval. Combined together, the candle’s wicks and body show the HLOC prices for a time interval.
Candlesticks charts are widely used in all sorts of trading and there’re many schools of technical analysis which rely primarily on them for price predictions. Thanks to their unique features, candlestick charts are one of the best digital options tools on the market.
Line charts are widely considered as one of the simplest and most intuitive chart types for price-related data. Although extremely easy to read and comprehend, line charts have a number of cons which can limit your ability to predict price swings.
These charts consist of an x-axis and y-axis. The x-axis indicates the time, while the y-axis, the price. Price data is displayed in the form of a simple line, drawn from left to right. An asset’s price for a specific time period can be easily determined by simply checking where the x and y axis intersect.
As we mentioned above, line charts are considered somewhat limited as they lack essential price details traders need for thorough market price forecasts. The problem lies in the way they display information. Their simple one dimensional series of connecting lines may be easy to read but they don’t display what’s happening between two time intervals. For example, an asset’s price may have significantly fluctuated between two time periods, but line chart won’t display that data.
Another disadvantage of line charts is that they don’t display HLOC related information. When using them, you need to know whether a point represents the high, low, open or close price within an interval. For example, a 10-minute line chart on opening prices won’t display correctly closing prices. This is due to the fact that lines end at the beginning of the last interval rather than at the end of the last minute of the trading period.
Even though line charts lack precision, they’re still widely used by traders because they’re easy to read and adequately represent market activities over longer periods of time.
Besides a wide range of price charts, seasoned trainers use calculation-based tools for technical analysis. Moving averages and oscillators are two examples of such binary options trading instruments. With them, you can substantially improve your chances of staying in the money.
A Moving Average, or just MA, is a chart line which soothes data to displays the direction of a market’s price without distortions. Simple Moving Averages (SMA) are estimated by the average of the closing prices of an asset for a trading period. For example, a 10-period SMA is calculated from the closing prices of the previous 10 intervals. Exponential Moving Averages (EPAs), on the other hand, provide more information regarding the intervals in a price chart. The latter are used mainly by short-term traders who need to keep a close eye on small fluctuations in the prices.
Oscillators are effective digital options tools used for price indication. As their name suggests they display a line which swings up and down in a wave-shaped form behind real-time price information. Through oscillator analysis, traders can predict when an asset’s price will move up and down. If an oscillator line reaches the so called “overbought” zone, the price is expected to start falling. When an oscillator moves down into an “oversold” zone, the price should start rising.
A few examples of oscillators are stochastics, MACD and momentum.
Wave Shape Analysis
Elliot Wave Theory
Developed long ago by Ralph Nelson Elliot, this theory is based on the belief that stock market prices reoccur over time. These repetitive prices moves can be predicted with the Elliot Wave theory.
The theory itself explains that an uptrend consists of three main up-thrusts, followed by smaller pullbacks. The last of these pullback series ends with a downward impulse, followed by a smaller upside pullback. This is known as an Elliot Wave cycle. Investors who use this theory in their trades try to determine where in an Elliot Wave cycle the current state of a market is. This helps them make understand whether a price will rise or fall.
Fibonacci numbers, or just Fib, are widely used in binary options trading as an instrument for predicting price retraces and pull backs. Traders who utilize Fibonacci numbers use three main percentage indicators – 38.2%, 50%, 61.8%. When a price pulls back by 38.2% from the previous move, the trend should resume. A 50% pullback is considered unclear and neutral. A 61.8% shows that the trend is going to reverse.
Volume indicators are considered to be among the best binary options trading tools. They’re especially useful for short-term trading, because they give clues of how the market will move.
Used by many traders, instruments reflect the number of an asset’s contracts and shares traded within a certain time interval. Most price charts display volumes below price data in a hypsographical form. Some programs allow you to create charts with bars or candles to represent volumes instead of time.
Volumes find a wide application in stock and future trades. Since these asset classes are traded through central exchanges, volumes can help you track the amount of shares and contract traded within a timeframe more easily. By monitoring for increasing and decreasing volume, you can effectively perform short-term trades.
Open Interest refers to the number of unsettled asset contracts within a market. For example, the open interest for a standard option contract is the number of contracts that have been sold for it. Let’s say that 40 Calls for Microsoft stock have been sold for a $30 strike price. In this case, traders would say that those calls have an open interest of 40. The same applies for binary options puts.
In binary options trading, open interest is used to measure the investor sentiment based on a put/call ratio. If the open interest in puts is greater than the open interest in calls for a stock, the put/call ratio will be greater than 1. This is a clear signal that the most traders believe that this stock price will fall. On the other hand, if the open interest in calls is greater, the put/call ratio will be less than 1. This indicates that most according to the majority of traders, the stock price will rise.
Some traders bet in the opposite way of the put/call ratios just because they find such indicators to be flawed. Others examine open interest as a way of identifying inside information. If a put option with a seemingly random time of expiration and strike price has an unusually high open interest in comparison to other stocks with relatively low open interest, this can be a sign that someone is stock-piling the contract with open interest.
In any case, put/call ratios are one of the more interesting digital options tools you can add to your trading toolkit.
Scales: Arithmetic vs Logarithmic
The main purpose of a price chart is to show how an asset’s price changes over time. The typical price chart has an x-axis for time and a y-axis for price. While time moves forward at a predictable rate, price is not linear and doesn’t always move in straight forward line. The price of some assets remain stable while others jump randomly without a clear logic. Due to this behavior, some charts use arithmetic and logarithmic scales.
This is the most common type of scaling. Seen on almost all graphs, arithmetic scales show each price increment on the axis. For instance, an arithmetic chart may have 10 tick-marks spaced evenly along the price axis, with each tick-mark representing an increase of $1 over the last. This type of scaling is usually suitable for charting asset prices which remain in a small range and don’t make huge jumps between time intervals.
Keep in mind that arithmetic scales cannot be used in all cases. Let’s take a look at the following example. A stock trades between $10 and $20 for six months, then leaps to $500 – $600 range for the next six months. With an arithmetic scale for the whole year, you’ll essentially squish the data from the initial six months into a very small vertical space. This is where logarithmic scale comes in.
Logarithmic scales are used on a price axis when an asset’s price has experienced significant variations, like in the example above. On a logarithmic price axis, each evenly spaced tick-mark represents the next multiple of ten.
Image a logarithmic chart with five tick-marks spaced one inch apart up the whole axis. The first tick-mark will indicate the $1 mark, the next $10, the one after that $100 and so on and so forth. On a logarithmic scale the smaller sections between tick-marks are spaced unevenly, with the lower values given larger vertical space. The design of logarithmic scales allows you to display asset prices over a large period of time regardless of how extreme their range is.
Wedges: Rising and Falling
A wedge is a reversal pattern which indicates a change in the direction of a trend. Wedges are formed when price stays within two converging trend-lines which slope in the same up and down direction. While the wedge holds, the upper trend-line acts as resistance, while the lower acts as support. Binary option traders who discover a wedge pattern, should do trades which allow them to profit from a move in the opposite direction of the trend.
Rising wedges form around internal uptrends. The support and resistance line of a rising wedge slop in the direction of increasing price. As the two lines converge, price is expected to break out of the wedge to the downside. So, if you see a rising wedge, you should consider investing in put options which require price to fall to be in the money.
Falling wedges are the opposite of rising wedges in that they form around internal downtrends. The support and resistance lines that border price in a falling wedge slope in the downward direction, and as they converge price is expected to break out of the pattern to the upside. Binary option traders who observe a falling wedge in progress should position themselves with Call-style options that require price to rise to be in-the-money.
Make sure not to confuse wedges with triangles. Though similar in shape, these two terms are not the same. While triangles indicate a breakout move in the same direction as the previous trend, wedges show a reversal of the present trend. The latter occur more often because triangles require a perfect horizontal support and resistance line, something that rarely happens.
Another instrument, considered as one of the best binary options trading tools, is the Flag. It represents a pattern for the continuation of an asset’s prevailing price trend. Flags occur during uptrends and downtrends and they generally indicate if a trade will continue or not. When flag forms, traders should watch carefully for a breakout in the opposite direction of the slope of the flag.
Flags are often confused with triangles, pennants and other continuation patterns. Although very similar, a flag differs from other patterns in the subtleties of its shapes. A flag is formed when price begins trading in a counter-trend direction and the new price pattern stays within the boundaries of two parallel trend-lines.
If a flag forms during an uptrend, it’ll have a downward slope. The signal that the prevailing trend is reasserting itself occurs when the top trend-line, or resistance line, of the flag is broken by price with an accompanying spike in volume. This is usually a sign to buy call options with high prices.
In case a flag forms during a downtrend. It’ll have an upward slope. The signal that the prevailing trend is reasserting itself occurs when the bottom trend-line, or support line, of the flag is broken by price with an accompanying spike in volume. In such scenarios, traders would typically choose put options.
Flags are one of the most common continuation patterns seen in binary options trading. They are considered by experts as an effective and somewhat dependable digital options tools due to their similarity to other patterns.
The instruments we’ve reviewed today are amongst the best binary options trading tools in the industry. With their help you can significantly boost your chances of success and enjoy bigger and more regular wins. Remember, most of these digital options instruments require skills and knowledge, before you can fully benefit from them. It’s not enough to have them, you need to know how to use them as well. Without proper training in technical analysis you’ll be essentially wasting your time and money, so make sure to invest as much efforts as needed to become an expert in them.