Many traders who make the transition from trading stocks, forex or commodities to binary options are often concerned by the lack of quality charting software that brokers provide. After becoming used to highly advanced and customisable charts to the simple line charts that binary options brokers provide, some traders struggle initially to apply their trading systems to this form of technical trading. Since technical traders look for repetitive patterns and familiar setups on detailed price charts, and perhaps through additional indicators, the basic in-or-out of profit binary options chart is often difficult to use as a trading tool in itself.
Find a good third-party charting package
The solution to this used by many traders is to run a parallel charting software package, or that of another derivatives platform such as spread betting or the free MT4 platforms provided by many forex brokers. Although it may initially be frustrating to switch between two platforms in order to make the analysis and then place the trade, it is one of the best methods of making sure that your binary options trades follow a strategy that you have developed. Understandably, the charting side of binary options has initially put many traders off although the use of a third party charting package will allow traders to realise the large profits available through binary options trading.
Once a suitable charting package has been found, ideally following a price feed as close as possible to that of the binary options broker, technical analysis can be applied to your binary options trades. Choosing which technical analysis methods to use is essential to success as a binary options trader purely because traditional binary options rely on a ‘higher or lower’-only outcome. This means that those technical methods which look for price to move higher or lower in terms of numbers of pips are not necessarily going to be the best when applied to binary options. The key to using technical trading methods with binary options is timing and setting the correct expiry time to support the trade. Whilst many technical indicators/patterns may be profitable in terms of fast moves reaching a set profit target, binary options traders do not want to get caught out with their options expiring during a market correction in the opposite direction after a fast spike in price.
Looking for reversals
Looking for market reversals is a good way for binary options of all expiry timeframes due to the fact that they often result in a sustained period of movement in one direction. Searching for signs of current trend exhaustion is just one way to use technical trading in order to inform when a good opportunity to purchase options may be imminent. Some of the most effective ways to do this is to look for familiar, and reliable, candlestick patterns such as ‘shooting star’ or ‘outside bars’ at key areas of support and resistance on a price chart. Often, a strong pattern here will indicate that the area of support or resistance is being defended strongly and at least a short-term market correction is required in the opposite direction before any further attempts to break this level is made.
Divergence and binary options trading
Another popular way to spot potential reversals on an advanced price chart which can then be applied to a binary options trading platform is price divergence using indicators such as RSI and MACD. These indicators are highly effective in showing traders when the market momentum is beginning to wane and one of the strongest signals is divergence in the oversold areas of the indicator. If price moves higher but the indicator reflects a lower high then opportunities will exist to purchase binary options with the anticipation that the market will reverse; at least temporarily.