Binary options offer great financial rewards for those who make the correct higher or lower call and the reliability of some technical indicators can make this increasingly probable. The sheer number of indicators available can both help and hinder binary options traders in search of their profitable trading strategy. One of the family of indicators which may be able to assist binary options traders in becoming profitable are oscillators.
What are oscillators and how can they help?
Oscillators are defined as leading indicators which is why they can potentially be great in assisting traders to spot market reversals. The most popular of these have very similar characteristics and also provide similar signals for traders to start looking for profitable trading opportunities. The stochastic oscillator and Relative strength index make up two of the most popular and reliable of these indicators, although there are multiple more varieties which give traders who are only looking to trade binary options using these a huge choice with which to experiment.
Using an oscillator as a leading indicator to spot market opportunities can be done in a number of ways. Although it is important to remember that indicators can generally not good to use alone for trading signals, oscillators are particularly good for binary options trading. The first reason for this is that they demonstrate when a market it either “oversold” or “overbought”. These two scenarios mean that the mathematical equation based on the recent price movements (these can be set to a custom number of bars) predicts that market sentiment has either pushed the price up too high or too low. This typically exists when the oscillator value is either below 30 or above 70 on the index scale to the side of the indicator window. A high reading above 70 alerts binary options traders to look for reversal signals in the market and to get ready to sell binary options, whereas a reading below 30 suggests the following. As all oscillators are leading indicators, they have the ability to pre-empt what the market will do. Unlike so-called “lagging indicators”, such as moving averages which tend to provide signals after the initial market movements, oscillators helpfully provide this indication before the price movement.
Taking divergence trades using oscillators
A second, and very powerful, way to trade binary options with oscillators is to use a secondary signal in order to reinforce the probability of a profitable trade. This signal can come from within the oscillator itself, or from an additional signal provider. One of the best setups for all traders is when an oscillator diverges within its oversold or overbought areas. This means, for example, that whilst price is making a higher high on the chart it is making a lower high within the indicator. This is a fundamental sign of market weakness and an indication that price is ready to reverse, or at least simply correct. For binary options traders this is an ideal opportunity to purchase sell options with a reasonable short timeframe and watch the price fall.
Price-action, binary options and oscillators
Another potentially successful way to trade binary options is to look for an additional signal outside of the oscillator. Many binary options traders will apply an additional indicator to their charts in order to wait for both of these to come in to agreement before trading. Price-action traders may also wait for the oscillator to reach its oversold or overbought areas before looking for candlestick reversal signals or for important areas of support and resistance to come in to play.