Whether you're trading binary options or traditional scalable assets, it's always a good idea to follow a detailed trading strategy. While no strategy is infallible, it's important to have a working template in place well before execution time. People have developed a number of unique strategies around binary options, from simple trend following through to range trading, news trading, and many more. Many trading strategies developed under regular conditions can also be adjusted to meet the needs of binary options.
Most trading strategies are based on simple concepts, such as support/resistance, trend lines, price patterns, market phase, and news. Regardless of the strategy or financial instrument in question, the analysis phase of trading can be split into separate technical and fundamental components. Technical analysis involves studying price itself through its spatial and temporal representation on charts, while fundamental analysis involves studying the underlying factors which move the market through news announcements and macroeconomics.
Technical and Fundamental Analysis
Traders often focus on either technical or fundamental factors, specialising in one or the other and making their trading decisions accordingly. However, it's best advised to learn the basics of both forms of analysis, because they shed light on different aspects of price movement. While fundamental analysis concentrates on the underlying factors driving the market, technical analysis concentrates on how price moves with respect to these factors. While economic events move price through news announcements, price levels themselves also influence policy decisions in a feedback-like fashion.
Support and Resistance
Support and resistance levels form the basis of many binary trading strategies, so understanding these concepts is essential. Support and resistance lines are basically important historic levels that price bounces off on the horizontal axis, with different levels respected within different time frames of reference. Many forms of technical trading in particular rely on the detailed analysis of support and resistance levels and how they change over time. Because binary options are concerned with price direction and directional trigger points, it's vital to pay attention to the relationship between support and resistance levels and trade expiry time.
Trend lines are another important subject to master for aspiring binary options traders, with price often respecting different trend levels and patterns as it unfolds over time. In many ways, trend lines are simply another representation of support and resistance, although trend lines are diagonal in nature instead of horizontal. Binary options range orders depend directly on trend lines, with other order types also taking trends into consideration when analysing price direction. Traders often make decisions based on either horizontal or diagonal support/resistance lines, either trading bounces off these lines or breakouts from these lines into new territory.
It's important to analyse different pattern formations when trading binary options, especially how they react around support and resistance levels. Price is often represented in the form of Japanese candlesticks, with common candlestick patterns including the spinning top, doji, hanging man, and shooting star. Despite these evocative names, most of these patterns are easy to spot on charts and simple enough to analyse. Like all trading, however, difficulties arise when you realise that patterns and lines don't always adhere to expectations. This is where market phase and fundamental analysis also come into play, with spatial price-based technical analysis always dependent on the temporal nature of price movement.
Market phase is a complex area of technical analysis that refers to different temporal stages of price movement. For example, it's important to pay attention to market open and close times, market crossover times and important news announcements, as each of these events can have a big effect on market conditions and change the nature of existing technical analysis. A price pattern that means one thing before a news event may take on a completely different meaning after it, so it's always important to stay up to date with the economic calendar and current market times. Binary options are especially sensitive to volume and liquidity conditions, so you really have to know the phase of the market before you make an investment. More detailed phase analysis includes subjects like accumulation and distribution, especially with regard to volume and depth of market.
Binary Options Time Frames
Like all forms of trading, it's important to understand the temporal nature of price movement. While price changes are continuous, they are always represented in a discrete fashion using a particular scale. The 1 minute chart is the smallest time frame available from many brokers, with some select brokers also providing 30 second charts and even smaller durations. Other common sizes include 5 minutes, 15 minutes, 30 minutes, 1 hour, 4 hours, 1 day, 1 week, and 1 month. While the majority of binary options traders use small time units for analysis and execution, it's important to have a basic understanding of larger time frames and what they represent.
Regardless of the financial asset in question, time frames are always fractal in nature. While this might sound like a complex mathematical abstraction, it's really quite a simple concept to wrap your head around. Movements in price are always nested within a larger whole, so even short term traders are bound to the time frames above them. When trading either direction or trigger points with a binary options trade, it's important to analyse support and resistance levels on higher time frames. Because time frames are a discrete representation of a continuous stream of data, it is important to develop an understanding of price movement that is independent of any particular frame of reference.