Trend Indicators in the Options Market
All trading platforms have different types of indicators and automated signals, yet, everything comes down to the two most important ones, oscillators and trend indicators. If it were a contest, then trend indicators would win, since they are traders’ favorite tool given that it can be used when the market is moving sharply and trends reach the range limits.
According to many, following a trend is a sure bet which means that if you follow the price movement and place a put or call option (which is conditioned by how the trend moves) you will walk away as a winner from that particular trade (or in most cases). The best solution to discover if a market is trending is by using the trend indicator, especially because markets are most of the time in a consolidate state with no particular movements. When the market is consolidating one is better to switch to the oscillator, but that will be discussed in another article.
When it comes to trend indicators, Bollinger Bands are quite common and they can be found on many platforms, including the world’s most famous Meta Trader 4 platform. The 7BO Binary Options Education devoted a special project to the Bollinger Band indicators which you may also check out. Apart from Bollinger Bands, the MT4 offers also the Commodity Channel Index(CCI), Parabolic SAR, etc. these indicators are default settings, whereby many customizable indicators can also be accessed.
The major task of these indicators is simply to spot a trend which will indicate us to either buy a call option when the trend is moving upwards (bullish trend) or to buy a put option if we deal with a bearish trend.
Trend Indicators Turn the Trend to Your Friend
Every trader’s ultimate dream is perhaps to ride the wave or to stick with a trend, but trends are not that common and one has to wait for one to come along. If you are waiting or looking for a trend, the best policy is to start with the analysis of your currency pair. If the currency pair is not major, but cross, a trend will probably not appear.
Trend indicators are positioned on the chart, and not opened in a separate window like oscillators; trend indicators move with the price, whereas oscillators move within ranges or limits. As opposed to the oscillators, if divergence is involved, the trend indicator will not be of any use. Trend indicators are better for more visible strategies, for example by adding to a trading position before it moves outside a specific level (breaks the range). This strategy is known as Trail stop order in the Forex market, whereby the market is moving in a bullish way and followed by the trailing stop which moves in the same direction with the same distance.
Ichimoku, Kinjun, Tenkan Lines
If you come to a dead end where trading is not possible, it is always an option to add to your position which simply refers to buying another position or opening a new trade. One of the greatest trend indicators used today is the Ichimoku cloud, which along with the Kinjun and Tenkan lines indicates the ideal and optimal trading conditions. The Ichimoku cloud defines trend direction, support and resistance levels, etc. if the trend is moving upwards, then the Tenkan line is above the Kinjun line and the cloud will be green which is in translation an signal to trade call options. As long as the two lines do not cross, regardless of dips, traders are supposed to buy call options. Of course, if the trend is bearish, the trader should look for put options in the same way. This is discussed in more detail in the Ichimoku Kinko Hyo article by the Binary Options Education. Traders have to bear in mind that as opposed to Forex, binary options trades are defined by expiry dates, most of the time, very short-term timeframes, but it is still possible to secure profits.
The Moving Average Indicator
Since moving averages are often used by traders who are trying to identify a trend, the moving average indicator can be beneficial in this situation. When traders spot that the averages are crossing or overlapping, they know that a trend is changing. The resistance and support prices will be stronger if the periods examined through moving averages are bigger.
This means that when having a bearish market with aligned moving averages, a put option would be recommended by the point until average is tested, and vice versa for a trend that moves upwards. In that situation, call options are recommended for trading.
The trend indicators can reveal detailed and accurate information, but the only downside is that they cannot be used when the market is not moving. Trend movements are recorded to take place only 35% of the time, which makes it hard to track them down. Still, the trend indicators can enhance your profits when a trend is spotted. The best thing to do is to combine other indicators, i.e. use the indicator which is the best for the given market conditions. If it is not the trend indicator, then certainly, it is the oscillator.
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References and Further Reading:
- Technical market indicators optimization using evolutionary algorithms (Pablo Fernández-Blanco, Diego J. Bodas-Sagi , Francisco J. Soltero, J. Ignacio Hidalgo)
- Stock trading rule discovery with an evolutionary trend following model (Yong Hu, Bin Feng, Xiangzhou Zhang, E.W.T. Ngai, Mei Liu)
- Intelligent stock trading system by turning point confirming and probabilistic reasoning (Depei Bao, Zehong Yang)
- Day trading system (Paul B.C, Robert Howard)
- Stock Trading: An Optimal Selling Rule Related Databases (Q. Zhang)