Binary Options Strategy: Trend Line
It is a well-known fact that it is important for a trader to be able to predict the market trend in order to determine when is the best time to place a trade. Here, we explain in simple terms what trend lines are and how to draw trend lines.
What are trend lines?
In order to make better investing decisions, a trader would analyze the charts to find out whether the price is going up or down. Trend lines are lines that drawn by the trader in order to have a clear view of the price movements.
In technical analysis, there are two approaches: trend line analysis and oscillator analysis. In trend line analysis, a trader analyzes in which direction the price will move, and trend lines are important indicators. The oscillator analysis signals overbought and oversold.
An uptrend line is plotted by connecting a series of low points, and a downtrend line is formed by connecting a series of high points. As the trend lines show a clear view of the price movements, it is important to take them into account when you place trades.
・A trend is a pattern that shows the direction of the price movements.
・An uptrend line is plotted by connecting a series of low points.
・A downtrend line is formed by connecting a series of high points.
・It is important to follow the trend when you place a trade.
These are important points you should keep in mind. It is necessary that you learn how to draw the trend lines correctly and use them as a binary options trading strategy.
How to draw a trend line?
There are drawing tools which can draw and generate trend lines automatically. However, most traders would like to draw trend lines by their own and they may have different drawing methods. Here, we explain how to draw trend lines in the candlestick charts with shadows. It is not suggested that this is the only way to draw the trend lines. It aims at helping you understand the basics.
How to draw an uptrend line?
First, you find the lowest low (Point A) which is the starting point of the trend line. You then connect it with Point B which is the lowest low.
As shown in the graph above, Point C is the highest price. An uptrend line is formed by connecting Point A and Point B.
How to draw a downtrend line?
In the case of a downtrend line, it is the reverse of the uptrend line. When you draw a downtrend line, you need to find the highest high (Point D) and take it as the starting point of the trend line. Then, you can connect it with Point E which is the highest high.
As shown in the graph above, Point C is the lowest price. A downtrend line is formed by connecting Point D and Point E.
・There is no definite way to draw a trend line. The basic method to draw trend lines is shown as above.
・A trend line is more valid with three or more highs (lows).
・It would make the analysis more accurate by looking at long-term trend lines, such as 4 hours, one day, and one week trend lines, besides the short-term trend lines.
・Whenever there is a change in the chart, you should adjust or redraw your trend lines.
How to use trend lines?
Predicting market trend by examining how steep the trend line is
A steeper trend line indicates that there is a strong tendency toward market rise or fall. By following the trend, it is likely that your winning percentage will increase.
You should pay attention to the trend line breaks and it may signal a trend reversal. The penetration of a downtrend line can signal buying, and the penetration of an uptrend line can signal selling.
Getting an idea of the current price rate
When you draw long-term trend lines, such as 4 hours, one day and one week trend lines, you should know the current price rate.
Large price movements will occur when sideways trend is broken
When sideways trends (i.e., horizontal price movements) last for a long time, it is likely that large price movements will occur.
Signals to trend reversals
Drawing trend lines help traders to find out and understand the price movements. Different traders would employ different analytical methods and draw different conclusions. If there are penetrations of trend lines, it is likely that trend reversals will happen.
If you can detect the right time to place trades, you will in an advantageous position. This is not saying that you can win the trades all the time by using the method. However, it is a strategy that can help you to predict the trend. For novice traders, it can be taken as a reference while trading binary options.