Trend lines are one of the basic tools for trading in all markets. Do not mistake basic with insufficient. Trend lines are one of the most valuable and effective tools for a trader. Traders who learn how to apply trend lines for shaping diagnosis of the market patterns are likely to rely a lot less on the many technical indicators that are frequently used.
- An uptrend is a case where the prices keep getting higher highs and also higher lows.
- A downtrend is a situation where there are lower highs and lower lows.
Determining trend lines help the CFDs or any other trader to find the conditions of the sentiment in the market. The trend in terms of sentiment can be seen as a persistence of sentiment. When the trader speculates that the sentiment is strong, the binary strategy which makes sense is to go with the sentiment. Be wary if you determine that the sentiment is very strong. A very strong trend is more difficult since it may be a prelude to a continuation of the action, however, it may also be a contra-indicator that the price is ready to reverse.
The power of trend analysis is its ability to predict into the future. Keep in mind that the trend lines are not indicators, and they are not lagging. Trend lines are in fact actual maps that define the boundary optimism and fear.
How to Draw a Trend Line
When you are new to trading you might not know how to draw a trend line which result in misjudging the price action. This is how you draw an uptrend line (Bullish trend):
- Find the lowest low.
- Find the next higher low following the lowest low.
- Draw a line from the lowest low to the higher low and continue into the future.
This is how you draw a downtrend line (Bearish trend)
- Find the recent high
- Draw a line next to the immediate lower high.
- Extend the line to the right end of the chart beyond the latest date and into the future
Outer and Inner Trend Lines
When you understand how to draw trend lines then you need to be able to detect whether there is an outer and inner trend. When you notice an inner trend line it indicates a shift in sentiment and momentum and should be an alert that conditions are changing fast. The trader can further more use the outer trend line as a boundary where the price will have a hard time in breaking. This means that finding an outer and inner trend line helps to find the right binary options strike price.
Trend lines in Forex trading strategies
You can find many different strategies for currencies trades, wether you are trading binary options or CFDs on the Internet, but often they are full of professional terms and difficult to understand.
What is a price movement corridor? This term means the possible spread of price swings in either direction.This practice is used to identify the general mood of the market and helps in projection making. Two parallel lines are plotted in order to determine the corridor.
Example of price corridor
As you can see, there is a downward trend on the chart that shows the superiority of market sentiment towards the sale of the asset and the continuation of the current trend. In such situations (if the trend in the future is not beyond the range), a trader can safely buy Put options or sell currency hoping for the fall of the price.
- The upper line is resistance line, which displays the trend of price’s highest values for a selected period of time. When scribing the line, you should take into account only peak values.
- The bottom line is support line, which shows trends lowest price values for the selected period of time. When scribing the line, you should take into account only peak values.
Binary & CFDs Trading: Trend Lines Strategy
On the websites of binary option brokers we have often read that this type of stock trading is simplistic and does not require a deep knowledge of the market to start earning. But it would be foolish to assume that you can earn an income without having any trading strategy.
CFDs are leveraged instruments but quite easy to understand – difference x leverage = profit/loss.
Binary options are actually relatively simple instruments of the financial market as an investor is only required to predict where the price of an asset will go up or down. That is the amount of profit, as opposed to for example Forex/CFDs trading. It does not depend on how many points the price changes, as long as it happened in trader’s predicted direction.
You can use insights from this article easily with Plus500 CFDs trading platform.
Thus, a key strategy of trading binary options or CFDs can be the work with trend lines.
In this regard, let’s introduce two key concepts and give them the example of an uptrend definition:
Support line – line, drawn by the lower price extremes. It takes that name, since within this trend it does not fall below the price of the mark and thus supported the uptrend.
Resistance line – the line has drawn through the upper price extremes. It takes that name, since within this trend it does not give a price break above themselves, thus, providing resistance.
As longer in a time warp unchanged support and resistance lines, so the stronger and more reliable trend and accordingly the more obvious to make forecast we make while trading binary options.
Remember the rule: as the trend is stronger, so more likely that it will retain its direction. That is, investors need to do the forecast according to its direction.
Another indicator of the trend’s reliability is the number of times that the price has tested support and resistance lines (that is trying to break them), but it did not stand their power and come back. The more frustrated breakdowns, the stronger is the trend.
Here’s what needs to be learned when choosing binary options: trend trading strategy is an elementary and key approach that will help you maximize your profits. Use Plus500 chart tools to draw support and resistance lines and determine trends.
Fibonacci Resistance Lines
To become a successful trader you need to be able to apply the standard Fibonacci resistance tool to the price action of the underlying market. Fibonacci ratios are the most important pattern and apply to all price patterns. If you do not know them yet, you need to learn how to apply the usage of them right away. It is hard to say why traders use Fibonacci lines, but part of the reason must be it is a self-fulfilling prophecy. Because traders find Fibonacci lines important, they become important.
You will find that Stops and Limits and Puts and Calls are all placed close to the Fibonacci lines. The Fibonacci lines do not predict the future of the underlying market, but they are useful markers when locating where resistance and support will be. When trading binary options, the weekly or daily and four-hour times price charts will be an effective time period to use. When markets react and change to even risks, they often move in Fibonacci ratios. Here is how you apply usage of Fibonacci lines in binary options trading.
- Take a weekly or daily chart and locate the appropriate Fibonacci line.
- When the Fibonacci line is applied, determine where the price is in relationship to the key Fibonacci ratios.
- When you have selected the binary options strike price you want to trade, determine which Fibonacci line the binary options strike price is near.
The outcome of overlaying the Fibonacci lines on the underlying market can be very valuable to the trader. The connection between binary option strike prices and Fibonacci lines are important since they can verify whether the intended strike price is the best one to use for a trade.
Example: A trader goes long a binary options strike price, but that strike price is just above a key 61.8 Fib line, which means that there is a high possibility of resistance. The chances of a successful trade is unlikely and would require a much more momentum than anticipated.
A Fibonacci line can help to find a binary options price if the spot market has recently probed above a 61.8% Fib line and if the trader wants to go with an in-the-money strategy, choosing the strike price right below the Fib line is a good choice. The most important Fibonacci ratios in trading binary options are 38.2%, 50%, and 61.8%.
You need to locate the high and low formed on a price chart. The Fibonacci tool connects the high to the low and generates the Fibonacci ratios. By reading our articles, you have learned a basic form of technical analysis as a binary options trader.
As a trader, you need to identify patterns in the price action. These patterns reflect market sentiment. Binary options trading is focused on direction and, therefore, the trader should apply patterns analysis and initially focus on the trend analysis, to boost confidence about the trading decisions. By doing this, you increase the chances to get profitable results.
Support & Resistance Lines
Fundamentally to be able to trade you need to be capable of describing what the price activity is doing on a chart. When you look at the chart, you are in the process of identifying and describing where the price is and what it is doing. A common and basic tool is resistance and support lines. The resistance and support lines prove where the emotions of the market are clustered.
Support is where the price stops falling and comes to a temporary rest. We call this area support. The price has for the time being stopped falling and is now resting on the floor so to speak.
Resistance is where the price stops rising and takes a break. The movement has at least temporarily hit a ceiling you can say.
Drawing the Lines
When drawing a resistance or support line you need to find out the following: Where is the most recent low? Where is the most recent high? From there you simply draw a horizontal line under the low and the one more above the high. It is common you need to wait a bit to see if these lines are taking form. You need to verify that there is a zone of support, which typically means waiting to see three failed attempts to break support or resistance.
First Trading Strategy
You are now ready to develop your first trading strategy. If you wish to buy in the market, one of the best locations to buy will be near a support area. On the contrary if you wish to sell into the market, one of the best locations to sell will be near a resistance area. It is quite simple why that is. The strong support makes it likely that a low in the price has established and if a strong resistance has been established it is likely a high has been established. Trading near support and resistance helps achieve the goal of buying low and selling high. A cliché nonetheless a solid business plan that always will be profitable.
You may be thinking this sounds too simple and how can it be? Well, in reality the lines break through often and you will soon realize this and you need to be able to incorporate this in your strategy. When a line is broken, it changes character. The support line begins to act as a new resistance line. The resistance line begins to act as a new support line depending on which line that breaks through.
It is evident that you try to determine how strong the support and resistance lines are. The stronger they are the greater the confidence the trader has in applying these lines to shape a trade.
Identifying the Degree of Weakness or Strength
The more frequent these lines have been touched without breaking, the stronger indication it is to the trader. We tend to say three touches confirm a good possible entry point. The longer the time-frame, the better indicator this is. When you get more advanced, you will need to consider the price action in relation to other patterns such as Bollinger Bands and the presence or absence of Doji candles.