The Right Tools For Binary Options
Binary Options, What Are They?
Binary options are a growing phenomenon in the trading world. What were once considered to be a fringe industry, gambling and scams are now gaining wide spread acceptance. Numerous world governments have even accepted binary options as valid financial instruments and have begun regulating them as such. Although they exist in many forms, all binary options have one thing in common. They are all worth 100% of the expected return if they close in the money and they are all worth 0% of investment if they close out of the money.
- Binary Option- Fixed return trading vehicle with an all or nothing pay out structure.
Trading Tools Or Binary Options Trading Tools
Binary options are a newer form of speculating financial markets. They are different than most other types of trading vehicle but still follow the same basic principles. For one, the value of the options varies with the value of the underlying asset. For another, it is possible from the movement of the underlying asset regardless direction. That means it is possible to profit with binary options when a stock, commodity, index or other tradable asset loses value. Another thing that binary options have in common with other types of trading vehicles is charting. You use the same charts, the same technical analysis and the same indicators as you would to analyze any tradable financial asset or derivative trading vehicle. Of course, as with any type of trading, not all tools and strategies work well with binary options. Some work better than others and some even seem meant for binary trading. I have compiled here a list and description of what I have found to be the top binary options trading tools today.
A little about me. I have been trading for over 10 years and trading binary options for over 2. I make most of my trading decisions on technical analysis and have used or reviewed nearly every indicator and tool there is. For more information on me, binary options and binary trading visit my blog dedicated to social trading binary options.
Time Series Forecast For Binary Options
Binary Options Trading Systems
These tools are all very useful for binary options traders but none of them represent a good system by itself. A sound binary options trading system will not rely on any one indicator, but on number of indicators. Using only one tool to generate signals will result in more losses then using two or three together. A good trading system also includes some form of risk management element in order to protect capital.
- click here for more on building a sound binary options trading system.
Time Series Forecast And Binary Options
The Time Series Forecast is one of the best tools for binary options I have seen and reviewed. The indicator uses the intersection of a series of linear regression models to create a line that tracks price movement. The indicator is meant to predict where prices are heading in the near future. Because of the nature of how the indicator is created it is also referred to as a moving linear regression. Interpreting the TSF is similar to a moving average but with some notable advantages. First, the TSF does not lag prices the same was as a moving average does. Second, the TSF predicts the direction of the next periods prices more accurately than a moving average.
From my experience the TSF works best when used in a trend following manner and with other indicators like support, resistance and trend lines. You can see in the chart above that the OEX makes a bounce from support in late November 2011. The resulting bounce is in line with the prevailing long term trends so bullish trades are in order. A signal is given each time the price of the OEX dips below the TSF and then crosses back over. Most of these signals will short term in nature. Since this is a chart of daily prices expiry on most positions should be limited to a fews days to a week. A few signals, such as the ones occurring close to the trend line, will have a longer term implication and may be traded with positions lasting a few weeks to a month.
Fibonacci Retracements For Binary Options
The Golden Ratio
Fibonacci did not discover the Golden Ratio but he did bring it to the west. Prior to that the ratio, the Fibonacci Sequence and their importance in nature were well known to Arabic and Indian scholars. In his book Liber Abaci (Book of Calculation) he gave European scholars their first look at Arabic numerals and changed the face of modern mathematics.
- The Golden Ratio states that two numbers are in Golden Ratio when their ratio is equal to their sum divided by their maximum. This ratio is inherent in nature and has been used by artists, sculptors and architects for centuries to lay out visually appealing works.
The Golden Ratio
Fibonacci, The Golden Ratio And Binary Options
The Fibonacci Sequence, which is based on the Golden Ratio, has been used to measure the financial markets for decades if not centuries. There are several ways to apply Fibonacci theory to technical analysis but the best and most useful for binary traders is the Retracements. The Fibonacci Retracement tool measures a trend, either up or down, and then produces a series of support/resistance targets for pullbacks, corrections and relief rallies. The tool is incredibly useful and eerily accurate at predicting where prices may either reverse or break through.
- Fibonacci Levels are great places to make short term trends. When prices reach a retracement level a contrarian short term option play can be made. For example on the chart above prices reach a top in mid May and begin to retrace. In early June prices reach the first retracement level and bounce up. A call option with 4 hours to 2 days of expiration would have profited from the Fibonacci bounce.
It is important to note that Fibonacci levels and indicators are not indicators of direction. It takes other analysis to determine where prices are heading. However, once prices bounce from or break through a Fib level the next level becomes the new target. In order to use the tool there must be a clear trend. It can be an uptrend or a down trend but it must be present. Start the measurement from the lowest point of the first candle in an uptrend or the highest point of the first candle in a down trend. End the measurement at the highest point of the last candle of an up trend or the lowest point of the last candle of a down trend. Once the measurement is taken the tool will automatically display the Fibonacci Retracement levels.
- Click here for more on Fibonacci Retracements for binary options.
High Low Moving Average Channel Indicator
Moving averages are an important means of technical analysis. They can be created using a number of different data points but are most often created by closing prices. Other moving averages may be created by using high prices, opening prices, low prices or an average or combination of any of these. Moving averages can be any length but the longer the period the better. Short term moving averages like 30 bar, 20 bar or 10 bars are good for short term trading and speculation while longer term averages like the 100, 150 or 300 day moving average are more suited to investors.
- The High Low Moving Average Indicator uses two moving averages to create a channel. One is calculated from the daily high prices, the other from daily low prices.
High Low Moving Average Indicator For Binary Options
Moving averages are a well known and well respected form of technical analysis. Envelopes and channels are another. This indicator combines both theories into one tool, providing an indicator with the power of two. First, the indicator is trend following, and trend confirming. When the channle is moving up the trend is up and when it is moving down the trend is down. The indicator is also useful as a volatility indicator as well. When price action heats up and daily trading ranges get larger the two lines of the indicator will move apart as well. Times when volatility increases are often good entry points for binary traders.
Signals are best when generated in line with the prevailing trend. When the trend is up and prices retreat below the lower average it is a signal to buy calls. When the trend is down and prices climb above the upper average then it is time to buy puts.Trend following signals are the strongest and have the least amount of risk. On the chart above there are three good trend following signals, each with an outlook of at least one month. There are also numerous shorter term signals as well.
Each moving average also provides an extreme limit. When prices are outside the lines they can be considered to be at a near term extreme and likely to snap back during the next period. Signals of this nature in line with the trend are better than those that aren't. It is possible to use the contrarian signal, just keep expirations short. On charts of daily prices as shown above I would stick to one day or less. Trend following signals may be valid for positions lasting up to a week or two.
Which Indicator Is Best For Binary Options?
jcme on August 01, 2014:
You are the best bro.
Justin Delano from Everett on December 26, 2013:
Thanks. Very helpful hub here.
TMHughes (author) from Asheville, NC on August 13, 2013:
For that you may need to visit my other hubs!
shamsAlAriyaf on August 12, 2013:
Excellent hub, except it lacked a crucial element: defining what binary options are!
Devika Primić from Dubrovnik, Croatia on August 01, 2013:
Informative ,helpful and well explained.