advanced trading ideas for binary optionsbinary option traders tend to enter call trades when the...

Option Banque Training Series Vol. 1

ADVANCED TRADING IDEAS FORBINARY OPTIONS

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Good technical analysis is essential for successful binary option trading. In this booklet we are going to discuss the significance of the trend, methods for identifying the trend and discuss candlestick charts, and some of the major candlestick patterns.

BINARY OPTION TRADING WITHTHE “TREND”

Trend is a series of price observations that move in the same direction (upwards

or downwards) continuously. Trading with the trend is always considered the

best and least risky strategy in binary optiontrading. In fact, the famous saying

“the trend is your friend” has become the holy grail of trading. There are

basically three major price action methods that may be used to identify the

ongoing trend, let’s discuss each one by one;

SWING ANALYSIS

Price of an underlying asset moves up and down in waves, every wave has

a swing high and swing low that can be used to determine the existing

trend as demonstrated in the following chart.


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If the price prints a Higher High (HH) or Higher Low (HL) in an ongoing wave as

compared to the swing high or swing low of the previous wave, then the trend

is bullish or upward. Conversely, if the price prints a Lower High (LH) or Lower

Low (LL) in an ongoing wave compared with the high or low of the recent wave,

then the trend is considered bearish or downward. For example, look at the

above chart; you can clearly observe that the EUR/USD printed a Higher High

and Higher Low on the daily chart, confirming the bullish trend in the short

term; in such a scenario we may predict that the price shall print another Higher

High in the current wave,and in case of a failure to do so, shall turn the

sentiment to bearish.

If the swing analysis shows bullish trend in short term, then binary option

traders tend to enter call trades around the swing low of the previous wave and

vice versa. It is pertinent to mention here that higher the timeframe;more will be

the reliability of the swing analysis.

MOVING AVERAGES

The use of moving averages is another widely used method to identify the

ongoing trend. Before coming to the subject matter, let’s briefly discuss

the types of moving averages:

Simple Moving Average (SMA)

The use of moving averages is another widely used method to identify the

ongoing trend. Before coming to the subject matter, let’s briefly discuss

the types of moving averages:



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Weighted Moving Average (WMA)

A weighted moving average is calculated in the same manner as a simple

moving average, but uses values that are linearly weighted to ensure that

the most recent rates have a greater impact on the average.

Exponential Moving Average (EMA)

An exponential moving average is similar to a simple moving average, but

whereas a simple moving average removes the oldest prices as new prices

become available, an exponential moving average calculates the average

of all historical ranges, starting at the point you specify.

Here we will discuss only an SMA strategy to identify trend. If the price is

abovea moving average, then trend is perceived to be bullish while if the

price is below a moving average then trend is considered bearish. 100

Simple Moving Average (SMA), 200 SMA and 55 SMA are the main

moving averages used in financial markets.

For instance, consider the following AUD/USD chart;



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You can clearly observe that the current price is above all the important

moving averages i.e. 55 SMA, 100 SMA and 200 SMA; thus it signals that

the current trend is bullish. In bullish trend, the moving average acts as a

dynamic support level i.e. the support area moves along with the

movement of the moving average whereas in bearish trend, the moving

average behaves exactly opposite i.e. acts as a dynamic resistance level.

Binary option traders tend to enter call trades when the price hits a

moving average support and vice versa.

Trendline

A trendline is perhaps the most basic tool in technical analysis. By defini-

tion, a trendline is a line connecting two or more lows or two or more

highs, with the lines projected out into the future. Ideally, binary option

traders look at these extended lines and trade on prices reacting around

them. Simple Moving Average (SMA), 200 SMA and 55 SMA are the main

moving averages used in financial markets

You can clearly observe in the above chart that trendlines are draw by

joining the swing low and swing high of candles. Now the question is how

to identify trend with the help of trendlines? Trendline channels are used

for this purpose as explained below;



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Trendline Channels

Two types of trendline channels are very common in technical analysis

that are:

• Upward Slope Channel (it shows bullish trend)

• Downward Slope Channel (it shows bearish trend)

For example consider the following weekly chart;

You can see that the price is moving forward in an upward slope channel

which shows that the current trend is bullish; a weekly closing below the

lower trendline will however turn the trend to bearish. Binary option trad-

ers tend to enter call trades near lower trendline in case of bullish trend

and put trades near upper trendline in case of bearish trend.



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Breakouts

There are two potential outcomes when price comes into contact with a

trendline:

• The price will bounce o� the trendline

• The price will break through the trendline

If the price bounces o� the trendline, leaving a clear rejection in the form

of a pin bar or engulfing candle then it is a confirmation signal for trend

reversal. On the other hand, if the price breaks the trendline and a candle

closes above/below the trendline then it’s a signal for the continuity of

ongoing trend.



BINARY OPTION TRADING WITH CANDLESTICKS

Candlesticks play pivotal role in any kind of technical analysis. Whether you

trade stocks, forex or binary options, without candlesticks, your technical

analysis is incomplete. Before coming to advanced level candlestick strategies,

first of all let’s discuss the basics about candlestick pattern.

INTRODUCTION

Japanese have been using candlestick pattern since 17th century. They

used to predict the price of rice with candlestick pattern. Later on, Steve

Nison introduced candlestick pattern into Modern Technical Analysis by

writing a book named Japanese Candlestick Charting Techniques. A

candle consists of a body and wicks as shown in the following diagram.



The highest point in upper wick shows the highest price level during the life of a

candle and vice versa.If the close of candle is higher than the open - the

candlestick mid-section is hollow or shaded blue/green. Similarly, if the open is

higher than the close - the candlestick mid-section is filled in or shaded red.The

advantage of candlestick charts is the ability to highlight trend weakness and

reversal signals that may not be apparent on a normal bar chart.

Now let’s discuss the use and significance of major candlestick patterns with

reference to binary option trading.

PIN BAR TRADING FROM KEY AREAS

Pin bar is a famous candlestick pattern that may be defined as a fast

moving spiking pattern in the price with the high/low quite a distance

away from the opening/closing. Pin bars are of two types that are bullish

pin bar and bearish pin bar.

A bullish or bearish pin bar around major support or resistance level is

considered one the most reliable signals for potential reversal. Binary

option traders consider a pin bar, around key level, as an ultimate signal

for a major change in the trend. Let’s discuss some ins and outs of pin bar

trading from key areas.

The emergence of pin bars around key support/resistance levels shows

that the continuity ofongoing trend is highly unlikely. For example consid-

er the following chart; a classic bearish pin bar emerged in EUR/USD on

27th December 2013 as the price faced rejection around the 61.8% fib level.



t was an indication that the bears had controlled the driving seat and a major

bearish reversal might be in play very soon. The pin bar trade setup was proven

correct and the price fell drastically in the coming days. Binary option traders

enter call trades once a candle in closed in the form of a bullish pin bar while

put trades are triggered when a bearish pin bar is emerged.

PIN BAR TRADING FROM KEY AREASUsing the engulfing bar pattern is another e�ective way to identify potential

reversal in the existing trend. Many binary option traders consider engulfing bar

pattern to be a reliable signal forprice reversal.

WHAT IS THE ENGULFING BAR REVERSAL?There are two types of engulfing bar reversal that are the Bullish Engulfing Pat-

tern and Bearish Engulfing Pattern. Each of the aforementioned patterns con-

sists of two bars in the opposite direction as demonstrated in the following

diagrams.



The two bars in the pattern are usually termed as Bar A and Bar B. To be quali-

fied as a genuine engulfing pattern, the Bar B must have a Lower Low (LL) and

Higher High (HH) as compared to the Bar A. In simple words we can say that

the Bar B should completely engulf the Bar A as the name of the pattern sug-

gests.

The engulfing pattern is considered more reliable when it is emerged around

key areassuch as Fibonacci levels, moving averages or horizontal S/R.

HOW TO TRADE THE ENGULFING BAR REVERSAL?There is no rocket science to trade the engulfing bar patterns. Once you are

convinced that the pattern is a genuine engulfing bar pattern then all you need

is to place a trade in the direction of new trend i.e.one should place a call trade

to trade the bullish engulfing pattern and a put order for a bearish engulfing

pattern.



EXAMPLEConsider the following USD/JPY chart; you can observe at least four clear

examples of the bearish engulfing reversal. In everycase, the Bar B or second

candle printed HH and LL compared with the Bar A orpreceding candle.

You can also observe that the price fell considerably following the emergence of

bearish engulfing patterns on the daily chart; this is exactly how the engulfing

reversal pattern works.

A POINT TO BE NOTEDIt is pertinent to mention here that for a valid bullish engulfing reversal, the

existing trend must be bearish. Similarly for a bearish engulfing reversal, the

existing trend must be bullish. If the bearish engulfing pattern emerges in the

mid of an ongoing bearish trend then it will simply indicate the continuity of the

bearish trend, same is the case with the bullish engulfing pattern appearing in

the mid of a bullish trend.



THE TWO-BAR REVERSAL SETUP

The two-bar reversal setup generates the same signal as we discussed in the

engulfing pattern. A valid two-bar reversal setup is demonstrated in the

following diagram:



There is only a minor di�erence between an engulfing patter and two-bar

reversal setup as explained below.

DIFFERENCE BETWEEN TWO-BAR REVERSAL & ENGULFING PATTERNS

For a valid engulfing bar pattern there is a strict requirement that the

second candle must have a Higher High (HH) and Lower Low (LL) as

compared to the first candle; in other words the second candle must

completely engulf the first candle. There is no such requirement for a

two-bar reversal setup; the pattern is considered a valid two-bar reversal

setup as long as the second candle retraces the gains/losses of the first

candle.

THE INSIDE BAR BREAKOUT SETUP

The inside bar breakout setup consists of a bar or a number of bars that

are completely engulfed by a major bar commonly known as the mother

bar. To be qualified as a legitimate inside bar breakout trade setup, there

should be at least one bar (more than one bar are better) having higher

low and lower high as compared to the low and high of the preceding bar

(the mother bar).





Binary option traders tend to enter call/put trades after a breakout through the

high or low of the mother bar. For example, a call trade may be placed if a

candle breaks the high of the mother candle and vice versa.

This was a brief account of various methods for identifying trend and using

candlesticks in your technical analysis. The above mentioned technical

strategies may help you optimize your profitability in binary option trading.

BINARY OPTION TRADING WITH THE “FUNDAMENTALS”

A study about various fundamental events that may a�ect the price of

di�erent assets is known as Fundamental Analysis. A few major funda-

mental events include interest rate decisions, employment reports, trade

balance report, Gross Domestic Product (GDP) numbers, sales reports etc.

It sounds very di�cult to be updated with hundreds of economic reports

daily; howeverno need to worry, the Economic Calendar has made the job

easier. You can find a real-time economic calendar at optionbanque.com.

All you need is to check out the economic calendar before buying an

option. It is however recommended to avoid trading ahead of major eco-

nomic releases.



In addition to routine fundamental reports, one should try to get understanding

of broader economic picture as well such as interest rate expectations, QE, GDP

forecasts and overall economic/geo political a�airs.

Let’s briefly discuss some important economic releases with reference to binary

option trading:

UnemploymentUnemployment is the total number of all persons above a specified age, who in

a short reference period were: not employed and were actively searching for

employment.A person is unemployed if he or she desires employment but

cannot find a job. Generally speaking, higher unemployment is considered nega-

tive for the economy and vice versa.

Retail SalesRetail Sales measure the change in the total value of inflation-adjusted sales at

the retail level. It is the foremost indicator of consumer spending, which

accounts for the majority of overall economic activity.A higher than expected

reading should be taken as positive/bullish for the asset’s price and vice versa.

Trade BalanceThe Trade Balance measures the di�erence in value between imported and

exported goods and services over the reported period. A positive number indi-

cates that more goods and services were exported than imported.A higher than

expected reading should be taken as positive/bullish for the asset’s price and

vice versa.



GDPGross Domestic Product (GDP) measures the annualized change in the infla-

tion-adjusted value of all goods and services produced by the economy. It is the

broadest measure of economic activity and the primary indicator of the econo-

my's health.A higher than expected reading should be taken as positive/bullish

for the asset’s price while a lower than expected reading should be taken as

negative/bearish.

Consumer Confidence Consumer Confidence measures the level of consumer confidence in economic

activity. It is a leading indicator as it can predict consumer spending, which

plays a major role in overall economic activity. The reading is compiled from a

survey of about 2,300 consumers in the euro zone which asks respondents to

evaluate future economic prospects. Higher readings point to higher consumer

optimism.A higher than expected reading should be taken as positive/bullish for

the asset’s price while a lower than expected reading should be taken as nega-

tive/bearish.

PPIThe Production Price Index (PPI) is based on producer prices at the point of

production in the case of commodities produced within a specific economy.The

Producers Price Index has two types of indexes. First, the output indexes which

measure changes in the prices received by producers. Second, the input indexes

which measure changes in the cost of production (excluding labour and capital

costs).

A higher than expected reading of PPI should be taken as positive/bullish for

the asset’s price while a lower than expected reading should be taken as nega-

tive/bearish.



Natural Gas StorageThe Energy Information Administration (EIA) Natural Gas Storage report mea-

sures the change in the number of cubic feet of natural gas held in underground

storage during the past week.While this is a U.S. indicator it tends to have a

greater impact on the Canadian dollar, due to Canada's sizable energy sector.

Industrial ProductionIndustrial Production measures the change in the total inflation-adjusted value

of output produced by manufacturers, mines, and utilities.A higher than expect-

ed reading should be taken as positive/bullish for the asset’s price while a lower

than expected reading should be taken as negative/bearish.

Additional data points of use for analysing the fundamentals of the markets

may include(but are not limited to) the following categories

Company Financials/Sector Cycles (for equity and equity linked assets such

as indices).

Money Supply (for indications on monetary policy, which a�ects currencies

and bonds)

Industry/Organizational Group Events (OPEC meetings,G8/G20 summits,

technology shows and conferences, miner conferences, industrial action by

worker unions)

Systemic Factors (country upgrades/downgrades, sovereign defaults, large

institutional crises, economic sanctions)



Just as technical analysis relies on the aggregation of price data and its

subsequent analysis for the sum-total e�ect on a given market, fundamental

analysis attempts to aggregate relevant information points to analyse and

predict the e�ect of the collated information on the given market.

Therefore, fundamental analysis requires attention to news and information flow,

which is a continuous process, involving the observation of numerous news and

information points as they become available.



RISK DISCLOSURE: Options Banque does not accept any liability for loss or damage as a result of

reliance on the information contained within this website; this includes

education material, price quotes, charts, and analysis. Please be aware of the

risks associated with trading the financial markets; never invest more money

than you can risk losing.

advanced trading ideas for binary optionsbinary option traders tend to enter call trades when the...

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