Channel trading is one of the most popular binary options trading techniques out there, but not everyone who uses this strategy knows how to properly identify the key data points that will lead to their success. Here we will break this technique down for you on a step by step basis, starting with the basics and moving forward into more complex areas. The beauty of this type of strategy is that it focuses on just call and put options, something that every binary broker offers.
It’s important to remember that just like any other binary options trading strategy, this method is not perfect and you do stand the potential of losing money. Our goal is to help you minimize this risk and maximize your ability to create profits.
What is a Channel?
In the world of trading, a channel is when the price of an asset can clearly be seen to fit within a specific range of prices on a chart. The channel can be moving sideways, trending upward, or trending downward. The best way to identify a channel is to use a strong charting software package using the candlestick option.
Trading with Channels
One of the most popular channel trading methods is the range bound asset. Here, you will create a real time chart for the asset in question. Once this is set up, it is time to see if a channel exists. Draw lines over the price chart, connecting the relative high points together from left to right, and the low points, going in the same direction. It’s often easiest to make sure that these two lines are the same color, and that they are not a color currently being used on the chart so that they stand out. It’s a pretty small thing, but it helps make your trading software a bit more user friendly. If the two lines are parallel to each other, then you have a channel. This is the same strategy described above with other expiries. These two lines should be as close to the relative high points and low points as possible without having extraneous price movement outside of the range.
If the two lines are parallel, and if both lines are moving straight across the chart, then you have a range bound channel. It is very important that you double check the timeframes that you are using for your candlesticks here. They should be as close as possible to the timeframe that you are trading. Also, in order to solidify your conclusions, you should have a chart available for the timeframe below your expiry and a chart for the timeframe above your expiry. This will help to maximize your success rates by adding an extra element of data to your trading.
From here, the rest is simple. You wait for the asset in question to approach either the top of the range or the bottom. If the asset is at the top of the range, you wait for the top wick of the candlestick to touch or even slightly cross the line that you have created on your chart. The moment that this happens, you will execute a put option with an expiry of the same timeframe as the chart. If you are looking at a chart where each candlestick represents five minutes, then your expiry will be for five minutes. The opposite will occur with the bottom of the chart and you will use call options here, being sure to stick to the right timeframes and expiries.
This concept can be applied to both upward and downward moving channels. The only thing to be aware of is that if the channel is moving upward, you will want to avoid put options, even if the price is at the top of the chart. Wait for the asset to drop to the bottom of the channel, and make your trades with the trend. The same holds true for downward trending channels. Wait for the asset to hit the top of the chart, and then take out a put option so that you stick with the prevailing trend.
Trading 60 Second Options with Channels
60 second binary options are inherently risky, and they are always fast moving. Using channels to trade an asset can help simplify this process and help you to make tough decisions more quickly.
To be successful with this, you need to be using the right tools first. You need a real time charting package with the ability to create candlestick charts. In some instances, such as with currency pairs, it will be easy to find free software. In others, there may be a subscription cost with this. Some brokers do offer their own trading software, but for 60 second options, this tends to be less than ideal because of the fact that prices can move so quickly. Log into your charting software, find the asset you wish to trade, and then set the timeframe for each candlestick at 1 minute.
When creating your chart, you will likely be unable to make a chart for anything smaller than 60 seconds. Use a 60 second chart for your main decisions, and a five-minute chart to help you confirm your findings.
Now it is time to observe. When one of the candlesticks crosses the uppermost line that was drawn, take out a 60 second put option. When one of the candlesticks crosses the lowermost line, take out a call option.
Things to Beware of
There are issues with trading in channels, regardless of the timeframe of the chart that you use and regardless of the expiry of the trades you execute. The most obvious problem is the fact that even the most range bound of assets will eventually break out from their rut. Typically, this happens because of some sort of news event, but not always. The best way to overcome this issue is to subscribe to a news service that sends out alerts when something unusual happens with your asset. Let’s say you are trading the USD/JPY currency pair, and the Bank of Japan makes an announcement that they are abandoning their stimulus package. This will undoubtedly cause ripples throughout the Forex market, and this pair will be impacted. Knowing this before placing your next trade will help save you from the unexpected nature of such an announcement and the market volatility it will create.