Price action is a commonly used binary options strategy. It is popular because it involves very little research, and you can make judgment calls based upon chart observations alone. This is a great method for those that are putting together short term trades of five minutes in length or less because it allows you to act quickly. Here is what you need to know about this trading strategy.
The Application of Price Action
You can use this strategy with any type of asset, but something that moves quickly, like a currency pair or a stock, is best. You also need to use candlestick charts for this to be most effective.
The goal is to find an asset that has a negative trend, but has shown an unusual price increase. You should follow the asset’s price, waiting for it to come off of the price increase and drop down below the previously established support line. Once it begins to recover, wait a moment for it to rise above the support line, then take out a put option on it. Because of the negative trend and because of the recent breach below the support line, this threshold has been erased, and a further decline in price becomes more likely, especially now that a weak upward movement has been thwarted so recently.
This strategy can be used for any timeframe, really, but it is most effective when you use expiries between five and 15 minutes. This is because it gives other traders to see the same thing that you have seen and act accordingly. Again, you want to focus on assets that move quickly, but if you are looking at indices and commodities, you will want to extend the length of the expiries that you are using to accommodate their slower reaction time.
Price Action isn’t Always Right
This method can be overly simplistic. It is effective, but if you just leave it at this, you will find that it might not have the high level of success that you desire. For this reason, having a candlestick chart is a must. You don’t actually need this type of chart to execute basic level trades when it comes to price action, but it is a very helpful thing because when you use a candlestick chart, you can detect smaller trends and patterns that a line or bar chart alone will never see. This will slow down your ability to process information, which is a negative for some, but it will increase your correct trade rate, so there’s a better positive angle to this than it is a drawback, depending on what your trading goals are, of course.
The other big drawback of this is that it is a response to trader psychology only. You should definitely have other methods of analysis that you use in conjunction with this one. You are trying to read overall trends, and you might even be fairly accurate at it just by glancing at a chart, but you should look at a number of different timeframes before executing a trade with this just to ensure accuracy. Fundamental indicators can also help you pinpoint trends, too, and they can help you to better anticipate trend reversals before they begin. Like many other trading strategies, this one works best when it is used with a handful of others, just to help you improve accuracy. For this reason, 60 second binary options traders should probably stay away from this. It can be accurate here, but not as accurate as it could be when used in other settings with more time for other traders to identify the same trends.
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