Predicting Price Movement in Binary Options

Predicting where markets will go next, in any given time frame, is generally a very difficult to almost impossible task, especially at times where predictability really diminishes to zero due to volatility and continuous false signals. With that being said there are several key factors that influence the markets, and these tend to be used by winning traders, as well as large institutional traders. The secret to success is being able to use binary options so that you can hedge uncertainty, as and when it appears, and to be able to identify early in the price movement, whether you should get out, or get in with a new trade.

The 200 Bar Moving Average

Everyone involved in financial trading watches the 200 bar moving average on the 1 hour and daily charts. Once price clears the 1 hour 200 bar moving average, it will start to consolidate and look to continue sideways or possibly continue further in the same direction. As you can see on the chart below, the 200 bar moving average doesn't always work, there's still a great amount of uncertainty and ambiguity involved. Smart traders however eliminate false decisions and losing trades by not trading against this average.

As you can see, one can trade both 5 min binary options, as well as hourly options, based on a trading plan that expects to have the 1 hour 200 bar moving average on its side. If price hangs around close to this average for too long, the odds of a crossover increase. On the other hand if price moves away from the average, more often than not, it means that more and more fund managers are fueling the existing trend and a reversal is highly unlikely.

Price & Time Symmetry

We know for a fact that markets can spend a big deal of time going nowhere, or trading within a range. Then as the inevitable breakout occurs, they trade out to new higher or lower levels. It helps to know where the trend is more likely to slow down and possibly start consolidating. Generally, but not always, markets tend to move in 2 or 3 steps. The first step will be an X number of price points, followed by some kind of consolidation and then another step will follow which will be of equal magnitude (same X price points) in the same direction.

On the chart below, you can see how price dropped sharply alongside the red double arrow, it spent a considerable amount of time consolidating, and it touched the declining 1 hour 200 bar moving average but failed to penetrate. At this stage we cannot know where price will really go, it all depends on more complex market data. It finally failed to cross the average and dropped sharply. The drop is identical in magnitude to the first one; you can see them both alongside the red double arrows. The watchful trader would have exited the market at exactly that level, without risking any further directional trades, then as the trader would have expected price to consolidate they could engage in short term binary option trading, essentially fading every move the market made.

But suppose the market went the other way, and it crossed the moving average with a lot of momentum. The knowledgeable binary options trader could have been prepared for either outcome simply by adjusting their Put binary option to the desired price drop, and for very short expiry time. And by buying a longer term one touch binary option with a much longer expiry time, and bigger price target, in order to profit from a possible crossover and a sustained rally, which would have lasted many days. If the price move is large enough, it can allow you to profit from the price move, regardless of direction, simply by using high yield, longer term binary options. If the price move is expected to be very small and very brief, then only simple Call and Put binary options can be used, but these offer less than 100% payout, so it's very difficult to profit no matter the direction. Very difficult but still not impossible if the trader acts very fast.

It's called Price & Time symmetry, because there can be symmetry in either price, as in our example, or in time, by where the 2 steps (the 2 price moves) are not equal in magnitude, but their duration is! In that case the trader has to count price bars, and be prepared. They would have to know that the first step of price action was X price points in length, and Y minutes in duration, so that when the next step begins, one of the two parameters will match the first step's, either it will be exactly X price points in magnitude or it will be different in magnitude but will last Y minutes.

Divergences

Beware of divergences in momentum indicators; if a market moves too much, too fast, but momentum indicators such as RSI do not confirm the move, then chances are the market will make a steep corrective move soon. Divergences are very tricky to use, they should only be used by traders who know how to interpret additional indicators, and at the very least you should use 2 different momentum indicators so that you can get a greater insight into the market move and whether momentum really diverges from price action. A single momentum indicator can be wrong.

Day of the Week

Believe it or not, many markets are influenced by factors such as what day of the week it is, the stock market for example has a strong tendency to rally on Mondays or Tuesdays, and to decline most on Thursdays. Currencies too follow daily patterns. If you choose a particular currency pair to trade you should do some research into a possible day of the week pattern. These patterns tend to be right very often.

Finally remember that identifying the trend can be very tricky, usually when traders refer to the 'trend' they mean the daily trend, as you zoom in or out on the charts the trend will seem to be one way or another, creating huge confusion. For most trading purposes, one only needs to focus on the 1 hour trend, and all the way up to the daily trend, anything else hardly ever matters.

Next: Money and Risk Management in Binary Options

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