Investments carry a high level of risk and may not be suitable for all investors.

A free demo account

with $10.000 in practice money

Investments carry a high level of risk and may not be suitable for all investors.

What is Technical Analysis in Binary Options Trading?

When traders find their preferred methods of trading and calibrating their binary options strategies, trading becomes amazingly interesting and exhilarating. Binary options traders have various tools and analysis methods at their disposal to get the important info to base their trading decisions on.

However, the technical analysis seems to be the most used for binary options trading namely because of its focus on charts and price action.

This article has the goal of explaining and highlighting the importance and usefulness of technical analysis in binary options trading.

What does Technical Analysis Offer in Binary Options Trading?

Binary options traders very often use the technical analysis, mostly because it uses financial charts as main means of analysis. One of the main points that traders need to realize is that having a good knowledge base is actually the key to boosting your potential of profit opportunity in binary options trading. The more knowledge you have, the easier it is for you to use the analytical tools correctly and act accordingly.

Traders depend on technical analysis to help them be as prepared as possible for the trades they are planning to make. What binary options traders need to do is be able to predict how the underlying asset price will be moving in a predetermined time frame. When you have a correct analysis then you are able to make better predictions which in turn makes you more prone to adequately boosting your earning potential.

Technical analysis has a few subtypes that we will go over in a couple of next sections.

Trend Following in Technical Analysis

What exactly does Trend following refer to in the context of a binary options trading industry? Well, this analytical method focuses on following the historical trends in order to learn how the current and future market trends would potentially develop.

If we think about this component, it actually makes a lot of sense. In order to understand present trends, we need to be able to understand how previous trends developed, moved and what influenced them. This way your trade decisions might have a much more substantial base of information upon which it can be configured.

Obviously, traders are advised not to place trades against the trend unless you get across a specific situation, where there is a clear indication that the trend in question is weakening.

Momentum in Technical Analysis

This type of analysis refers to a change in price over a certain time frame and thus giving the trader information on how fast the price is moving downwards or upwards.

Momentum analysis makes use of an oscillator as its main chart type. The way it calculates the price change over time is by just subtracting a closing price of a chosen period from a closing price of a previous period. After the calculation is made, the result is visually represented in a graph. Depending on the result the oscillator will generate a positive or a negative value for the trader.

Mean Reversion in Technical Analysis

Mean reversion calculates the mean of a price of an underlying asset. What exactly does this mean and why do you need to know about it?

Well, since we know that the asset prices are rising or falling continuously, it is clear that sometimes what we need to figure out is what is the mean of those asset prices. This helps traders to identify if the price will possibly settle at a certain calculated point. Obviously, this may help traders to figure out and guess whether the price in question will be rising or falling in a certain time frame.

Pattern Recognition in Technical Analysis

This technical analysis subtype is pretty self-explanatory. It refers to a type of analysis where the product of the analysis is in a pattern form. This means that the tool searches for patterns that are happening within the framework of a certain trend. If you are able to identify a trend then obviously it will be easier for you to possibly correctly predict the movement of the price.

This is a very helpful method for traders that deal with assets that have a strong inclination for having pattern changes.

Support and Resistance Levels

These factors are not a part of technical analysis per se, but regardless of that, they are a crucial part of any binary options strategy.

Support level refers to the level that helps support the asset price in a way that it enables the price to stay above the critical line. Also, if the asset price does indeed fall below this indicated level, it will rise pretty quickly. Similarly, resistance levels refer to levels that prevent the asset price from rising above a certain point.
How are binary options traders supposed to set up and use these elements while developing their binary options strategy?
This particular method is very helpful when trying to establish positions by locating your enter or exit points. In case either one of your lines is breached, that does not mean they are going to be deleted, it will simply adjust. Once your lines are crossed upside, what was once your resistance now becomes a support line.
The only issue with this specific strategy is that it doesn’t necessarily depict the direction in which the asset price is moving. However, when combined with other techniques and analysis, support and resistance levels help binary options traders to identify crucial positions and precise timing for a Call or a Put.

The overall conclusion is that this particular type of analysis is extremely helpful in creating a potentially sustainable trading strategy. Obviously, traders need to continuously educate themselves in order for them to pinpoint which strategy is adequate for which preferred outcome. Once you have a clear vision on what it takes to build your chosen strategy then you begin playing with specific analytical tools and methods. Each one has its benefits but only you know if the certain method or tool will be beneficial to your overall binary options trading strategy.