Technical analysis is used by the majority of professional traders to spot profitable opportunities for trades before they occur. The idea is based on the interpretation of specific chart patterns, those shapes and movements created by fluctuations in the price of an asset, which tell traders when a future price movement is likely. Many of the patterns and setups used by traders are considered as highly reliable with the cyclical nature of finance markets allowing these to be back tested over many years. It is also true that the sheer popularity of technical analysis has contributed to their reliability, as more traders recognise the patterns and place their trades according to these they become self-fulfilling. Whilst sceptics point out that this may show technical analysis as false signals, for those wanting to trade in the direction of the majority it is very helpful.
What are the alternatives for binary options traders?
For binary options traders, the short-term expiry times of these options make technical analysis particularly useful. Although technical patterns can be seen on all price charts, from sixty second to monthly timeframes, they can be very effectively applied to even the shortest periods of time. Since the same setups are followed regardless of timeframe, binary options traders looking for short-term opportunities can simple learn to interpret a handful of the most popular setups to provide them a winning edge in the binary options market.
For those who are looking for an alternative to technical analysis, the possibility to use fundamental analysis is also available to binary options traders. This form of analysis diverges from technical chart studies and looks for the underlying “real” reasons for price movements. These are known and fundamental influences driving prices higher or lower and are often linked to key economic indicators/policies which influence the price of underlying assets. Essentially, these fundamental drivers are the cause of many of the charting patterns which are followed by technical traders. For longer-term traders, fundamental analysis can be particularly profitable and, even for short-term binary options price movements on news can also be a very profitable binary options strategy.
What are the most effective technical setups for binary options traders?
Technical analysis is a very broad subject and covers a large number of technical patterns, indicators and strategies. Luckily, however, it is also one of the most accessible methods for new traders to look for profitable setups and many can begin by just learning a handful of technical setups before applying indicators and additional filters to these in order to improve entry and exit strategies.
For binary options traders, it is clear that much of the charting software provided by brokers is not really up to scratch for detailed technical analysis and the first thing that should be considered is to get hold of a decent charting software package. Many brokers offer demo versions of the Metatrader platform free of charge and this is both excellent for charting of the major forex pairs, but also one of the platforms which most of the industry’s technical indicators are designed to be used. For those wanting to trade stocks or commodities, there are a number of excellent trading packages which provide real-time charting which technical studies can be applied.
In terms of the most effective set-ups for binary options traders, these are going to be technical patterns which provide a high probability of price moving, and remaining higher or lower than the strike price. This means that traders are likely to benefit from looking for technical patterns which either predict a continuation in the current trend or a nearby reversal. With the help of support and resistance zones, technical patterns such as ‘double-tops’ and bottoms are perhaps the easiest and one of the most effective setups for price reversals which can be found on any timeframe. In addition to these, technical indicators such as MACD and RSI can also confirm if the chart signal is valid for a high-probability trade. For continuation trades, some of the most straightforward chart setups are “flags” and “pennants” which can be found within a strong trend. Additionally, break-outs of areas of consolidation are both simple and highly effective methods for binary options traders to consider.
