Understanding Binary Options Indicators

Trading indicators can be divided into categories of default indicators and custom indicators. Traders generally understand the default indicators as those provided as standard on software such as the MT4 trading platform, which includes the ‘heavyweight’ indicator tools such as Bollinger bands, moving averages, RSI and MACD. These are some of the most popular and time-tested indicators and also those which a large number of traders rely on as the basis of their market analysis. Custom indicators, on the other hand, are often less well-known (having not been around as long) but they can also be highly effective in providing unique opportunities to make profits through trading.Since there are many hundred and possibly thousands of default and custom indicators combined, it is important for binary options traders to decide which of these are most likely to benefit their trading. Since many software programmes, such as the MT4 platform, were originally designed for forex traders and several of the default indicators work best on stocks, it is worth being selective in those indicators which can assist individual binary trading strategies. However, one factor which benefits binary options traders in using third-party charting software is the provision of many binary options markets within these. For example, the rise in popularity of commodity and index trading has resulted in many traditionally forex-only brokers incorporating these on their MT4 platform and thus allowing binary options traders to use them to apply their custom indicators.Custom indicators are always evolving due to the ability of traders with individual strategies to code these directly into the charting software. The custom indicators which result from these have evolved with the demands of the trading community and, in more recent times, have begun to focus on developing indicators that can be applied to binary trading strategies. There are now a handful of very good custom indicators with the specific aim of being applied to binary options. These attempt to cater for the unique differences that binary options offer, such as the irrelevance of a stop loss or take profit level and the simple notion that the timing and the broad direction of the trade need only to be taken into consideration to provide a profitable outcome. Trading binary options can therefore require a much simpler approach to trading, with the requirement of only a fractional change in the price to reap rewards or inflict losses rather than a focus on the degree of the price movement on a chart.

Introducing several custom indicators which can benefit binary trading strategies

The News Indicator

Some traders may argue that they don’t require an indicator to tell them what major news releases are planned for the coming day. Many fundamental traders will have already prepared for this and, depending on what underlying assets are being traded, will have a good grasp of the forthcoming major news releases on any given day. However, for those who generally enjoy trading from a technical perspective, using charting and binary trading strategies based on technical setups, the news releases are not necessarily going to be the highest priority. Whilst all traders should have a general idea of the daily news events, especially the large ones such as interest rates and US non-farm payroll data, it is impossible to be alert to everything when trading an individual strategy.Fortunately, there is a very useful and convenient custom indicator which has been designed to alert traders when a major news release is imminent. Not only is this valuable for traders who focus on fundamental trading and may actively look for news releases for trading opportunities, but it can be an important indicator for technical traders with very little interest in market fundamentals. For those who have experienced a sudden, detrimental price spike whilst trading directly from the charts, the news indicator will be particularly useful. This indicator not only highlights the news events directly on to the charts throughout the day but it offers 5 and 10 minute alarms before the event.Although this indicator is designed to highlight news events, its most effective function may be alerting people when not to enter the market. For non-fundamental traders who may not have assessed the impact that a particular news release may have on the market, the news indicator can provide good advice of when not to be exposed in the markets. Avoiding large news releases in the minutes before their release is simple with this indicator and it is likely to save technical traders the anguish of getting caught out trading with an unforeseen, but entirely avoidable, news event.

Paint the Town Red Indicator

This is another custom indicator which is appealing to binary options traders, not only for its simplicity and effectiveness, but also the fact that it works well alongside other indicators. The Paint the Town Red indicator provides a great visual signal of the trend. The background of the chart simply turns red or green depending on when the price moves above or below the moving average. Although this sounds fairly basic, it is particularly effective when used in conjunction with other indicators or chart patterns and levels to confirm the trade. Additionally, this indicator keeps traders aware of the trend, which is an important factor for all binary trading strategies.Since binary options only require that price closes fractionally higher than the original strike price, the short-term rise and fall of markets can be traded very effectively. Although the problem with this may be that it can be considered overly-simplistic, it is most effectively used when combined with the other chart-based trading tools. Two examples of these are incorporating the main support and resistance levels as well as some basic candlestick analysis in order to determine when to purchase binary options based on this indicator. Avoiding trading into potentially congested support or resistance, as well as looking out for reinforcing candlestick patterns to confirm a trade can be used very effectively with the Paint the Town Red indicator.

The support and resistance tool

As a custom indicator, this may not light up your charting screen like some of the indicators available to binary options traders, although it is arguably the most powerful indicator available. The support and resistance indicator shows a trader where the most popular levels of support and resistance have historically occurred on a chart. Whilst this is not a mind-blowing creation, the importance of support and resistance for binary options traders cannot be underestimated. Using an indicator which simply guides a trader to where these areas of support and resistance exist not only reduces the amount of preparation time required to plan a trade but also acts as a standalone identifier of a trade entry.It is important to begin by understanding what makes areas of support and resistance important in trading and, particularly, for binary trading strategies. These areas are created at technical points on the price charts of all forex, stock and commodity charts. They can be seen as the points where the price stops moving in one direction and reverses in the other. This occurs because of the existence of clusters of market orders and a collective response by traders at these significant points. As a general rule, the more times an area of support or resistance is tested, the more significant it becomes. However, if these levels are broken, support can become resistance and vice versa as their significance remains but simply in the opposite role.Where these levels become significant for binary options traders is when the price approaches these levels. As the support and resistance indicators clearly identify these zones, thus removing the difficulty of this for most new traders, we can begin to anticipate that the price will react. The support and resistance indicators are highly accurate at pinpointing the most significant areas and many binary trading strategies look for a reversal of the trend in these zones.Whilst taking a blind trade in the opposite direction is likely to be profitable many times, waiting for an additional signal when the price reaches the indicated support or resistance level is highly recommended. Candlestick analysis and other price action strategies are particularly effective when the price reaches these areas in determining if the support or resistance will be maintained, or if the price will break through this level.

The Relative Strength Index

The Relative Strength Index (RSI) is one of the most popular trading indicators available for the simple reason that it is one of the most reliable ones. Traders involved in all underlying assets use this valuable indicator to help them to make the correct trading decision. Although the RSI is not a “black box” indicator, providing a one-stop shop for purchasing puts or calls, it is an excellent indicator to support the convergence of additional indicators as explained below. Developed in 1978, it may be surprising that this indicator is still highly popular in an age when traders can design their own custom tools, however, this is a glowing testament of its utility to traders of both the digital and non-digital age.The RSI is an oscillator designed to measure the two elements of magnitude and velocity to provide traders with a reading which reflects the current strength of price in a market. The reading is reflected on the indicator within a scale of 1-100, with the default levels of 30 and 70 automatically included on many versions of the RSI. The idea behind the indicator is that the oscillator will move higher and lower on this scale relative to the strength of the market price movement by using an assessment of its magnitude and velocity. The outcome is that, as the price moves higher or lower, the RSI indicator will also move higher and lower on its index. Trading signals are commonly interpreted when it moves lower than the 30 level or higher than the 70. These areas suggest that the asset is oversold (below 30) or over bought (above 70) and that traders should begin to look for a reversal trade. Just looking at any historical price chart it is clear that the RSI is incredibly good at preempting significant reversals, however, it is most effectively used alongside a reinforcing signal where a convergence will assist binary options traders to time their entry correctly into an oversold or overbought market.One of the most powerful ways to use the RSI is to look for the many times that it actually disagrees with the price that is being shown on the price chart. This is known as divergence and is an incredibly popular and effective binary trading strategy. Divergence is basically all about trying to spot a market reversal when the chart price is “lying” to traders. This occurs most effectively when the chart price reaches a recent new high or low, but the RSI indicator does not reach a similar new extreme. In the case of a new high on the price chart, it is common for the RSI to make a lower high, indicating a divergence between the market price and that the wane in underlying strength will soon result in a reversal. Similar to many other highly popular indicators, the existence of a clear divergence has a self-fulfilling element which makes the large number of traders anticipating a reversal to increase the likelihood of this actually occurring.

The TRIX indicator

When traders talk about the most popular indicators available, they can generally be categorized in to two groups. On one hand there are those known as ‘trend-following’ indicators and on the other hand ‘momentum-following’ indicators. Trend-following indicators are most popularly known as moving averages and help traders to look for opportunities which agree with the general direction of the prevailing market trend. Although these are highly effective when viewed historically, their real-time application is limited due to the fact that they lag behind the current market price. Lagging indicators, such as the moving average, do not therefore provide great entry signals on their own.On the other hand there are also the momentum indicators, such as oscillators, which not only gauge the temporary directional movement within a market but also have the power to preempt market movements. Whilst this may sound like the holy grail of trading, the major problem with trading signals generated by the overbought and oversold areas of oscillators is that they can often provide false readings if traded on their own. The decision, therefore for many traders has traditionally been to take the valuable information from each different type of indicator without simply relying completely on any single one.The TRIX indicator, however, attempts to solve the problems that each type of indicator has by combining their predictive and trend-following attributes into one indicator. Whilst predominantly a momentum indicator, the TRIX indicator was designed to filter out the smaller movements within the market and also to provide traders with signals based on a combination of trend, high/low levels and moving average crossovers. At first sight it looks very similar to the MACD, with two intercrossing lines providing the trend-following element and the highs and lows of the indicator providing the oversold and overbought levels. The TRIX indicator provides trading signals which are highly reliable and have become a standard feature of the most popular charting software packages. For binary options trading strategies it can be used effectively alongside other trading tools such as candlesticks, support and resistance and Fibonacci analysis. The combined power of the two popular types of indicator makes the TRIX indicator an important tool for beginners and experienced traders alike.

The importance of convergence for binary trading strategies using indicators

Convergence in indicators refers to the way in which they come together to agree or disagree with each other in reinforcing a trading signal. Most traders will agree that using too many indicators on any one chart can be highly detrimental because it has a tendency to result in ‘analysis paralyses’ or the inability to make a decision. Waiting for all of the stars to line up to give the green light for a trade is therefore not always the best way to trade as it rarely occurs. However, there are several ways in which traders can use the convergence of indicators and trading tools to positively guide trading and to ensure the highest probability that the majority of decisions are profitable.Using the fact that technical analysis allows for charts to be viewed in different timeframes is one of the most effective ways to positively utilise convergence. This involves moving from the higher timeframes, such as the daily or even weekly charts, to establish the trend as well as the key areas of support and resistance. By subsequently moving to lower timeframes to establish if there is a general convergence between the different charts, traders can prepare to look for a detailed trading entry on their preferred timeframe. Many traders use this method to establish where these influential areas of support and resistance may interact with the current price on their preferred trading timeframe; thus maintaining that the trend remains their friend.Convergence between indicators and additional trading tools can also be a highly profitable trading scenario. A good example of both indicators and tools converging to reinforce a trading decision is the combination of a technical indicator, such as RSI or MACD, and Japanese candlestick analysis. Whilst using the indicator alone to signal potential trading opportunities is not advisable due to the lack of precise entry signals that it provides, adding a method of pinpointing these entries will increase the probability of success. An indicator such as the RSI can be used to determine when an asset is overbought orversold and the recognition of certain candlestick patterns such as a shooting star or engulfing candle will reinforce the reversal. This convergence is particularly useful for binary options traders to ensure that the entry is made as close to the reversal as possible.

Summary

There are literally hundreds of custom binary options indicators to use alongside thousands of binary trading strategies and several of these stand out as particularly useful. The emergence of charting programmes such as MT4, and the increased willingness of brokers to provide a whole range of underlying assets on these, is particularly good news for binary options traders. The constant demand for the development of new, exciting indicators allows both novice and experienced traders to develop fresh methods and tools to look for potentially profitable setups.Whilst there has been a large movement towards designing new indicators, it is true to say that some of the oldest provide the most reliable trading signals. Classic indicators such as the MACD, RSI and Moving Averages still play a very important role in many technical trading decisions. These time-tested indicators also provide excellent examples where convergence with other analytical tools can provide excellent trading signals and high probability binary options trading setups. This convergence is further enhanced when traders look beyond their favourite timeframe in order to determine important areas of support and resistance as well as the general trend on higher timeframes. Whilst binary options are often purchased based on intra-day timeframes, having a broader overview of the bigger trading picture is incredibly useful to reinforce indicator-based trading signals.

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