In the previous article, we were looking into a martingale-based strategy, and it’s time to work with another one. The option strategy I am going to describe is one of the most popular ones among novices, it’s very amazingly simple and used either at option exchange, or at forex and stock exchange. This strategy doesn’t have the definite author and name, because widely used and called in different ways. But, the base is trend-trading.
Any currency quotation, stocks or metals rate or indices move in a specific direction, which always changes. And the trend is this very direction. There are three kinds of trends: uptrend (a price rises), downtrend (a price falls) and flat (a price doesn’t change). Surely, never a one asset have a defined direction, that’s why the trend is just a general tendency of movement, and it always has different corrections and bounces.
Traditionally, trends are looked for in long-term charts (longer than 1 hour), though, it’s not like that at option exchange. Considering the fact most traders buy short-term options (less than minute), they search trends in minute and 5-minute charts, that’s why they change several tens of times a day. However, a trend is a relative term, and we can see downtrend in an hour-chart, but uptrend in a minute-chart. Then, experienced traders realize that uptrend in the minute timeframe is a correction from the main one in the hour-chart. If you use short-term trading, i.e. buying 30-second options, you should take minute-chart tendency into consideration; and if you use long-term trading, holding the order longer than half-hour, then you must pay attention only to hour trend.
How do traders use trends? For experienced, tendency is the essential part of a trading strategy, that they concern looking for and bolting out signals for buying and selling; as for novices they often use only one trend for rate predicting. Surely, these strategies give less profits, but they are comprehensive and thus, so popular. Usually, a trader buys an asset then uptrend is defined, and sells when sees downtrend. It’s quite logic, but not always working. Nevertheless, this option strategy exists and we’ll talk about it in details further.
Firstly, opentwocharts. Whatwillyouopendependsonoptionsyouchoose. If you choose a 60-second options, open a minute and 5-minute chart. You’ll look for a trend in a 5-minute chart, tracking the price behavior and your bet in a minute chart. For estimating a trend, just use a straight line. Experienced traders can do this in a moment, just after a look at the chart, but if you can’t – build two straight lines. One of them will go through maximums of the chart, the second – through minimums. And if this canal is going up – it’s uptrend; down – downtrend. And if it has no direction – it’s a flat.
After estimating the trend, build a trend line (this straight line). At uptrend it’s built at minimums, at downtrend – at maximums. At flat two horizontal lines are built, creating a canal of a price. Usually, traders don’t use flats, waiting until sides of such a canal will be broken. You can see how it looks like in pictures of this article.
When all preparations are over, you can start trading. Pay attention to the chart when your trend is estimated, and once the price reaches the trend line, enter the market toward the trend. For example, you’ve built a trend line at minimums of the 5-minute chart. As the rate reaches this line because of the correction, buy an call-option.
If your bet fails and the price breaks the trend line, wait and look whether the trend will change back.
As I’ve already mentioned, only newbies use this strategy, as they can’t work with more difficult ones. Trend-trading is very simple, but not always that profitable, so I recommend using it at a demo-account for practice. And only when you’ll create or study an advanced strategy, start trading with real money.
For the conclusion, I will add this option strategy can be used only combined with other tools. If you use it alone, you’re likely to lose – it’s especially about novices unable to estimate a trend sometimes.
for binary options