⚡️⚡️Visit us to know about best binary options indicators for trading in South Africa, learn how to start trading online right now!⚡️⚡️
All content on name-of-the-site.com is provided solely for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, service or investment. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate.
What are indicators
Indicators are the key aspect of the technical analysis of the market, due to which a trader gets an opportunity to follow the asset trends, as well as its potential upside or downside.
Trading, with all its obvious advantages, is still a very complicated job, which comes down to tracking the dynamics of an asset and profitable entrance into trading in order to make a profit. It so happens that no trader of binary options can do without indicators of technical analysis. Some people are fans of a "clear chart" and support and resistance levels, but even these people often use indicators. Studying in detail the state of the market, using a large set of data, traders use all possible tools - broker's signals, reviews, forecasts, strategies, including various indicators. Sometimes indicators are the first thing newbies get acquainted with, the first source where they get their first signals. Experienced traders, who have come a long way in trading binary options, have a whole arsenal of such indicators that can generate signals depending on the market situation, asset type, expiration, etc. So what are these "indicators"? Let's talk about it in more detail.
Technical analysis in binary options is a method of predicting future asset price behavior based on historical market data. When a trader performs a technical analysis for binary options, he/she believes that those situations, which have already been on history, are bound to repeat.
In a sense, all a technical analyst needs are trading charts and only trading charts.
Varietiesof price charts
Each trader is comfortable conducting technical analysis for binary options on a certain type of chart. The following styles of bars are distinguished:
Line charts were the earliest form of charting in financial markets and are still popular among binary options traders. Line charts are based on time and are constructed by comparing the closing prices of assets over a selected time period. For example, a 30-minute line chart will relate the closing prices of an asset every 30 minutes.
Binary traders, among other chart display options, use linear prices because they help them easily observe the overall behavior of an asset over time. Linear style bars are also ideal for displaying strong support and resistance levels for selected assets.
Japanese candlesticks are the most popular way to read price movements on charts. They are clear, they are easy to learn and most importantly, they work. The first mention of candlestick patterns can be found in the Japanese rice trader Homma Munahis in the 1700s. Almost 300 years later, candlesticks were rediscovered by Steve Neeson in his book titled "Japanese Candlesticks. Graphical Analysis of Financial Markets." In this guide, we will break down everything that pertains to candlestick analysis. Candlestick charts provide much more information than line charts and are today the preferred market analysis tool for traders and investors.
What are candlesticks?
Each candlestick tells us four things about itself: its opening price, maximum price movement, closing price and minimum price movement.
The shadows of a candlestick represent the highest or lowest point that the candlestick reached.
A bullish candlestick is formed when the price is rising. In financial markets, the term bullish means a long position or buy.
A bearish candle is formed when the price is falling. In financial markets, the term bearish refers to a short position or sale.
The body of a candle is the space between the opening and closing of the candle. If the body is white, it means that the closing price of the candle is higher than the opening price. If the color is black, it means the closing price is lower than the opening price of the candle.
Each candlestick represents the time frame or time period that we have chosen for its opening and closing. For example, on a 4-hour chart, the candles open and close every 4 hours.
If we plot several candlesticks, we can compare them to a line chart. The shadows of the candlesticks also show the price fluctuations. Thus, we obtain at once a maximum of information, which we need for effective market analysis. This is why Japanese candlesticks are mainly used for technical analysis these days.
What isa bar chart?
The bar (bar, histogram) chart has been known since the 19th century and is actively used in stock trading because it is convenient and informative. The bar chart is an analog of the Japanese candlesticks and is traditionally used extensively in the United States and European countries. A bar is a vertical line with short horizontal lines-dashes directed in different directions, in some cases there may be only one horizontal line.
The bar shows four values: the opening price (Open) as a horizontal line to the left; the closing price (Close) as a horizontal line to the right; the maximum price of the period (High) - the upper bar boundary; the minimum price (Low) - the lower bar boundary. The bar chart also shows gaps, price gaps.
It is considered that the left line below the right one on the bar shows that the price is going up. If the right line is below the left one, the price of the asset is falling.
The size of the bar shows traders' activity. If the bar is short, it means that both buyers and sellers have decreased activity and the asset is not of much interest. A long bar with a large distance between maximum and minimum shows that both buyers and sellers are active in the market. The distance between the minimum price and the maximum is called a range.
But, of course, based on the information of one bar you do not trade, you need a confirmation of the trend with graphical figures.
On the bar chart the trend is drawn in a straight line above the daily highs on a downward movement and below the daily lows if the direction is upward.
How to analyze bar chart information?
To analyze bar chart information, you need to understand what the closing price is. It is the price at which the last deal was made during the period of bar formation. By the closing price you can determine the mood of traders.
If the closing price is lower than the opening one, it means that the market is probably dominated by negative sentiments. If the closing price is higher than the opening price, it shows that the market is in a positive mood.
The opening price is the price at which the first deal is executed at the selected time interval. Most often the opening price coincides with the closing price of the previous bar or, if these values are very different, we can see a gap in price on the chart.
A series of bars of a small range can indicate that the market is in an unstable position, a breakout is possible. A series of bars with a large range indicates that active trading is in progress.
A series of bars in which the maximums and minimums are all higher indicates a steady uptrend. If the maximums and minimums decrease in a series of bars, the trend is downward. A series is represented not only by consecutive unidirectional bars, but also by the majority of such bars in a sequence.
The main analytical activity on a bar chart is to identify patterns.
One of the main patterns is the combination of three candles, in which the central bar is surrounded by bars with lower highs - this promises an increase in price. A pattern with opposite readings would be a reversal in the downward price direction.
Pros and cons of the major stock charts
Any instrument has its positive and negative aspects. We offer you to compare the main characteristics of the basic charts in the table below
clearvisualization;an understanding of the general trend;complete overview of the figures;technical analysis.
Insufficient data for decision-making.
a wide range of available data;clear visualization of the overall trend.
it is impossible to immediately determine the direction of the price in a narrow time period.
the ability to predict the trend in a small time interval;a clear understanding of the price movement;at a specific time;availability of complete information.
it is difficult to see the figures because of the three-dimensional image
Types of indicators for binary options trading
What are leading indicators?
A leading indicator is a tool designed to predict the future direction of the market, which helps traders to predict price movement in advance.
If a leading indicator gives a right signal, a trader can enter before the market moves at the very beginning of a trend. However, leading indicators are by no means 100% accurate, so they are often combined with other technical analysis and price action tools.
Popular leading indicators:
The Relative Strength Index (RSI) is an impulse indicator that traders can use to identify overbought or oversold zones. When the RSI gives a signal, the market is believed to be turning around. This is a sign that a trader can enter or exit their position.
The RSI is an oscillator, so it is shown on a scale of zero to 100. If the RSI is above 70, the market is often perceived as overbought and is displayed in red on the chart. If the indicator falls below 30, the market is usually considered oversold and is displayed in green on the chart.
The Money Flow Index (MFI) technical indicator
The Money Flow Index (MFI) technical indicator shows the ratio of cash flows (positive and negative) as applied to the financial instrument in question (FI).
In this case, it is correct to call as positive cash flow that amount of money, from the total amount of operations with the given FI, which leads to the growth of its price. And, correspondingly, the negative one is the amount of money that has been "spent" to decrease the price of the asset (FI) in question.
Naturally, nowadays there is no need to calculate this indicator by yourself, because any trading terminal with built-in technical analysis package, for example, MT4 terminal, will do it for you.
The Moving Average-MA method is still the most popular tool for technical analysis. It has gained its fame due to the ease of constructing, calculating and interpreting results. The essence of the method is to calculate the average data for a certain period of time. For example, it is necessary to find the average closing price of an exchange asset for the last five days. To do this, add the closing prices of each day in the specified interval and divide by five (number of days). At the end of trading on the sixth day its closing price is added to the sum and the values of the first day are excluded at the same time; the obtained result is divided by five again. When presented schematically, the indicator slides along the chart of the asset. The direction of movement indicates the prevailing trend. The ascending movement indicates that the market is rising, and the descending movement indicates that the market is falling.
Types of Moving Averages
Simple Moving Average (SMA) - simple moving average;
Weighted Moving Average (WMA) - weighted moving average;
Exponential Moving Average (EMA) - exponential moving average.
Simple MovingAverage (SMA)
The above example shows a simple moving average calculation. Its formula is as follows:
SMA = (Sum of prices over a period of time) / period of time.
However, many analysts and traders are convinced that this method lacks accuracy due to too generalized interpretation of the data. In the above formula, the weight of each day's closing price is equal to the others. Many suggest giving more weight to the later price value.
Weighted MovingAverage (WMA)
Weighted moving averages give more weight to more recent data in the calculation. The most important is the current day. The calculation is as follows: the closing price of the fifth day is multiplied by 5, the fourth day by 4, the third day by 3, and so on. The resulting sum of products is then divided by the sum of multipliers (5 + 4 + 3 + ...).
As a result, the moving average method offers the following formula for any period:
WMA = (Sum of products of prices and weights) / (Sum of weights)
Exponential Moving Average (EMA).
However, the above moving average options have a drawback. If the input data (closing prices) fluctuate significantly, the value of moving average starts "twitching". For example, the daily closing prices of an asset fluctuate between 50 and 60 pips, and its five-day SMA is around 55, but includes one day with a closing price of 70 pips. When that price exits the calculation period, the value of the SMA will fall - and not because of the actual market situation. In order to avoid this and to redeem the fluctuations of the moving average, aligning the series of values, analysts have proposed an exponential method of calculation - EMA. The formula is as follows:
EMA = Rs * K + EMAv * (1 - K), where
K = 2/n - 1,
n - the averaging period,
Ps - the price of today,
EMAv - yesterday's EMA value.
EMA follows the market more quickly than SMA and WMA, because it pays more attention to fresh data and does not register the abrupt changes in response to changes of old data.
What is a Bollinger Band indicator?
The Bollinger Band indicator is a trend indicator consisting of three lines. It was created by John Bollinger in the 1980s. It can help you in identifying overbought or oversold zones as well as determine the current market volatility.
The average line is a common MA with a period of 20.
The upper line is a moving average, shifted upwards by two phases.
Lower line - moving average, shifted downwards by two phases.
The MACD indicator is based on the movement of moving averages. Below you will learn what the MACD indicator is, in what situations it is best used, how to set it up, and how to use the MACD indicator to its full potential.
Popular Indicators for Binary Options Trading
What is MACD in mini words
MACD in simple terms is the result of two different moving averages simultaneously assessing the market.
ATR (Average True Range) is a classic indicator, which shows the relative volatility of a financial instrument. Refers to the class of oscillators. It is very important that the definition of volatility is the main purpose of the ATR indicator.
Stochastic Oscillator is an oscillator, which shows the current price in % relative to the past price range. The indicator is drawn in a separate window under the price chart and consists of two lines: %K - fast and %D - slow. The values vary from 0% to 100%, at the 20% and 80% levels there are signal lines that mark out the oversold (from 0% to 20%) and overbought (from 80% to 100%) zones.
The Stochastic indicator shows the ability of "bulls" and "bears" to set the closing price at the edge of the recent interval. If the bulls can push the prices up throughout the day, but are unable to keep the closing price near the high, the Stochastic begins to fall, indicating that the bulls are getting weaker. If the closing price rises to the upper boundary of the range after making a new low, it means the bears were able to push prices lower but cannot hold them there. The rising Stochastic shows that the "bears" are not as strong as they look.
Calculation formula, characteristics and settings of the Stochastic indicator
The indicator is drawn in a separate window and consists of two lines:
%K - fast, main line (solid line)
%D - slow, additional line, it is a moving average of %K with a small averaging period (dashed line)
The formula for calculation of the main line:
%K = (C - Ln) / (Hn - Ln) * 100
C - closing price of the current period
Ln - the lowest price of the last n periods
Hn - the highest price of the last n periods
%D is the averaging of %K line with the period specified in settings.
When installing the Stochastic indicator in settings it is necessary to specify the following parameters:
Period %K - calculation period for the main line of the indicator. In the standard settings it is 5.
Period %D - period of averaging for drawing the secondary line. In the standard settings it is 3.
Deceleration - this parameter indicates the internal smoothing of %K line, allows the indicator to react more smoothly to sharp price changes. The standard settings have the value 3.
Prices - select the type of prices, Low/High - highs and lows are used, Close/Close - close prices are taken into account. Low/High - Low/High is used in the standard settings.
MA method - determines the type of average moving average for calculating the %D line. Simple is used in the standard settings.
Also, the recommended by the author of the indicator levels for oversold and overbought zones are set by default - 20% and 80% respectively.
Stochastic indicator is often used with default settings. At the same time there is always a possibility to change them, to evaluate on the historical data the work of the indicator with other parameters, to choose the most optimal ones for your trading.
The investment strategy that is chosen determines the risks that the investor is ready to undertake and the investment time horizon.
If the calculation is to invest large sums in order to preserve the capital and cautious increase in the range of a little more than a bank deposit - straight road to the strategy of long-term investment in the stock market.
The indicator is a standard tinted RSI (Relative Strength Index) with the addition of a trend filter based on the Bollinger Bands (Bollinger Bands, BB). The filter allows to sift out the very false signals that do not allow to work only on the RSI.
Thus, we obtain a self-sufficient oscillator, on the basis of the indications of which we can build trading systems.
Strategy main parameters:
Trading interval - H1 (1 hour)
Currency pair - GBP/USD, EUR/USD
Money Flow Index (MFI)
Money Flow Index (MFI) shows the rate at which money is deposited into the security or withdrawn from it. MFI resembles the RSI indicator in the principle of work and in the calculation, but it additionally takes into account the volume. Basically, this indicator measures the pressure of buyers and sellers. The MFI is built in the basement of the chart and ranges from 0 to 100:
Trading Extreme MFI
The essence and characteristics of the Market Facilitation Index.
Bill Williams has developed the Market Facilitation Index for one of the first versions of his trading system, which he described in detail in his book "Trading Chaos". The author himself positions this tool as the most effective indicator for estimating the market reaction on changes in trading volumes.
Williams likes to emphasize that his trading system, Profitunity, is unique and does not apply to classical technical analysis. However, most of his indicators (Alligator, AO, AC) are modified moving averages or simple oscillators. Of all Williams' indicators, the BW MFI is the most original, although it is also quite simple in its construction.
The tool is based on a single formula:
MFI = (High - Low) /Volume,
High - is the maximum of the current candle,
Low - the minimum of the current candle,
Volume is a tick trading volume.
MFI on the chart
The MFI is shown on the chart as a bar histogram. Depending on the readings of the indicator columns are colored in the following colors:
Green if both MFI and volume are rising;
Brown if both MFI and volume are decreasing;
Blue if MFI is growing and volume is decreasing;
Pink if MFI is falling and volume is rising.
A lagging indicator is a tool used by traders to analyze the market trend based on the average values of previous data. There are several types of lagging indicators, each of which can be used in a trading strategy to analyze dynamics and determine entry and exit points.
Swing trading is a strategy for identifying the likely direction of price and trading based on the information obtained. Usually medium-term timeframes are used, although sometimes positions can be held open for more than two weeks.
The volatility of the market, the level of which is analyzed separately. It is necessary to have a big leverage on markets with high volatility. Especially if the asset is traded on large timeframes.
Experienced speculators call swing trading the purest form of trading.
The main goal is to make a small but regular profit during the day after performing technical analysis and opening a deal. Experienced speculators can hardly look at the trading screen after entering the trend. Beginners are recommended to control the process to close the deal if necessary.
Trading through market crossovers with MA
Moving Averages (MA) is the main indicator of the financial markets, based on the construction of the averaged value of quotations (prices) for the selected number of bars on the chart, thereby indicating the direction of the trend. Number of bars for drawing
Moving averages (MA) are traditionally selected by Fibonacci numbers: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, etc.
Trading Bollinger Bands
The Bollinger Band is the perfect indicator of volatility, which cyclically tapers or widens to show a wave-like price structure.
The Bollinger Band indicator uses the maximum possible mean square deviation of the commodity price relative to this moving average in its calculations. In other words, a stock price can fluctuate (wave) as much as it wants relative to the moving average, but its limit will not be higher than some value.
Here are three of the most popular online options brokers to choose from: