Every trader wants to enter the market close to the point of reversal because is an obligatory condition for beneficial trading on any asset. Maintaining the position as long as necessary toward the main trend and reaching the opposite peak is a hard but achievable task. The most important thing is to utilize the accurate indicators of the reversal and exact binary options strategy.
How to identify the trend
The main problem of any strategy is not the models and trading indicators, it is human psychology. Every trader has a personal vision of the market situation: when a trend starts or ends or when there is a reversal and not the price correction. Examining how signals work for binary option, that any forecast is carried out on historical details, which means that delay is unavoidable.
Let's take into account the trend of directional price movements, which have a statistical value on the timeframe.
In other words, 2-3 candlesticks in one direction the size of 10-15 points for scalping on the M1-M5 is an obvious trend, for medium-term trading needs strong movement during several hours. Every reversal indicator has its delay value and the methods to work with it are different for every situation.
Why takes a swing price
As market psychology states, a reversal of the price movement shows a change in the balance between bulls and bears. Important fundamental news and statistics can change the trend. The main task of these indicators is to find this trend reversal.
Three stages of market reversal:
1. Rollbacks and breakdowns are coming close to the important price zones and levels. This may be a line of expiration, support, resistance, maximum and minimum, or the boundary of the channel;
2. The price should be fixed above or below a certain level. It would be better if this happens after several (at least two) retests;
3. Two previous points are completed, and there is a strong movement against the previous tendency.
After the first turn, the binary option trader should assess how large the possible consolidation could be, until the balance of powers on the market changes. After its completion, you need to open a new one or fix the result of the current deal.
What is the reversal? It is a sufficiently "wide" trend, not less than 20-30% of the standard volatility over the past 7-10 days. If the percentage is smaller, it is just a local rollback or correction that will end very fast.
Remember, that there is no technical indicator that could provide an exact guarantee of the reliability of the signal. However, if the opposite movement is very long and strong, the credibility of the new movement will be high.
We need to monitor market volumes because when the new movement appears, they will increase. It is far better to look at non-tick (real) volumes on futures and options. The small and medium-sized traders should follow the market makers or the market will quickly return to the fleet or to the previous movement.
The main purpose of reversal indicators:
- Provide the information only about the significant corrections and pullbacks;
- Give a minimal delay to the trader.
Regardless of the parameters and methods of calculation, the principal task of all reversal binary option signals is to show the end of the current trend.
Basic Trend Indicators
The most well-known instrument of technical analysis is the Moving Average (MA). This indicator allows us to predict the future movement of the price basing its position near the indicator line: lower for sales (SELL), higher for purchases (BUY). A probable reversal is situated on the breakdown.
During the creation of the binary option strategy, you should remember that the average value displays only the clear strong trend. Beneficial intraday and short-term deals show up on short impulses. That’s why it is better to apply the following method: use MA with a lot of periods ("long" Moving Average) for general analysis and "short" to filter the signals.
If you want to compensate for the delay, use the several averages with different offsets and time periods, for example, in the standard Alligator of Bill Williams, which stay efficient on any asset.
The same algorithm is applied to the Parabolic SAR (PSAR). But in this case point of a trend change is placed on the break of the indicator line. In comparison to the MA, this trend indicator provides many false signals on speculative activities of market makers. It may be hard to find such a change in the situation but you can identify them using graphic patterns and oscillators. The standard version of PSAR has such a negative reputation as redrawing, but there are enough modifications without this issue!
Binary options trader should pay attention to Heiken Ashi candles. This is a counter-trend candlelight reversal indicator, which is more often applied in the stock market. However, Heiken Ashi could be also profitable on the Forex market on higher timeframes and medium-term deals. It is shown as an altered candlestick chart. The market "noise" is rather filtered, a trend is seen, candlesticks change their color at pivot points. It is not applied in the short timeframes because of the significant delay!
For flat (lateral movement) periods when the accuracy of MA signals decreases, there are complex instruments such as a reversal indicator Ichimoku Kinko Hyo, which provides the possibility to trade on a rebound from the borders of the sideways range and affirms the breakdown.
Graphic reversal patterns
These candlestick patterns were developed for the Price Action indicator-free strategy. They are the more advanced version of the standard candle patterns. Analysis of graphical patterns of binary options for newbie’s has always been quite difficult. The ability to identify the candlestick pattern comes with time and practice and on small timeframes, it practically doesn’t work. But if you monitor the dynamics of volume, then it is possible to effectively filter the unstable models. In the medium and long-term deals, most of the reversal indicators are worked out in the right way.
ZigZag is a managed and correct instrument to identify the important event. This can be a true reversal, correction, short-term rollback, speculative impulse. The indicator has a redrawing, but the "completed" areas provide good support/resistance levels and, as evidenced in practice, in the future, the price makes at least one of their retest. However, there is one problem. ZigZag settings need to be continuously modified to the current volatility, or the pattern will be very unstable.
Channel and impulse reversal indicators
The possibility of a trend reversal raises when the price comes closer to the boundaries of the channel or its middle. Typically, more reliable signals provide dynamic channels. But do not forget about the main rule of the binary trading platform: the breakout or rollback signal should be confirmed by other tools. The reserve "course" is defined by the channel width indicators of volatility and market pace (ATR, Momentum).
The word "pulse" refers to all types of oscillators, mostly overbought/resold. Along with exiting extreme strong signals for a reversal or continuation of the tendency will be variances in the movement of the price graphs and the histogram of indicators (divergence), on the breakdown of average levels you can include volume to open trades. Pay attention that any divergences are important only on timeframes from H1 and above!
Regardless of what solver has applied reversal indicators (CCI, RSI, Stochastic), the regular moments of the breakdown of lines or entry into the extreme zone won’t guarantee such reversal. The trend will continue long with the "sticking" of the oscillator in oversold/overbought, and any action of the market makers might quickly lead to the correction and resume the movement. If you see the pullback to the middle, this is can be considered as the signal. However, often this is just an opportunity to see an emerging trend.
All MACD combinations or modifications of oscillators with various periods and settings provide accurate data in determining the trend. Example:
- RSI (21) + RSI (120);
- Stochastic (5,3,3) + Stochastic (21, 9, 3).
If the quantity of false signals does not decrease, work with the next group of indicators. This is an already complex strategy of binary options.
Composite reversal indicators
Several generations of traders have been applying the basic indicators so it’s very difficult to find the new combinations. That’s why it is necessary to apply the non-standard approaches. In these cases, the traders apply a computer terminal that analyzes the market situation and offers several variants of strategy.
The next advantage is the terminal screen. Sometimes the trader sees the indicators (MA, Ichimoku, or oscillators) but not the direction of the price. The figure displays an example of a rare version of trend determination.
Trend strength evaluation should be a part of the strategy of all reversal indicators and binary options signals.
- The main issues of identifying the trend lie in the sphere of human psychology. If you look at the reversal too long, you start to see them where they don’t exist. Don’t let the market confuse you!
- The newcomers should start the work with the trend reversal and not with the continuation of the trend. But you still want to enter, open the position without changing the already opened volume. Close the “smallest” Stop Loss first. In this way, you protect yourself from the small pullbacks.
- When you’ll become more experienced, you learn to understand the fundamental events and to identify the true reversals. Only the market makers know where the price will follow. But for stable trading, you can start with the point of entry within 20-30% of the coming tendency, and the standard level of Take Profit (at least 50-70 points). Apply the trailing stop, if the movement is strong!
- Don’t make the decision based only on the data of the "author's reversal indicator". Analyze the situation on several timespans and filter the false signals. Compare your information with the data of indicators that function according to the other principles. Only after this analysis, you can open the transaction.
Remember that the result of any examination is subjective and depends on the trader’s professionalism and experience. Consider your trading style (scalping or long-term trading). If you are the scalper, 10-15 is already a trend for you. As for long-term trading, such movements shouldn’t be considered regardless of free binary signals and these indicators. Apply to the indicators of trend reversal without redrawing!