While it is possible to trade binary options without any prior experience or understanding of the markets, taking the time to learn and understand binary options charts can improve your trading success and your profits. By using both fundamental and technical market analysis, traders are able to make more accurate predictions regarding the direction the price of an asset will move. Despite this advantage, it is important to remember that we can never predict the market 100% since there are many factors which are unpredictable and beyond our control.
What is Fundamental and Technical Market Analysis?
The financial market is driven by several factors and if you really want to become a successful binary options trader in the long run, you cannot make a trade on an abstract guess. Instead, you have to make informed decisions and this can be a daunting task since there is not one, but rather hundreds of factors which drive the financial market. These factors are also interrelated and changes in one factor will cause changes in other factors. While some of these changes can be foreseen and predicted, others will completely take you by surprise and because of this, you need an effective way to analyze the market.
The two forms of analysis that we are talking about are Fundamental Analysis and Technical Analysis.
Fundamental market analysis is based on the interpretation of the economic climate and market data. Here you are focused on the financial well-being of the entity or the asset that you are analyzing. For example, if you are analyzing a particular stock, you will analyze the performance reports of the company and will try to assess how these reports are going to affect the stocks of the company and their respective indices. Keeping up to date with the latest financial news and announcements will provide you with some indication of the direction the price of an asset will move.
Technical market analysis, on the other hand, is all about prices of the assets. Here our focus is on the historical price movements of different assets and we use several mathematical and statistical tools to predict the future price movements. Technical analysis generally uses one concept – ‘History repeats itself’. By using technical analysis, it has been proven that prices follow patterns or trends and that these patterns repeat after specific intervals. It has also been shown that these price trends do not really change unless there is an external force affecting the demand and supply of the assets which could change the direction of the price movement. So our analysis here will also depend on the demand-supply equilibrium.
An integral part of technical market analysis is reading and understanding different trading charts which can be viewed as trading tools. Most binary options brokers provide charts with the historical price movement for each asset and as a trader, your goal is to learn how to read these binary options charts so that you can increase your trading success and ultimately, your profits.
So let us move on now to explore the different types of trading charts used in binary options trading.
Binary Options Line Charts
Line charts are the simplest of all technical analysis tools. They are easy to read and traders with any skill level can actually understand these charts. It is important to note though, that because of the simplicity, Line Charts are not complete and they only provide a general overview of an asset or the market.
Below is an example of a typical line chart.
The horizontal axis on the line chart reflects the time of trading and the vertical axis reflects the price of the asset. In order to find out the price of the asset at any given point of time, you simply a trace a vertical line from your preferred time on the X-axis and take it all the way up to the line graph. Then draw a horizontal line to the price axis or the Y-axis. This will give you the price of the asset at your chosen time.
Line charts can reflect different time frames from one minute right up to one year. The longer the time interval, the easier it is to see the price trend of the asset. That is, is the price of the asset trending upwards, downwards or horizontally? With the ability to see the trend of an asset in binary options trend charts, a trader can then execute their trade based on this information on the trading interface of the broker. So for example, if a trader can see that the price of an asset has an upward trend, they can use this information and make a Call option trade when trading this asset. That is, they predict that the price of the asset will continue to move in an upwards direction as in the price trend.
It is important to note that if you are going to use a line chart in order to establish the trend of an asset, you need to confirm what price is reflected on a line chart. That is, an asset will have different types of prices in any given time interval. These are the Opening Price, the High Price, the Low Price and the Closing Price. When a trade opens, the existing price of the asset is called the opening price and when the trade ends, the price of the asset is referred to as the closing price. During a specified trading time interval, the price of an asset will fluctuate. It can reach a maximum point and then again fall to a minimum point, which are referred to as the High Price and the Low Price of the asset.
Since only one type of price is normally reflected on a line chart, you never really get detailed insight about the asset price so if you are using a line chart to assist you with your trading, make sure you know what type of price is reflected on this chart.
Let us move on now to Bar Charts.
Binary Options Bar Charts
Bar Charts are yet another visual display of historical price data of an asset and they can be used to technically analyze market behavior and to predict or forecast future prices. Bar Charts are simple and provide valuable information about an asset’s price behavior.
As with a line chart, a Bar Chart also makes use of an X-axis and a Y-axis where the X-axis represents the trading time intervals and the Y-axis represents the price of the asset. Bar charts also can reflect different time frames from one minute right up to one year and the longer the time frame reflected, the easier it is to identify long term trends.
As you can see in this example below, while a Line Chart shows a continuous line, a Bar Chart shows individual bars.
Most bar charts also usually reflect all the price types of an asset such as opening price, high price, low price and closing price but you can customize the number of price types that are shown in the chart. You will notice that in the bar chart example, the chart shows a single bar at any given point in time and they are always vertical. The top point of the vertical line is the highest price attained by the asset during any trading time interval and the bottom point is the lowest price. You can also see two small horizontal bars protruding out on either side of any single bar. The one that protrudes out to the left is the opening price of the asset for the given trading time interval while the one protruding out to the right is the closing price of the asset.
In binary options trading, you simply need to look for the trend of the asset price and if you see that the trend is moving in a downwards movement, you can tell you that the asset is following a bearish sentiment and making a Put option trade will be more realistic in the short term.
Let us move on now to Candlestick charts.
Binary Options Candlestick Charts
Candlestick Charts are also an effective technical analysis tool which can be used to enhance your trading effectiveness. These charts are used to track the price changes of an asset. Most binary options brokers do not offer candlestick charts but you can find free binary options charts online with ease. A standard candlestick chart is made up of different types of candlesticks. Each candlestick has a different meaning based on their shape, color and location on the chart providing us with vital information regarding the price movement and trend of an asset.
Candlestick charts were created by the Japanese centuries ago as a way to track price changes in their once most traded commodity, rice. Today, traders worldwide use candlestick charts to track the price changes of any asset.
Candlestick charts can be used for any time frame and for any asset and they reflect all four price variants of an asset, namely, Open, High, Low and Closing which is abbreviated as OHLC.
Let us look at a typical Candlestick. As in the diagram below, candlesticks are often color coded making it easier to remember what they represent. A basic Candlestick will have a central rectangular block called the real body and it can either be hollow or filled. A hollow block represents a Bull market and a filled block represents a Bear market. The real body has two thin lines protruding out from the top and the bottom of the real body. These lines are called shadows and the one that protrudes up is called the Upper Shadow and it is known as the wick of the candle. The line that protrudes down is called the Lower Shadow and it is known as the tail of the candle. The top point of the Wick or the Upper Shadow will always represent the High price and the bottom point of the Tail or the Lower Shadow will always represent the Low price irrespective of the Real Body.
A green candlestick represents a bullish trend and the bottom of the real body reflects the opening price of the asset whereas the top represents the closing price of the asset. The red candlestick on the other hand represents a bullish trend and the bottom of the real body reflects the closing price of the asset whereas the top represents the opening price of the asset.
There are many different types of candlesticks and each has a different meaning based on its shape, color and position within the chart. Here we will look at an example of engulfing candlesticks.
These Candlesticks can be used to determine the price direction of an asset in very short-term trading periods like the 60 Seconds trade option. There are two types of Engulfing Candlesticks and the first is a bullish engulfing candlestick.
Bullish Engulfing Candlestick Pattern
When a bigger Hollow Candlestick succeeds a smaller Filled Candlestick, it is called a Bullish Pattern Engulfing Candlestick. If you look at the image below, you will see that the opening price of the second trade, which is the Hollow Candlestick, is lower than the closing price of the previous trade which is the Filled Candlestick. The closing price of the second trade is also higher than the opening price of the previous trade. This implies that the price of the underlying asset will now increase. That is, the Bullish sentiment is very strong and a price reversal or a Bullish trend is imminent indicating the perfect opportunity to make a Call option trade.
Bearish Engulfing Candlestick pattern
The Bearish Engulfing Candlestick Pattern is exactly the opposite to the Bullish Engulfing Candlestick Pattern and it occurs when a bigger Filled Candlestick succeeds a smaller Hollow Candlestick. In the image below, you will see that the opening price of the second trade which is the Filled Candlestick is above the closing price of the previous trade which is the Hollow Candlestick. This reflects the continuity of the previous price pattern. But then, the closing price of the second trade is lower than the opening price of the previous trade and this implies that the price of the underlying asset will now decrease. That is, the Bearish sentiment is very strong and a price reversal or Bearish trend is imminent, making it the perfect opportunity to make a Put option trade.
As we have said, there are many types of candlestick charts and candlesticks, each with their own specific meaning based on the price movement of the asset in the market. It takes time to master Candlestick charts so try to work with them on a daily basis in order to get familiar with them. With practice, you will be able to use the valuable information they provide in order to enhance your trading effectiveness and ultimately your trading success.
Binary Options Day Trading Charts
In binary options, day trading is understood as trading an asset within a single trading day. That is, you will select an expiry time for a trade for that same day such as the 60 Seconds trade option or an expiry time of a few hours. Binary options day trading charts provide us with information of the price movement of an asset within that day and from this information, a trader can then make their trade. All the charts we have covered above such as the line chart, bar chart and the candlestick chart can all be used as day trading charts and the focus of the trader is to find patterns within this day trading chart in order to analyze the direction that the price of an asset will move.
As with all the types of charts we have covered, day trading chart reading takes time and experience and if you make a conscious effort to work with these charts on a daily basis, you will be able to easily detect the chart patterns and trends of the asset prices.
Binary Options Chart Indicators
There are several technical indicators that are available in order to analyze the markets. These are based on very complex mathematical formulae but we are in luck because most chart providers actually do the mathematical part for you. Some of the technical indicators used to analyze the markets include the Relative Strength Index or RSI which is a price momentum oscillator which compares the magnitude of an asset’s recent gains to the magnitude of its recent losses. Another indicator used by traders is the Moving Average Convergence Divergence or MACD indicator which helps you to see trends and momentums of an asset price. Another well-known technical indicator is the Fibonacci Retracement indicator. Fibonacci numbers were developed by Leonardo Fibonacci and Fibonacci retracements are used for finding out the support and resistance points of an asset or the reversal. As with trading charts and learning how to read them, it takes time to understand and master the use of technical indicators. They may seem daunting at first, but with some experience, you will be able to use them to your benefit while trading online.
Binary options trading is an exciting form of online trading that enables traders to make big profits with low risk. To enhance trading success, traders have the luxury of using technical market analysis to analyze market movements. By using different charts and learning how to read these trading charts, you will be able to reveal the trend and patterns of the price movements of an asset, providing you the information you need to make a winning trade.