With the trend following strategy, one exploits the law of probability. Basically it comes down to the following – if a price has risen in the last few days, then the probability that it will do so in the future is even greater than it is to turn around the course. This is especially true when the timeframe of the option is chosen to be very short.
In order to succeed with this strategy it is important to analyze the charts exactly. You should be able to recognize certain binary options signals and find out if there is a chance for a trend reversal, which would mean that the time to invest has been missed. Use any technical analysis aid tools that you can.
Experienced traders can recognize the trend-lines with chart analysis, as well as support linesand resistance levels. Theypredict exactly the direction in which the option will change. Only in very rare cases can an investor recognize a market movement at first glance. There are some very good indicators of a downward or an upward trend. For example, when obvious minor highs are forming, it usually indicates an upward trend. In an uptrend, the lows are usually higher, same as in the explanations of many binary options strategies.
Whenan investor has determined the direction, and has discovered a rising trend, he will purchase a call option. The probability that he makes a profit in case of correct analysis is very high, because just a small incremental gain is sufficient. Remember that you should always gather all the relevant information you can. There are many ways do that, from reading the news to following other economic sources. There are also binary options software sourceswhichcan support the chart analysis. Note that if no clear trend can be seen, the trend-following strategy cannot be appliedin this case and most experienced investorswill recourse to another option.
A very big question – why are charts so important and how do I use them? Most beginning traders prefer to use simple line charts, mainly because of the clarity and perhaps due to the lack of other alternatives. Unfortunately,line charts are relatively unsuitable for most analyzes, becausea lot of the information is lost. The connected dots represent only the closing prices per unit of time – what happens during this time unit, you do not know.
Bar charts are quite more revealing and insightful. They consist of individual bars or rods, which show the maximum, the base, the opening and closing prices. Each bar represents a single time unit: On a daily chart a single bar represents a whole day. On a 5-minute chart a single bar represents 5 minutes and so on.
Candlestick charts are very widespread nowadays. Actually, the information they contain is the same as in a bar chart, but presented in a better graphical way. That`swhycandlestick charts are easier to understand and follow, even with an untrained eye. The single candle consists of a wick, a fuse and a body. Thewick and the fuse mark the maximum and the lowest values. The body describes the opening and the closing prices. A candle can represent different periods of time, samethe bar chart.
In general, candles are displayed in different colors, depending on whether the price has gone up or in each time interval. There is usually an emphasis on the interval between the opening and closing prices. Therefore candlestick charts are very well suited for those markets where this interval is particularly important, for example in equity markets. In markets which are traded around the clock, for example the Forex market, bar charts often make more sense. Ultimately, choosing a chart type depends on your personal preferences and trading needs
Which type of chart should I use?
If you areusing line charts, then we advise you to stop doing it and change this habit immediately. Line charts are simply not suited for the necessary binary options analysis. Of course there are some exceptions. For example if you`re looking at a very long time interval a line chart can be sufficient.
Whether you want to use a bar chart or a candlestick chart is entirely up to you. Sometimes if you`re inexperienced you might confuse a candlestick chart for a bar chart and vise-versa. However, with some practice you will be able to use bar chartsperfectly and haveall the necessary informationin sight.