THE BEST BINARY OPTION INDICATORS
Binary options allow traders to make predictions on time-bound conditions on predefined values of forex, stock indices, commodities, and events. Every binary option has a pre-determined strike price, an option premium, and an expiry. The differentiator is the settlement price remaining fixed at $0 or $100, based on the option condition that is being fulfilled. The net profit or loss is kept fixed by it. The option premium also remains fixed from $0 to $100.
As binary options are condition-based and time-bound, probability calculations play a major role in valuing the binary options. The determining factors are volatility, timing, and the direction of the price move. Technical indicators used for trading binary options should incorporate these factors. A trader can take a binary option based on spotting trend reversal patterns or continued momentum.
Details About Binary Options Technical Analysis and Indicators
Binary options technical analysis depends on technical indicators. You can use these indicators on charts to analyse market movements. Technical indicators are used by binary options traders in order to find trends and patterns in underlying markets so they can use those to make their trading decisions. Trading indicators are generally categorised into four types, such as –
- Trend: These indicators show the direction of the market. They are also known as oscillators.
- Volatility: Volatility indicators show the extent of market movements and the changes of the price.
- Momentum: Momentum indicators show the strength of a trend and signal where reversals may take place.
- Volume: These indicators show the number of units that are being sold and bought.
Type of Indicators
Based on how they work and when they provide signals, indicators can be categorized into two types, such as
Leading indicators are based on the past price. The difference of these indicators from the lagging indicators is that they offer signals for the near future. A trader receives the signal first and then sees an awaited situation on the price chart. After that, the trader can open a transaction at the exact moment when the situation takes place. There are arguments about how leading indicators work. According to the supporters, it is very important to get the signal beforehand. The opponents do not agree. They say that the signals are for the future and so, they can be false often. The market situation can change anytime and predictions cannot be strong as confirmations.
The advantages of leading indicators are the lack of delay and detection of key levels. Thanks to these indicators, traders can open a transaction exactly on time which helps them to target higher probability trades. The disadvantage is that they sometimes generate false signals if the market situation is very volatile. Moreover, novice traders may find using these indicators a little difficult as they are often applied in more advanced analysis.
Like leading indicators, lagging indicators also rely on the past price. You can expect a small lag in the information they will provide. This is why we call them lagging tools. It goes something like this. The trader notices a good moment on the price chart to enter the trade. After a short while, the opportunity to open a position will be confirmed by the lagging indicator. There are arguments on how it works as well. The opponents say that such a delay is a waste of valuable time, while the supporters say that it is important to confirm the best entry point with confidence.
The advantage of the lagging indicators is that the signals they offer are strong since they are presented after an actual situation takes place. Moreover, the risk of false signals involved in this is low. It means that the traders have great chances to execute successful operations with them. The disadvantage is the delay but it is the part of how these indicators work. Traders may lose some pips due to this short delay. Also, the indicators do not offer identification of key levels.
Top 3 leading indicators
- Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator. It is used by traders to signal if a market is oversold or overbought. By getting this signal, traders can easily decide whether to buy or sell, since a trend can be about to reverse. You can use RSI to know what the right time is to get into trades. When it comes to binary option contracts, it means that the trader can make an informed decision about if to sell or buy a contract, and choose the expiry time they want.
- Stochastic Oscillator
Stochastic Oscillator is a momentum indicator. This indicator has similarities with RSI. It can also show if a market is most probably going to be overbought or oversold. However, it is set out slightly differently, where two lines mark out trends. Stochastic Oscillator is used to compare current closing prices to the previous trading range. You can see the oscillator on the chart as two lines. When the lines cross, it is considered a leading signal that a change in the direction of the market is approaching.
The indicator is based on the idea that market momentum is faster than price or volume in changing direction. So, it can be used to forecast the direction of market movements. When stochastic lines move above 80, it signals that the market is overbought and it will reverse while creating a downtrend. To the contrary, when the lines reach below 20, it signals that the market is oversold and it could be followed by an uptrend.
The Stochastic Oscillator is prone to false signals during volatile market conditions. To prevent this from affecting your trades, you can use the indicator in conjunction with other indicators. You can also use it as a filter for your trades instead of using it as a trigger. It means that you would enter the market after the trend is confirmed, what traders normally do with a lagging indicator.
- On-Balance Volume (OBV)
On-Balance Volume (OBV) is a momentum indicator. It monitors volume to allow traders to predict the market price. OBV is mostly used in shares trading, as stock exchanges document volume well. Traders using OBV as a leading indicator concentrate on increases and decreases of volume without equal change in price. It is considered a sign that price will increase or decrease imminently.
Since it is leading indicator, OBV can also give false signals, especially because around announcements surprising the market, the indicator can be thrown off by huge volume spikes. Although volume changes, yet it does not always indicate a trend. So, it may cause traders to open premature positions. This is why the OBV is often used in conjunction with other leading indicators or lagging indicators along with a systematic risk management strategy.
Top 3 lagging indicators
- Moving Averages (MA)
Moving Averages (MA) are used by traders in order to confirm a trend by using previous price action. It is a trend indicator. The name comes from the fact that the data is updated continually as soon as new figures are available. There are two types of Moving Averages; Simple Moving Averages (SMA) and Exponential Moving Averages (EMA). SMA is the simplest type of MA that offers the average of the set of figures. These figures are generally the closing price of a market. It means that the average depends on past price data which can make it slower to react.
EMA also relies on past data, but it offers more weighting to the most current values, accounting for the highest percentage of the average. It makes EMA more relevant for traders who prefer trading short-term contracts.
Moving Averages are usually used in a combination with other indicators to provide traders with a complete picture of events and price movements in the markets. Traders can use several technical indicators to their charts at any one time.
- Moving Average Convergence/Divergence (MACD)
Moving Average Convergence/Divergence (MACD) is a trend indicator. It is made of three trend indicators – a slow line, a fast line, and a histogram. The indicator is developed with the primary objective of showing the relationship between the two Moving Averages. The main thing trading look out for with MACD is for the lines to converge, since, it can signal the formation of a new trend.
Once the lines cross over one another, it indicates that the trend has reversed and the line will begin to diverge. Traders can use MACD in their binary options trading in order to determine how much the market will move and in which direction so they can choose the best strike price available.
- Bollinger Bands
The Bollinger Band is based on a 20-day Simple Moving Average (SMA) along with two outer lines. The outer lines signify the positive and negative standard deviations away from the SMA and traders use them as a measure of volatility. When the levels of volatility are increased, the bands widen. On the contrary, they contract when the volatility is decreased. When the price reaches the outer bands, it frequently acts as a trigger for the market in order to bounce back at the direction of the central 20-day Moving Average.
It is suggested by some strategies that Bollinger Bands have the properties of a leading indicator, but they do not provide leading trading signals alone. Bollinger Bands cannot give any indication of the exact moment when the change in volatility may occur, or towards which direction the price movement will be. They merely give a sign that a breakout may occur soon by giving bullish or bearish signals. This is why traders often use Bollinger Bands with price action or in conjunction with other lagging tools or leading indicators like the RSI in order to confirm the signals offered by the bands.
Some More Popular Binary Options Indicators
- Pivot Point
In binary option trading, Pivot Point is used in conjunction with support and resistance levels. The analysis using this indicator helps traders in determining trends and directions for any timeframe given. Since it has the flexibility in timing, Pivot Point is a great indicator to use in binary options, especially when you are trading highly liquid major currencies.
- Wilder’s Directional Movement Indicators (DMI) Average Directional Index (ADX)
Wilder’s DMI (ADX) indicator consists three indicators that measure the strength and direction of a trend. The Direction Movement Index (DMI) is composed by three lines, such as the ADX (black line), DI+ (green line), and DI- (red line). The strength of the trend is shown by the Average Directional Index (ADX) line. The higher is the value of the ADX, the stronger is the trend. You can change the colour of the lines, but in most software; black, greed, and red are the default ones.
- Commodity Channel Index (CCI)
The CCI indicator calculates the current price level of a particular security related to the average price during any timeframe given. Generally, this average price level is the moving average. You can choose time periods as you wish which allows you to choose when the binary option will expire. The indicator is useful in recognising new trends and extreme conditions of oversold or overbought securities. The CCI is very popular among day traders who are interested in short-term trading, and it can also be used with additional indicators like oscillators.
How to Trade with Binary Options Indicators
The binary options indicator is a MetaTrader 4 signal indicator that signals the trader when high-quality trading opportunities arise and also offers guidance. You just need to follow its instructions to execute new binary options trades. The design of the binary options indicator is developed with a number of technical indicators in order to look for counter trend reversals at over-bought or over-sold levels. It is applied for both the lower and higher timeframes.
When a trading opportunity comes up, a pop-up box, an arrow, or a sound alert is generated so the trader can grab the trading opportunity. The arrow includes the direction of the trade – be it call of put. Your exit position is timed according to the timeframe you are trading. For example, if you are trading off the 1 minute chart, your exit position would be at 5 minutes expiry. Similarly, if you trade off the 5 minutes chart, it will have 30 minutes expiry and so on; 1 hour expiry for the 15 minutes chart, 4 hours to end of day expiry for the 1 hour chart, and end of week expiry for the daily chart.
The binary options indicator is designed in a way so it can protect the trader’s account balance by restricting the amount of losses. For example, it only identifies new trading opportunities when the price of an asset obtains sufficient energy and momentum to decisively break above or below well-defined criteria. When these conditions are satisfied, price usually has enough strength to advance in its favoured direction by an extended distance. It also secures wins in the process.
Binary options indicators must be used for timely actions under constant monitoring. It is very beneficial to trade with technical indicators, but you must never forget the risks that are always associated with trading. There is one disadvantage with technical indicators, and that is that they show results and calculations based on past data which can generate false signals. So, before you use an indicator to trade high-risk, high-return assets like binary options, you must practice caution with thorough analysis and detailed backtesting.
Volatility indicators are a special form of technical indicators that measure how far an asset drifts from its average directional value. An asset will drift from its mean direction when it has a high volatility.
Day traders use popular technical indicators like Simple Moving Averages (SMAs), Exponential Moving Averages (EMAs), Stochastic Oscillator, Bollinger Bands, and On-Balance Volume (OBV).
The Average True Range (ATR) indicator appears like a single line in a section under your chart. This line moves up and down. Reading the ATR indicator is pretty simple. A higher ATR signals increased volatility, while a lower ATR means decreased volatility.
Bollinger Bands, Average True Range, and Standard Deviation are volatility indicators.
In binary options trading, the Fractal indicator is based on the patterns that you can notice on the price chart repeatedly. It captures possible turning points on the chart and draws the arrows. These arrows show the pattern formation. The fractal pattern can be a bullish pattern or a bearish pattern.
No, binary options indicator does not filter signals during major news events to provide customers with more control. You can choose from a number of other news-based indicators and install them for free on your MetaTrader 4 platform to avoid trading during news events.