This is a business of risk, but it doesn’t have to be a complete gamble. You can use technical or fundamental analysis to help you make trading decisions, but one great method that is sometimes overlooked is price action.
What is price action?
Price action is a way of theorizing which way price is headed based off of what it is already doing. Whereas fundamental analysis relies on interpreting events surrounding the market, and technical analysis relies on indicators that are a step removed from price. Price action takes you straight to the source.
Since price is what you’re trading, doesn’t it make sense to let the price itself tell you what to do?
Using Price Action Trading Binary Options
When you use price action to plan a trade, you look for patterns in the price that have predictable outcomes. One great thing about price action is that the same patterns that occur in one market may also occur regularly in another market. These patterns have often shown to repeat themselves as well. When you can recognize these patterns forming by watching price action, you can trade accordingly.
Let’s look at a Forex binary options example to see how this works. One common price action pattern a lot of traders work with is the inside-4-bar. This pattern looks like four small bars that are all “inside” the length of a bar directly proceeding them (they may or may not be inside each other).
This is a breakout pattern, without a specific direction. So you might place a binary options Double One Touch trade where you set a specific trigger on either side of the formation at a particular distance where you’ve determined price will go within a set time period. If either of your triggers are touched during the payment window, you win your trade.
These are entry rules only, and you will need to also learn to develop the equivalent of exit rules. With a binary options trade, you’re not in indefinitely until you get out like you would be in a traditional trade. Instead you have a set point at which you’ll be exiting the trade unless you decide to get out early with a partial win or loss. You’ll need to decide how you choose your expiration date, and also how you’ll decide whether to leave a trade early. These decisions should be very specific and should not be random.
While price action can be very reliable, it works better under some market conditions than others, and some formations may be more intuitive to you than others. There is also the fact that you’re going to have to learn how to recognize the very best setups and also to analyze them within a given context. So it is critical that you backtest your method on historical data for the assets you’re thinking of trading, and then that you demo test in real time with virtual money before you go live with real money.