'The Trend Is Your Friend
' is a very popular term in the trading industry, and thus an important factor of technical analysis in general. To make use of the current market trend we need to be able to identify current directional price movement. In simple terms we need to know whether or not the market is trending, and if so, in which direction (Up, Down or Neutral). It is self-explanatory that for this strategy to work we require a trending market. Let's look at why trading with the trend can be a huge benefit, while stacking the odds in our favor at the same time. Any form of confluence will assist when making trading decisions. The more confluence we have the better.
Definition Of A Trend
A market trend is a perceived tendency of financial markets to move in a particular direction over time. These perceived trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames. Traders identify market trends using technical analysis, a framework which characterizes market trends as predictable price tendencies within the market when price reaches support and resistance levels, varying over time.
Did You Know:
- Market price trend can be classified as either up, down or neutral.
- Markets statistics show that trending markets only occur 1/3 of the time, while being neutral(Range Bound or Consolidating) the remaining 2/3.
- Trend continuation, or reversal, tend to occur at relevant support and resistance levels.
- Market trend can vary on different time frames for the same asset.
- Identifying a neutral trend is equally as important as identifying a trending(Up or Down) market.
How To Identify The Type Of Trend
An uptrend can be identified when higher highs and higher lows occur, while lower highs and lower lows occur during a downtrend. A neutral trend is easily identified when no new highs or lows are formed. We also refer to a neutral trend as a sideways market.
Figure 1 - Different Trends
Why It Is Important To Identify Trend Direction
Trend trading has come a long way, being around since financial trading was born. Unsurprisingly it is still around today, used by traders around the world as a very powerful form of technical analysis. Trend direction can play a big role in a trader's over market outlook. Identifying market trend is thus a great skill to have as a trader. Although it might seem like a basic aspect of trading, newbies and professionals alike sometimes cannot perform this 'simple' task.
Applying The Strategy To Binary Options
The great thing about this strategy is that it requires no indicator use, and is a valuable skill you can learn and use while making trading decisions. To apply this to binary options, very much like with Forex trading, we take advantage of the pullbacks that occur during trending markets. In very extreme cases we may not have these opportunities, thus not being able to enter on the pullbacks. If a neutral market occurs we can either trade the range of the market in both directions, or simply stay out of trades for the duration of the range bound conditions.
During an uptrend, referring to Figure 1 A, we would enter a call option on the HL(Higher Lows). During a downtrend, referring to Figure 1 B, we would enter a put option on the LH (Lower Highs). We can do this multiple times during a trending market. Although it is best practice to not be greedy, only taking advantage of this 2 -3 times. Pullbacks occur much more often on smaller intraday time frames.
Figure 2 - A strong Up trend
Figure 3 - A strong Down trend
Metatrader indicator for trends lines
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The indicator will automatically draw trendlines.
Figure 4 - Metatrader Indicator for Trend Lines
Trend Trading Summary
The trend can be your friend or your worst enemy. Always make sure that you are on the right side of the market direction as it will reward you well. As we mentioned this is a skill that requires some practice. Learning it is well worth it and will stay with you forever. Remember that knowledge is power.