The most important technical indicators of binary options

Consider the following bets:

  • Pay 45 USD to bet that gold will be higher than 1,700 USD at 1:30 this afternoon. If you win, you get 100 USD (profit 55 USD), otherwise you lose 45 USD.
  • Now I have received $81, betting that the Nasdaq 100 index will fall below 8,600 at 2 this afternoon. If your prediction comes true, keep a profit of $81. If not, the loss is $19.
  • If the USD/JPY exchange rate is higher than 108 at 3 o’clock this afternoon, you can win 100 USD by paying 77 USD; if not, you will lose 77 USD.

Welcome to Binary Options. All or nothing, one or zero, these securities are available on Nadex. Binary options allow traders to place time-limited conditional bets on predefined values ​​of stock indexes, foreign exchange, commodities and events. Like standard exchange-traded options, each binary option has an option fee ($45, $81, and $77 in the above example), a predetermined strike price ($1,700, 8,600 points, and 108 yen), and Expiry date (1: 30pm today, 2pm, 3pm).

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The difference is that the settlement price remains fixed at $0 or $100, depending on the option conditions that are met. It keeps the net profit (or loss) fixed. The option premium is also kept between 0 USD and 100 USD. (Related: A guide to trading binary options.)

Calculate probability

Since binary options are time-limited and condition-based, probability calculations play an important role in evaluating the value of these options. It all boils down to “What is the probability that the current gold price of US$1,220 will rise to US$1,250 or higher in the next four hours? ” The determinants include:

  • Volatility (how much, is it enough to cross the threshold/strike price?)
  • The direction of price changes
  • timing

The technical indicators applicable to binary options trading should include the above factors. People can hold binary options positions based on the discovery of sustained momentum or trend reversal patterns. Let’s take a look at some popular binary options technical indicators.

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Wilder’s DMI (ADX)

Wilder’s Directional Movement Index (DMI) Average Directional Index (ADX) consists of three lines, namely ADX, DI+ and DI- and their relative positions, designed to capture the strength of the identified trend. The following table is a table explaining the trend.

Location

momentum

ADX value> 25

ADX value <25

DI+ is higher than DI-

Indicates an upward trend

Strong upward trend

Weak, unsustainable upward trend

DI- higher than DI+

Indicates a downward trend

Strong downtrend

Weak, unsustainable downward trend

This is an example of using 3M Corporation (MMM) stock:

Based on the determined momentum and trend strength, appropriate buy/sell positions can be taken.

Center point

Pivot point analysis (combining support and resistance levels) helps determine the trend and direction in any given time frame. Due to the flexibility of time, pivot points can be used for binary options, especially for trading major currencies with high liquidity. A good example (with calculations and charts) is included in the use of pivot points in forex trading.

Commodity Channel Index (CCI)

CCI calculates the current price level of a security relative to the average price in any given time frame. The average price level is usually a moving average. The time period can be selected according to needs, allowing traders to flexibly choose when the binary option expires. CCI helps to identify new trends and extreme situations in overbought/oversold securities.

It is very popular with day traders in short-term trading and can be used with other indicators (such as oscillators). In the formula below, “price” is the current price of the asset, “MA” is the moving average of the asset price, and “D” is the normal deviation from the average. A high value above +100 indicates the beginning of a strong uptrend. Values ​​below -100 indicate the beginning of a strong downtrend. The calculation formula of CCI is as follows:













CCI

=



price



Well



0.015

X

D

















Where:















price

=

The current price of the asset















Well

=

Moving average of asset prices















D

=

Normal deviation of moving average






begin{aligned} &text{CCI} = frac {text{Price}-text{MA} }{ 0.015 times text{D}} \ &textbf{where:} \ & text{Price} = text{current price of the asset} \ &text{MA} = text{moving average of asset price} \ &text{D} = normal of text{ and moving average Deviation} \ end{alignment}


CCI=.15XDpriceWellWhere:price=The current price of the assetWell=Moving average of asset pricesD=Normal deviation of moving average

Stochastic oscillator

In an interview, Dr. George Lane, the creator of the Stochastic Oscillator, said: “It follows the speed or momentum of the price. Usually, the momentum changes direction before the price.” This important basic detail indicates the extremes of overbought and oversold. Circumstances, the reversal of the bullish and bearish phases can be identified. The intersection of the %K and %D values ​​indicates a signal for trade entry. Although the 14-day period is standard, binary options traders can use the time frame they want.













%K

=

100


(



C



L14



H14



L14



)
















Where:















C

=

Recent closing price















L14

=

Low of the previous 14 trading days















H14

=

The highest transaction price in the same 14-day period






begin{aligned} &text{%K} = 100 left (frac {text{C}-text{L14} }{ text{H14}-text{L14}} right) &textbf{where:} \ &text{C} = text{recent closing price} \ &text{L14} = text{lowest price of the previous 14 trading days} \ &text {H14} = text{Highest price traded in the same 14-day period} \ end{aligned}


%K=1(H14L14CL14)Where:C=Recent closing priceL14=Low of the previous 14 trading daysH14=The highest transaction price in the same 14-day period













%D

=

3-period moving average of %K






begin{aligned} &text{%D} = text{3 period moving average%K} \ end{aligned}


%D=3-period moving average of %K

A level above 80 indicates overbought, and a level below 20 indicates oversold.

Bollinger Bands

Bollinger Bands capture an important aspect of volatility. They determine the upper and lower limits as dynamically generated bands based on the recent price changes of the security.

The values ​​that are usually followed are 12 of the simple moving average and two of the standard deviations of the top and bottom bands.

The contraction and expansion of the band indicate reversal signals and can help traders establish appropriate positions in binary options. If the current market price is higher than the upper limit, it indicates an overbought situation. When the current market price is lower than the lower limit, it means oversold.

One of the challenges of binary options trading is to correctly predict the sustainability of trends in a given period. For example, a trader may establish the correct position for an index, predicting that it will reach 1,250 at the end of the 5-hour period, but that level will be reached within the first two hours. If the trader plans to hold the position until the expiration, or once the level is reached, he should execute a predetermined strategy (such as closing the position), he needs to monitor continuously for the remaining three hours.

Bottom line

The technical indicators discussed above should be used to take timely and continuous monitoring actions. A major disadvantage of technical indicators is that the results and calculations are based on past data, which may produce false signals. Traders should proceed with caution and conduct detailed back-testing and thorough analysis of high-risk, high-return assets such as binary options.

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