Binary options trading is normally based on specific conditions and it is also time-bound. Therefore, every trade/option placed is based on the probability of the value of the underlying asset getting to a certain level. So, it is all about the probability and time.
When trading, the probability of the market analysis behaving as predicted depends on three major factors which are:
- The volatility of the market of the underlying asset
- The market trend
- And the period of time under consideration.
These three factors, therefore play a very major role when analyzing the markets during binary options trading.
Normally, markets that tend to be very volatile tend to exhibit very many large market swings compared to markets that are not volatile. An example is the EUR/USD currency pair. The EUR/USD is known to be very volatile and it is very much traded. If you look at the chart of the EUR/USD, you will realize that the currency pair exhibits very large market movements compared to other currency pairs like NZD/JPY.
On the other hand, when predicting how the markets will behave in Binary options trading, the trend is usually very important. In binary options, it is mainly about whether the markets will drop or rise especially when using the High/Low option.
Time is also of much essence since binary options are usually limited within a stipulated timeframe. The results of an option depends on how the trade will close after the option expires. In simple terms, if you are using a simple High/Low option and you place a call then the option should expire when the prices are above the entry level without minding whether the market prices have been below the entry level for 99.99% of the time. What is required is that when the option is expiring, the conditions of that option to be met at that time. If the market prices stayed above the entry level of the call in our above example for 99.99% of the time and just when the option is expiring the prices falls below the entry level, then the option will have expired out of money and you end up making a loss.
Any binary options technical indicator has to be based on the three factors (Volatility, trend and time).
The most commonly used binary options trading indicators are the trend and oscillation indicators. These include:
- The Moving average
- The MACD
- The RSI
- The pivot point
- The Fibonacci
- The Commodity Channel Index (CCI)
- The Bollinger Bands
- The Stochastic Oscillator
- The BO Indicator
In binary options trading, the indicators are not used for exiting the trades since most options are set till the expiry time is up unless the broker allows the use of the Option+ option.