Every beginner first wonders which strategy to try first? There are several options available to him for this. He can test very short-term trading or buy binary options with a longer term on a higher time basis. But how does he best do it? First of all, it might make sense to think about how the markets generally behave. If you ask yourself, the following things immediately come to mind:
- The market is in a trend phase upwards
- Or it is in a downward trend phase
- Or the market tends sideways
There are actually not many more options. It is therefore not surprising that most professional wealth managers use trend following. On the one hand, a trend can be better assessed in terms of its behavior and at the same time it generates the highest return with a lower trading frequency.
But of course it's not quite that simple. In order to benefit from a trend, the retailer must firstly find the right entry, secondly stick to it long enough and thirdly find the right exit. On the one hand, the trading frequency is lower, on the other hand, the trader is always emotionally bound to his current positions. As you can see, everything has its advantages and disadvantages. Before we move on to the trend-following strategy, here is an overview of various strategies for trading binary options
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How do you find a trend?
Traders always struggle to jump on a trend too late. Indeed, it is hardly possible for private traders in particular to recognize a trend reversal early on. There are several signs and indicators in market technology, but a low will only be caught in the rarest of cases. You may not have to. In many cases, it is sufficient to have a trend formation confirmed, for example by bottoming out and trend indicators.
If we look at the current S&P 500 chart on a 4-hour basis, we can clearly see that this reversal was very dynamic and private traders without much experience had little chance to get in early. But were there any signs of this before?
First of all, we don't need any indicators to recognize that a bottom has formed. You can say that in retrospect, but if you put up with not wanting to get into the low right from the start, that's enough. A floor is usually defined as a floor if the second low is higher than the first low, see markings in Chart 1.
Next, we can have some indicators shown. There are basically two options:
- Indicators that show us a trend divergence
- Indicators that confirm the trend
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What does a trend divergence indicate?
In the real sense, a trend divergence is a divergence between the course of the price and the course of a suitable indicator. Such divergences indicate in an ongoing trend phase that the trend is weakening. If we look at the chart of the S&P 500 again and combine the course of the price with the RSI indicator, we can clearly see a divergence at the marked points.
The RSI indicator measures the relative strength of the trend by he puts the current strength in relation to a certain past period. However, the RSI was unable to recognize the dynamic reversal from last week, but was only able to confirm it. That is the weakness of indicators. You can only process strong movements in the courses slowly. Conversely, this means that such a divergence may be suitable for an exit. This question does not arise for the binary options trader in most cases, unless he has the opportunity to sell early.
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When is a trend considered confirmed?
As we have seen, we can also use the RSI indicator to confirm the trend. There are a lot of other trend-confirming indicators, for example the MACD, ADX or the momentum. The latter is also ideal for finding divergences. It virtually measures the speed of a trend.
Let us summarize again:
- A reversal is completed when a bottom has formed
- The RSI indicator confirms the reversal and the emerging trend
- We are looking for an entry after breaking a relevant resistance
- We are looking for an exit (if sold early) as soon as the RSI indicator has one Divergence indicates
Apply trend following strategy: trading in 5 steps
There are numerous different strategies available for trading binary options, but on what does the financial instrument really matter? In the following slideshow, we have summarized what traders should absolutely know and how they can carry out their first trade in just a few easy steps.
Now, of course, the question is, which broker we have ours from Can implement trend-following strategy. For this we need a broker who also offers terms that can span several days. The binary.com broker is ideal for this because the trader can not only specify the end of the term, but also the duration. We chose 10 days as a trial.
Our payment should be 1,000 € if the trade is successful. For this we would have to deposit € 569.29 as a margin. Our net profit would then, after the term had expired, be € 430.71 or 76%.
Conclusion A trend-following strategy would definitely be recommended for beginners. Short-term trading is more suitable for experienced traders who know the dynamics of the market and react quickly and can make the right decisions. Trend following is a somewhat boring approach, but using trends is not as easy as it looks at first glance. If you still want to trade intraday, you can follow trends on a short-term basis. However, the dealer should always bear in mind that the reliability of indicators also decreases with shorter calculation times. Good luck!