Binary Options Strategy using Price Action

Price Action Strategy

One of the best ways to trade binary options is to develop a trading strategy that is predicated on movements in the prices of the underlying securities an investor is looking to trade.  The study of price action is the process of developing a methodology where changes in prices determine the futures movements of the underlying security.  There are a number of specific patterns that are created by movements in price action but most surround reversals or continuation observations.

Trading Price Action is the process of making all investment decisions from price chart that does not contain any studies such as moving averages, momentum indicators or oscillators. The goal is to identify support and resistance areas and trend, along with pivot points reversals.  To accomplish this trader needs a price only chart that allows them to modify specific time periods.  The charts can be bar charts that show an open, high low and close, a candlestick chart, or even a line chart, but these omit information that is key to determining the changes in price action.

Reversal Price Action

A Key Reversal Day is price action that designates a reversal off of a pivot point. The price action is defined as a pattern where prices sharply reverse during the course of a specific trend. In an uptrend, prices open in new highs and then close below the previous day’s closing price. In a downtrend, prices open lower and then close higher. The wider the price ranges on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place.

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A key reversal day generally leads to follow through were traders who jumped into long position as the underlying security makes new highs, are now forced to liquidate positions as prices move below support levels.  A key reversal day changes momentum, and quickly generates momentum in the opposite direction of the trend.

The entry point for a key reversal is the open of the next trading bar.  For example, binary options traders that are using daily key reversals of an uptrend  would purchase the daily binary options call on the day following the key reversal.

The Double Bottom Reversal is a bullish reversal pattern typically found on bar charts, line charts and candlestick charts. The double bottom pattern is made up of two consecutive troughs in price action that are roughly equal, with a moderate peak in-between.

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Many times the double bottom has individual price action on each bottom where prices reject support levels with closing prices that are well off the bottom.

A double top reversal is a bearish reversal pattern typically found on bar charts, and candlestick charts. The double top pattern is made up of two consecutive peaks in price action that are roughly equal, with a moderate trough in-between.

Similar to the key reversal, a trader would use the reversal bottom or reversal top on the bar following the reversal.

Outside Reversal Day

An outside reversal day is a price pattern that reflects high levels of volatility as price action fluctuates. The underlying security’s high and low prices for the day exceed those of the previous trading session. The highs and lows are in essence outside the highs and lows of the previous day, giving the pattern the name outside day. Strong volume on an outside reversal day is generally considered a sign that the pattern will create a reversal.  The opposite of an outside reversal day is an inside day.  This is when the price today is within the range of yesterday’s price action.  The inside day is usually a sign of uncertainty, and makes it difficult to draw any specific conclusions.

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Pin Bar Reversal Day

The pin bar price action is a reversal strategy that uses a trade setup that is similar to a key reversal day. As the market price moves in the direction of the trend up to a certain level, it suddenly retreats all the way back to near the opening price. A pin bar reversal pattern is made up of price action where the high in an uptrend is well below the previous opening and closing price.  In candlesticks, this would mean that the candle has a long wick and a short body.

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The rejection of price direction is what causes price to go back towards the opening price of that candle, indicating that the traders in the previous trend have run out of steam and that counter-trend players have come in. The best bet for an entry is to wait for the open of the next bar to initiate a binary options trade. If the wick is down and the security closes up then a trader would purchase a binary options call.  If the wick is up and the close is down a traders would purchase a binary options put.

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