How to Trade into Momentum

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Video Transcription

Welcome to the fourth lesson of the Day Trading Binary Options Course. On this lesson, you will learn the importance of momentum and how to trade into momentum.

Okay, so in this lesson we will learn the importance of momentum when we are trading binary options. Unlike Forex or stock trading, binary option has a time limit, which is called the expiration time, and this is what makes momentum so important when trading binary options.

Let’s say that we took this trade right here at the breakout of this range. Okay? Now, as you can see here, if we take the trade at the end of this candle, price continues to jump inside a very tight range, because there is no volatility, which means that momentum is nonexistent, and which means that the possibility of our binary option ending or expiring out of the money is bigger, which means that we will be losing money in the long run.

So what scenario would you rather trade, a clean breakout of an ascending range with big momentum to the downside or a nice setup but with no follow through?

So the thing that we want to make clear here in this lesson is that when trading binary options, you have to look for the right times of the day and the right assets to trade. For instance, this is a great setup of a continuation of an up mode, but this is a choppy range where there is no momentum.

And how do you trade into momentum? This is the second part of the lesson. You will know now how to look for volatility. Volatility creates momentum in the market. Momentum is created when levels are broken by price, either to the upside or the downside.

This is a clear example. And we also use charts, chart patterns to trade binary options. Here we have an aggressive move down, then our retest of this area of support. Now this is called a double bottom. And we have confirmation of the other side of the test of support, so we can trade.

We have a long setup after this bullish engulfing candle. You have to put everything together in order to get your setups. Since we are on the 15 minute chart, you can buy an hourly or two hour expiration option, and your option expires in the money.

Now, if you draw this trend line right here, you can see that we might have a level that is going to be broken. And when the RSI breaks to the upside and price breaks above this descending resistance and the 50 period moving average, we have momentum to the upside.

Momentum is created when these levels are broken because these levels are being watched by a lot of traders around the world. And when they are broken, a lot of traders position themselves to the right side of the trade, in this case to the long side, or they buy calls. Okay?

And you can buy into momentum when we have a break above and a close above these levels. The cool thing about this is that we have a retest of this 50 period moving average, which gives us a fake of below the 50 level of the RSI, and when the RSI actually fakes back or returns above the 50 level, which is bull country, and we have a confirmation of the end of this correction, we can buy call options into this momentum to the upside.

So what you need to do is go through your charts and try to find these moments, these times when price breaks out and try to figure out when would it be a good time to buy binary options.

In this case, you have two options. One you can buy it here, at the breakout of these levels, which is the aggressive way of trading, and there’s nothing wrong with it. If you choose to trade an hourly expiration, you would actually have ended up in the money. One, two, three, four candles, closest right here. You would have ended up in the money by trading this breakout.

But if you wait for the retest of the levels, which will be right here, you need confirmation of the RSI and, of course, a candlestick confirmation that this correction is over and that we in fact have momentum to the upside.

Remember that these corrections can be the result of short-term traders that have traded this momentum to the upside and have decided to take profits right here. But a second batch of buyers will always or most likely will come after a small correction.

So look for these spots and trade into momentum and avoid to trade choppy ranges like this one because you have no control over your options once you buy them. If you don’t trade into momentum, your odds of expiring out of the money are much, much bigger.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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