Technical analysis is the art of forecasting the future price of a trading instrument based on historic price. Typically, technical traders use price charts to conduct their analysis with the x‐axis being time and the y‐axis being price. See Exhibit 10.1 .When trading an underlying instrument, you are typically trying to forecast direction.
One of the great aspects of option trading is that you don’t necessarily have to forecast where an instrument will go, but you can simply forecast where it will not go.There are certain technical principles that focus on areas where an instrumentwill not go. Once again, with the use of options you can speculate on such future conditions.One of the great advantages of binary options is that you can speculate on volatility without having to fear that you will lose more than you put into the trade.
SUPPORT AND RESISTANCE:One of the most popular and simplistic technical trading methods is using the theory of support and resistance. Support is a level that an underlying asset has previously had difficulty penetrating to the downside. The theory behind support areas on charts is that, typically, when price hits support, it stops and then reverses direction, moving higher.Resistance is a price level that an underlying asset has had difficulty penetrating to the upside.
The theory behind resistance is that typically when price hits resistance, it stops and then reverses direction, moving lower. Exhibit 10.2 is a diagram demonstrating support and resistance. Support is a price level that an underlying asset has difficulty moving below.The more times price bounces off a support level, the more significant that level becomes.Resistance is a price level that an underlying asset has difficulty moving above. The more times price bounces off a resistance level, the more significant that level becomes.If you see a support/resistance area on a chart and believe that it will not be breached, you may be able to use binary options to speculate on this.
BREAKOUT TRADING:If a particular trading instrument has been trapped in a consolidation pattern for a while, a technical trader may want to make an assumption that it will break out either to the upside or the downside. One of the biggest difficulties of breakout trading is that it is extremely hard to forecast the direction of the breakout. In other words, you never know whether the instrument will break out and go up or break out and go down.Exhibit 10.9 illustrates a technical breakout to the upside. In this diagram,the price of an underlying was caught in a tight range between support and resistance.
Eventually, enough momentum occurred, causing the price to push through the resistance level and climb higher.Exhibit 10.10 illustrates a technical breakout to the downside. In this diagram, the price of an underlying was caught in a tight range between support and resistance. Eventually, enough momentum occurred, causing the price to push through the support level and move lower.
Fortunately, binary options offer you a way to take advantage of a breakout without having to be concerned about the direction of the trade.You can simply buy an option that speculates on the underlying’s going up and sell an option that speculates on the underlying’s going down at the same time.As long as you buy the options relatively equidistant from the market price of the underlying, if one of the options is correct, your profit on one leg of the trade will be enough to overcome for the loss on the other leg and yield a net profit. This type of trade is called a strangle.