Binary options trading is one of the most popular investment options in recent years. To maximize their chances of gaining in binary options trading, more experienced traders have turned towards using strategies for options trading technical analysis. Technical indicators are powerful tools when used alongside other trading strategies.

Technical indicators are statistical or mathematical calculations that provide binary options traders with insights into market trends or behavior based on historical prices or data movement. Technical indicators help traders understand the market and make better-informed decisions.

This article will explore some advanced technical indicators traders use to improve their trading strategy. However, this article will treat the Fibonacci retracement technique, Bollinger bands, and the Stochastic Oscillator.

Fibonacci Retracement

Fibonacci retracement is a technical trend indicator for trading binary options. It is based on a mathematical pattern observed in financial markets called the Fibonacci Sequence. The Fibonacci retracement levels are a series of horizontal lines on the price chart identifying potential market support and resistance levels.

Traders identify the peak and the trough (two extreme high and low points) on the chart and draw a vertical line between them. Afterward, horizontal lines at Fibonacci retracement levels of 23.6%, 38.2%, 50%, 61.8%, and 100% are drawn to create a grid. These levels will then be used as support and resistance while trading and to identify possible price reversal or retracement points. These points will determine or hint at the most suitable times to enter or exit a trade.

In practical steps, you should:

• Identify the price trend using moving averages or other simple trend strategies.
• Identify and mark the peak (the highest point on the chart) and the trough (the lowest point on the chart)
• Draw the Fibonacci retracement levels.
• Wait for the price to retain one of the Fibonacci levels. Note that a retracement indicates a possible reversal in the price trend.
• Use other confirmation signals or techniques like trend lines, candlestick patterns, and so on to validate the reversal.
• Once the reversal is confirmed, enter the trade toward the new trend.
• Put appropriate risk management techniques in place.

Despite the frequent accuracy of the Fibonacci replacement technique, it is best used combined with other tools and indicators to avoid being misled.

Bollinger Bands

A Bollinger Band is a technical analysis tool to hint to a trader whether an asset has been overbought or oversold. A set of trend lines characterizes this tool. Three trend lines are plotted, including:

• a simple moving average line(the middle band) of the asset’s price, and
• two standard deviation lines(the upper and lower bands)

To set up your Bollinger bands:

• Compute a simple moving average(SMA). A 20-day SMA is recommended.
• Calculate the standard deviation value.
• Multiply the standard deviation value by 2
• Add and subtract this value from each point along the SMA line.
• Mark these values on the chart as they represent the upper and lower bands.

Whenever the bands come together to constrict the moving average, it is called a squeeze. The squeeze is a signal of low volatility, and a sign of future increased volatility. Therefore, the wider apart the bands move, the more likely the decrease in volatility. Traders also believe that the closer the prices move to the upper band, the more overbought the market is, and the closer the prices move to the lower band, the more oversold it is.

Stochastic Oscillator

Oscillators are technical indicators that signal to binary options traders when an asset has been overbought or oversold in non-trending markets. They are typically used alongside other trade indicators to make trading decisions. The most popular oscillators are the stochastic oscillators, relative strength indicator (RSI), money flow indicator (MFI), and rate of change (ROC).

The stochastic oscillator is a momentum oscillator that compares the closing price of an underlying asset to a range of its previous prices over time. This type of oscillator is range bound, i.e., it has a reading range between 0 and 100.

Formerly, traders used to take note of two ranges— 80 (signifying an overbought trade) and 20 (an underbought trade). However, recently, traders have been using the changes in the stochastic oscillator as clues of future shifts in trends.

Stochastic oscillator charts usually consist of two lines— the three-day simple moving average line and the actual value of the oscillator for each session line.

An intersection of these two lines indicates a large shift in momentum from day to day and therefore signals a possible reversal.

Any divergence between the stochastic oscillator and trending price action is also a signal of reversal.

Conclusion

Technical analysis indicators are good tools that traders use to make better-informed and data-driven decisions. However, these indicators should not be used alone. Combining them with other types of technical indicators is best for optimal results.

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