Trend Line Trading

Hamish Raw
15th January, 2013 - Posted by in Technical Analysis

Introduction to Trend Line Trading

The trend line trading binary options strategy is a very simple but profitable strategy that can be used to trade the Call/Put option as well as the Touch/No Touch trade type on a short term basis. Due to the fact that for this strategy we shall be using the hourly and 4 hourly charts, it is possible to derive several trend line trading signals in a single trading day that can put some considerable money in a trader’s pocket. The trend line trading strategy is simple to use and very profitable when used correctly.

For this strategy, we are going to keep it very simple, so we will not be using any technical indicators. We will just use the price channel tool and some common sense to produce our trading signals.

Price Channel Tool

Our integral tool which will be used to derive trend line trading signals is the price channel tool.

The price channel tool (also called the equidistant price channel tool), is a tool that is available on the MT4 platform and is used to detect areas where the candlesticks form a price channel. An equidistant price channel is formed when the highs and lows of the candlesticks can be connected by two trend lines which are parallel to each other, forming a price channel. For the duration of that time, the price of the asset will form highs at the upper channel trend line and form lows at the lower channel trend line. The projection of the price channel can then be used to detect where prices will be capped and where a price floor will exist. By extension, the trader can also use the price channel to detect possible areas where the price of the asset is not expected to reach, and other areas on the chart where the price of the asset will get to, forming the basis of a Touch/No Touch trade on the binary options trading platforms.

In order to obtain a true price channel, the equidistant price channel tool must be applied to an area of the chart in such a way that each trend line must touch at least two points where the price of the asset makes highs or lows. Once this has been achieved, the trader can proceed to make his trade decisions based on the direction of the trend and the price limits defined by the price channel.

Call/Put Trade with the Price Channel Tool

For this trade type, it is important for us to know the short term trend for the asset. This can easily be detected using the direction that the price channel faces. A price channel can be ascending (uptrend), descending (downtrend) or horizontal in nature.

For an ascending price channel, the trend is up. Therefore we would use it to trade a CALL option since we do not want to go against the trend. The CALL option would be purchased at the open of the next candle when the previous candle has closed on or above the upper trend line.

If the channel in question is a descending channel, then we would use it to trade the PUT option, purchasing a PUT contract on the open of the next candle if the previous candle has closed on or below the upper trend line.

If the channel is a horizontal channel, forming when the markets is range-bound, we would trade both the CALL and PUT option, opening the trades one after the other as they form on the price channel using the guidelines already mentioned.

Touch/No Touch Trade with the Price Channel Tool

Since the price channel restricts the price action until a time when the price breaks out of the channel, we can use this tool to create the boundaries which will serve as our Touch and No Touch strike zones.

For the Touch trade, any price set within the price channel will serve as a Touch price target. For the No Touch trade, we can use any region outside the price channel as our price target for the No Touch trade. To be on the safe side however, we should only use a region below the lower trend line for an ascending price channel, a region above the upper trend line for a descending price channel, and totally avoid using the horizontal channel for the No Touch trade.

 trend line trading provides signals for trading binary options

The chart above illustrates the CALL, TOUCH and NO TOUCH trades for an ascending price channel. After tracing the channel, we can clearly see that two CALL trade opportunities came up, along with numerous opportunities for the TOUCH and NO TOUCH trades.



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