A trading indicator is a tool used by traders to analyze market conditions and predict future price movements of financial assets. Those indicators are based on mathematical formulas that are applied to historical data and provide insights into trends, momentum and overbought or oversold conditions.
A trader uses indicators to strategize their trading process and find out the best possible trends in the market to invest their capital. The most popular trading indicators are moving averages, oscillators and volume analysis tools.
Trading Indicator in a nutshell
- Trading indicators analyze market conditions and predict future price movements.
- They are based on mathematical formulas applied to historical data, revealing trends, momentum, and overbought or oversold conditions.
- Popular indicators are moving averages, oscillators and volume analysis tools that help traders identify trends.
- Trading indicators only reflect past price movements and cannot accurately predict future prices.
What are Trading Indicators used for?
Trading Indicators are the most basic computation plotted on the price chart as lines that are used to identify the signals and changes in trends in the stock market. These computations are mathematical in nature and act as tools that have been applied to a chart to understand the workings of a market so that a trader can understand properly and make a clear analysis.
An indicator makes use of price data along with graphs, charts, and mathematical formulas that are known to produce a signal for a trend in the market. The term used to explain the process of using technical indicators is “technical analysis” since it takes technical instruments to work on the trend chart.
Example: How do Trading Indicators work?
To understand how these trading indicators work, let’s take an example of the indicator “Moving Average” and see how it works on the price charts. This is one of the most popular indicators yet, and you will know why.
The moving average, is a price trend indicator that establishes a balance in the price data by informing the trader about the changes in the average price every day. It is an analysis method that uses price points of various financial instruments and joins them with the duration. It creates a trend line, which then removes any type of fluctuation that may have been caused due to surges in the price trend. It calculates the average price of the asset over a specific time period, such as 10 days or 50 days.
This indicator identifies the type of trend taking place in the market and becomes an important part of a trader’s trading strategy. Therefore, you will make a long bet if the price of the asset lies above the indicator. But you may need to consider lower bets if the price is set below the moving average indicator.
Therefore, these indicators offer trade signals and warnings that can be suited according to the investor’s will. You can also combine trading indicators to understand the best exit strategy when there is a sudden change in price value.
Moreover, the best thing about indicators is that you can practice them on a demo account before you actually apply them on real-time accounts to understand their effect. Later, when you have mastered these indicators, you can apply them to the price charts and control the market trends according to your wish.
The only disadvantage of an indicator is that they only display the movement of price but cannot predict the prices that could be displayed on the chart in the future. There is no added benefit to the chart readers with these indicators.
How to use Trading Indicators for Binary Options?
To use binary options indicators as a technical tool to show the rise and fall of a market, you need to understand which indicator is appropriate for each situation. Their main purpose is to find out the current market price situation, provide information about all the essential facts and give an overview of the stocks or trades by predicting the future.
Types of Binary Options Trading Indicators
- Trend Indicators: MACD, Parabolic SAR, Alligator Indicator
- Volume Indicators: On-balance Volume, Put/Call Ratio, Volume Price Trend
- Support and Resistance Indicators: Pivot Point, Fibonacci Retracement, Top
- Volatility Indicators: Bollinger Bands, Average True Range, Standard deviation
- Momentum Indicators: Relative Strength Index (RSI), Stochastic Oscillator, Money Flow Index
Here’s a simple guide to use trading indicators for binary options trading:
1. Choose Your Trading Indicators
Start by selecting trading indicators that match your trading strategy and goals. Most popular indicators for binary options trading are moving averages such as the MACD, Bollinger Bands and the Relative Strength Index (RSI). Each indicator provides insights into market trends and volatility, so consider your trading style and preferences when choosing.
- MACD (Moving Average Convergence Divergence): A momentum indicator that identifies potential buying signals when its line crosses above the signal line and selling signals when it crosses below.
- Bollinger Bands: These bands signify potential selling signals when the price touches or surpasses the upper band (indicating overbought conditions) and buying signals when it touches or goes below the lower band (suggesting oversold conditions).
- RSI (Relative Strength Index): This oscillator indicates overbought conditions (above 70) as potential selling signals and oversold conditions (below 30) as potential buying signals.
2. Combine Trading Indicators
Combine different indicators to maximize the accuracy of your predictions. For example, if you combine the MACD (Moving Average Convergence Divergence) with the RSI, you can get additional signals that provide a more detailed overview of market conditions.
3. Interpret and Confirm Signals
After selecting and combining your trading indicators, it’s time to interpret the signals. Pay attention to confirmation between indicators before making trading decisions. For instance, if the MACD indicates a bullish trend when its line crosses above the signal line and the RSI confirms oversold conditions (when its value falls below 30), it may signal a buy (higher) opportunity.
4. Execute Trades Higher or Lower
Now that you have analyzed the trading indicators and confirmed the signals, it is time to execute your binary options trades.
- If the indicators suggest a bullish trend, consider placing a “Higher” trade, anticipating that the price will exceed the strike price.
- If the indicators indicate a bearish trend, opt for a “Lower” trade, expecting the price to decline below the strike price.