Volume is highly relevant to binary options trading because it can help identify profitable opportunities and avoid potential losses. This guide will provide a comprehensive overview of using volume with binary options, from how to correctly measure trading volume to implementing winning strategies.
Most Important Facts About Binary Options Charts:
- News events can significantly impact volume in binary options, leading to easy-to-spot trends.
- Volume technical indicators help binary options traders filter out false signals and make more informed trading decisions.
- Low volume can increase price volatility and wider bid-ask spreads in binary options trading.
- Decreasing volume during an uptrend may indicate potential weakening momentum or a forthcoming reversal.
- Binary options traders utilize volume indicators such as Balance Volume, Volume-weighted Average Price, and Volume Price Trend to gauge the flow of money in an asset along with emerging trends.
What Is Volume on the Financial Markets?
Before providing binary options volume tutorials and discussing a few top strategies, it’s important to know what exactly volume is. Volume reflects the intensity of buying and selling of an asset. In binary options, the volume measures the number of contracts traded and trade sizes within a specified timeframe.
Analyzing volume trends can help traders identify potential reversals, breakouts, and the overall strength of a trend.
Tutorial on Binary Options Volume Trading
If you’re keen on trading binary options during various volume scenarios, you might be contemplating the initial steps to get started. This segment aims to lead you through the process of trading during low and high volumes by utilizing diverse strategies specific to the circumstances.
Pick a Suitable Broker
Choosing the right broker is the first step in volume-based binary options trading. Look for a platform that provides reliable real-time data and supports technical indicators necessary for volume analysis. A reputable broker ensures transparency in pricing and order executions.
Determining which regulatory authority licenses them is an excellent method to know if a broker is reliable. Also, reviews left by other traders are great indicators of whether the platform provides an outstanding and trustworthy service. Pocket Option and Quotex are great platforms you can check out.
- Welcomes International Clients
- Offers High Payouts: 90% – 97%+
- Professional-grade Platform
- Swift Deposit Process
- Enables Social Trading
- Provides Free Bonus Incentives
- Min. deposit $10
- $10,000 Demo
- Fast Execution
- High Profit up to 95%
- Fast Withdrawals
- Free Signals
- Welcomes International Clients
- Offers High Payouts: 90% – 97%+
- Professional-grade Platform
- Swift Deposit Process
- Enables Social Trading
- Provides Free Bonus Incentives
- Min. deposit $10
- $10,000 Demo
- Fast Execution
- High Profit up to 95%
- Fast Withdrawals
- Free Signals
Measure the Trading Volume
You can measure trading volume in two ways: directly and through technical indicators. Let’s first look at how to find out the trading volume utilizing the direct method. Most chart software provides a tool that shows volume directly on your display. This tool should be active by default. However, in some cases, you may need to switch it on manually.
At the bottom of the chart, you’ll notice thin upward bars with various lengths. They symbolize the trading volume during a specific timeframe.
- Longer bars indicate high trading volume.
- Short bars indicate low trading volume.
The issue of candle patterns is they are unreliable as a single source of information. You may identify the pattern going in a specific trajectory, but you cannot decide where the trend is going without the trading volume information. That’s why measuring volume is important.
Indicators for Binary Trading With Volume
Indicators provide valuable insights into market activity, giving traders additional information to work with. There are multiple indicators available to use that provide specific volume metrics. The most popular indicators for binary options are:
1. On Balance Volume (OBV)
This indicator takes into account the price of the asset and volume data. It operates under the assumption that volume changes will affect the asset’s value. A rising OBV suggests buying pressure, while a declining OBV indicates selling pressure. Traders often use OBV to confirm trends and identify potential reversals.
2. Volume-Weighted Average Price (VWAP)
Like OBV, volume-weighted average price indicators calculate an asset’s average value over a specified period, weighted by the trading volume at each price level. It provides a benchmark for assessing the fair value of an asset based on both volume and price. Traders often compare the current market price to VWAP to determine whether the asset trades above or below the average price. It’s also helpful for determining support and resistance levels.
3. Volume Price Trend (VPT)
Volume price trend indicators are designed to assess the strength of a price trend. It works by multiplying the percentage change in price by the volume, outputting a value that indicates the trend’s strength. When the VPT line is rising, it indicates strong buying interest. Conversely, a declining VPT line may signal weakening buying interest and potential for trend reversal. VPT is a great tool for confirming trends and identifying potential entry or exit points.
4. Volume Oscillator (VO)
The volume oscillator indicator is a technical analysis tool that measures the difference between two moving volume averages. It helps identify changes in trading volume over time and highlights market shifts.
VO is typically displayed as a histogram, with positive values indicating increasing volume, while negative values suggest decreasing volume. By observing the volume oscillator, traders can gain insights into a price trend’s underlying strength or weakness.
Binary Trading on Low-Volume
This section explores three binary trading strategies for low-volume assets.
News Trading Strategy
The news trading strategy is great for low-volume binary options because new announcements and developments can significantly impact an asset’s value.
Using this strategy requires being current with economic, political, and geopolitical events. Knowing upcoming announcements is a huge advantage, as it makes predicting the market much easier.
- Economic Calendar: Utilize an economic calendar to identify upcoming events that can cause potential changes to an asset’s value.
- Evaluate Market Expectations: Assess market expectations and forecasts regarding the impact of the upcoming news event. If the expected news is positive, the asset is likely to gain value, whereas if the news is negative, it can cause a downward trend.
- Select Binary Option Type: Since the asset is low-volume, the anticipated news will bring in a wave of traders, increasing the volume. Now, you can choose a call or put an option based on the news. However, if you’re unsure how the market will perceive the news, you can opt for the straddle strategy. This involves placing calls and putting options simultaneously.
- Place the Trade Before the News Event: Execute the binary option before the news event to capitalize on anticipated market reactions and price movements triggered by the announcement. By entering the trade ahead of the news event, you’ll benefit from the initial surge in volume.
Risk Management and Trade: Assess the risk, considering the outcome of the news event is not guaranteed to swing the market in a specific direction. Then, make an educated decision on how much you are willing to allocate to the trade. Finally, complete the trade and monitor how the asset is performing.
Tunnel Trading Strategy
The tunnel trading strategy is great for low-volume markets where important political, economic, or financial news is waiting to be announced. Traders are unsure which direction prices may move and are hesitant to commit, leading to lower volume. This strategy draws precise trendlines to predict price movements, forming a tunnel-like structure. The binary option is based on the expectation that the price will persist within the established tunnel until the option expires.
Step #1 Identify Narrow Trendlines: Using technical indicators, identify major trendlines that encapsulate price movement. Due to limited market activity, the trendlines may be narrower than high-volume markets.
Step #2 Draw Tunnel Lines: Draw parallel trendlines and account for potential price movements within the established tunnel. The narrower the tunnel, the better it aligns with subdued market activity. Choose a binary type that suits range-bound markets. Options designed for limited price movements work best for this strategy.
Step #3 Execute the Trade: Given the limited activity in low-volume markets, select a short expiration time. A shorter timeframe is better because of the few price movements within the tunnel. Finally, execute the binary option, predicting the price will continue moving within the narrow tunnel until it expires.
Range-Bound Strategy
Price movements are often constrained in low-volume conditions, so using range-bound is an ideal strategy. This strategy aims to capitalize on the limited price movements by predicting the value of an asset will remain within a specified range until the option expires. Technical indicators will help identify historical support and resistance levels, making it easier to see how the asset’s value fluctuates.
Step #1 Identify Historical Support and Resistance: Use technical indicators with price charts to locate the support and resistance levels. Then, draw narrow horizontal lines at these levels. Opt for a more constrained range to align with the lesser market activity.
Step #2 Choose Trade Type with Expiry Time: Select a binary option with a boundary feature and a short expiry time. Short-term binary options are ideal since the market is less likely to fluctuate. Execute the boundary option, predicting the price will remain within the identified narrow range until the option’s expiration.
Binary Trading on High-Volume
This section covers three binary trading strategies that work well with high-volume assets.
Moving Average Crossover Strategy
The moving average crossover strategy utilizes the crossovers between short-term and long-term moving averages to identify potential trend reversals or confirm existing trends. This strategy is particularly effective in high-volume markets where trends are easier to spot.
Select Moving Averages: Choose two moving averages, one short-term and the other long-term.
Step #1 Identify Crossovers: Look for crossovers between the selected moving averages. A bullish crossover occurs when the shorter-term moving average crosses above the longer-term, indicating upward momentum. A bearish crossover happens when the shorter-term moving averages cross below the longer-term.
Step #2 Confirm Volume: Confirm crossover signals with strong volume support. A surge in volume during a crossover adds validity to the signal.
Step #3 Complete the Trade: Execute a binary option in the direction indicated by the crossover signal and set the expiry time. You’ll want to align the expiry time with the expected duration of the trend.
High-Volume Breakout Strategy
The breakout strategy capitalizes on significant price movements following the breach of a key support or resistance level. It’s effective in high-volume markets where increased trading activity can lead to huge breakout movements.
Step #1 Identify Key Levels: Use technical indicators to find key support and resistance levels.
Step #2 Wait for Breakout: Monitor the asset’s price as it approaches the identified level.
Step #3 Execute the Binary Option: Open a binary option trade once the breakout occurs with strong volume confirmation. Ensure you set the trade to a put or call depending on the trend. Choose an expiry time that aligns with the expected duration of the price movement.
Momentum Trading Strategy
The momentum trading strategy aims to profit from ongoing market trends with significant volume. Traders identify strong price momentum and execute binary options in the direction of the trend.
Step #1 Identify Momentum: Look at charts and utilize indicators like Relative Strength Index or Moving Average Convergence Divergence to identify the asset’s momentum.
Step #2 Confirm Volume: Ensure the momentum signals have strong volume support to confirm the trend will continue.
Step #3 Complete the Binary Option: Execute a binary options trade toward the identified momentum. Set the expiry time to align with the expected duration of the trend.
Pros and Cons of High Volume in Binary Trading
- High liquidity = high volume of trades
- Reliable trends
- Market manipulation risk is lower
- Enhanced transparency
- Greater availability of contracts
- Flash crashes possible
- Short-term trend predictions are more difficult
- Herding behavior
- Market hype
- Illiquidity threat
Pros
- High Liquidity: High volume ensures easy execution of trades with minimal slippage.
- Reliable Trends: Trends in high-volume markets are often more reliable, providing traders with stronger signals for technical analysis. Also, high-volume assets are less likely to change trends unless a major event happens.
- Availability of Binary Options Contracts: Multiple high-volume assets are available for binary options trading. They are priced accurately and better reflect trends than low-volume assets.
- Reduced Market Manipulation Risk: High-volume assets are less likely to be manipulated due to the substantial amount of investors actively trading. The risk of a single entity manipulating prices is diminished significantly.
- Enhanced Transparency: With more investors trading, market information is generally more transparent and reflective of true supply and demand dynamics.
Cons
- Possibility of Flash Crashes: High liquidity doesn’t eliminate the risk of sudden and extreme price movements. Major news and geopolitical events can instantly affect trends and negatively impact already executed binary options positions.
- Difficult to Predict Short-Term Trends: Although an asset may follow a trend, short-term binary options are still difficult to predict. This is because the value of an asset will zig-zag between highs and lows throughout the day.
- Potential for Herding Behavior: Traders may succumb to herd behavior in high-volume markets rather than relying on the data given. For example, if most investors predict that the underlying asset will gain value, other traders may jump on the trend without due diligence.
- Market Hype: High-volume markets can sometimes attract speculative hype if an asset is expected to rise or fall in the future. This makes it difficult to predict the price accurately, and any announcement of the asset can swing the market in the opposite direction, which can end in major losses.
- Risk of Illiquidity: Despite overall high liquidity, certain assets may experience periods of illiquidity, making it challenging to exit positions.
Pros and Cons of Low Volume in Binary Trading
- More price swings
- Unique strategies
- Predictable market behavior
- Fundamental analysis is most helpful
- Low-volume trading arbitrage opportunity
- Low-volume assets make executing trades more difficult
- Technical analysis is the least helpful
- Difficulty confirming trends
Pros
- Potential for Significant Price Movements: Low volume can lead to more price swings, providing profitable opportunities.
- Opportunity for Niche Strategies: Traders can utilize unique strategies that capitalize on low-volume markets.
- Predictable Market Behavior: With fewer traders, market movements may be more predictable, allowing investors to react to price changes more effectively.
- Bigger Focus on Fundamental Analysis: With less reliance on technical signals, traders may find emphasizing fundamental analysis more valuable.
- Opportunities for Arbitrage: Price discrepancies between brokers can create opportunities for arbitrage strategies in low-volume trading.
Cons
- Reduced Liquidity: Low-volume assets may lack liquidity, making executing trades at desired prices harder.
- Reliability of Technical Signals: Technical analysis signals may be less reliable due to less information that you would get from higher trading volumes.
- Trend Confirmation: Trends may be less reliable because there might not be enough volume to confirm their strength.
- Scaling Positions: Scaling up positions may be challenging due to limited liquidity.
- Risk of Whipsaw Movements: Low volume can lead to erratic price movements, increasing the risk of whipsaw patterns.
How Does the Trading Volume Affect the Price of a Binary Option?
While volume doesn’t directly affect the price of binary options, it indirectly influences price movements, offering valuable insights into market sentiment and the reliability of trends.
High volume signals strong market interest, confirming the validity of trends and providing confidence in predictions. On the other hand, low volume suggests reduced market interest, making price signals less reliable and increasing the risk of whipsaw movements.
Beyond trend confirmation, volume impacts liquidity. In high-volume conditions, binary options have tighter bid-ask spreads and efficient trade execution. In contrast, low volume can lead to wider spreads and increased price slippage, affecting the trade’s overall price.
Conclusion
Understanding and leveraging volume is an important skill every trader must learn to incorporate because it helps them understand how the market is performing and shows profitable opportunities. This comprehensive guide has equipped you with the relevant volume, technical indicators, and various strategies for low—and high-volume markets.
Before starting your binary options trading journey, take the time to understand this concept because it will improve success rates. A great way to start is with a premium broker like Pocket Option or Quotex because of the demo account feature. This lets you experiment and try various volume-based trading strategies without risking money.
Most Asked Questions:
How does low volume impact binary options trading?
Low volume can increase price volatility, wider bid-ask spreads, and reduced liquidity. As a result, traders must adapt their strategies according to the low-volume conditions.
Can volume be used to confirm trends in binary options?
Yes, volume can be used as a metric to confirm trends. Increased volume during an uptrend suggests buying pressure, while high volume during a downtrend indicates selling pressure.
Are there volume indicators for binary option traders?
Yes, the most popular technical indicators are On-Balance Volume (OBV), Volume Price Trend (VPT), and Volume Weighted Average Price (VWAP).
Are there specific strategies for binary options trading in high volume?
Strategies like breakout and tunnel trading are more effective in high-volume markets due to increased liquidity and stronger price movements.
Do binary options brokers provide volume data for assets?
Yes, most binary options brokers provide volume data and technical indicators, but the features and indicators offered may vary depending on the platform. You can utilize most platforms’ demo accounts to see what features and indicators are offered.