Binary options trading offers a unique opportunity for traders to engage in short-term trades with limited risks. This guide focuses on trading lower lows in a bearish market, a common scenario in binary options. Understanding how to capitalize on these market conditions is crucial for successful trading.
We’ll explore the concept of lower lows, how to identify them, and strategies to effectively trade them in binary options.
Good to know:
- A lower low on a price chart indicates that the price of an asset has fallen below its previous low and typically occurs in a bearish market.
- To trade lower lows with binary options, traders should enter a SELL or PUT trade when the price reaches a new low, taking into account pullbacks to determine the duration of the trade.
- The strategy is risky and most effective when the downtrend continues throughout the trading period; it is less reliable in sideways markets or unexpected trend reversals.
- Other strategies for trading lower lows include trading on economic news and the Pinocchio strategy, which bets against the current trend in anticipation of a reversal.
What is the strategy of trading lower lows?
The strategy of trading lower lows involves noticing that the price of that asset has fallen back below its previous low and making a trade based on that.
Lower lows often happen in a bearish or downtrend market. The prices continue to drop during the trend. Sometimes there is a reversal and the price rises by a fraction. But this interruption lasts only a moment, and the trend continues. In most cases, the price then falls below its former low, reaching a lower low.
Example of a lower low
A good example of a lower low can be seen in the BTCUSD price between 17th and 21st February 2022. This asset was in a bearish (downtrend) market during this period.
On the 17th, it traded at $40556. The price dropped the following day to $40037. It reached a new low of $38420 on the 20th. The price continued to move downwards that day and fell to $37054, reaching a lower low.
There are trading strategies for binary traders that can work with such assets with high volatility. People take advantage of the opportunities the market presents.
The first step is to identify the market conditions. Then use the opportunities available. We will explain this further with a few trading techniques.
How to trade lower lows with binary options
Binary options allow you to place short-term trades in the financial market with limited risks.
Many traders focus on this market instrument because of its simple nature of winning all or losing all. There are many trading strategies to choose from, and traders can focus on one or more to make gains on binary options. The most suitable approaches would depend on the market conditions. Many traders stick to trend trading when it comes to binary options. Whether your chosen asset is a bullish or bearish market, you can make gains speculating in the direction of the market at any time.
Prices go up in a bearish market, reaching new highs. A bearish market is a condition where the asset’s price keeps falling, reaching new lows and lower lows during the trend. The opportunities abound in such markets.
But the trader needs to know how to take advantage of each market condition. We will show you how to trade lower lows with binary options in a bearish market in this short guide.
But first, let’s understand the meaning of a lower low in a price chart.
As we have mentioned, the first step is to know what condition the market is in. Trading lower lows may not be possible in a bullish or uptrend market.
In a market where the prices are falling, you can find lower low trade signals and make gains on binary options trading.
The prime thing is to enter a SELL or PUT trade every time the price reaches a new low.
- Identifying new lower low: Draw a horizontal line on the price charts, which passes through the previous low and extends to the new one. Note that the line has to pass through the old low price. This indicates a new low and signals a good point to enter the market on a SELL trade.
- Look for pullbacks to ascertain the time-length of the trade: Most trends often have disruptions whereby the price momentarily moves in the opposite direction. This is called a pullback.
You can know how long the pullback lasted by measuring its distance from the last break out into a new low. Once you measure this, minus the result from the previous low. The result is a good forecast of the new pullback time length. Though the market can shift direction at any time. This is only an estimation.
You can also use time instead of the distance of the pullback to find a good entry and exit point.
The bars on the pullback represent the time. 1 bar equals 1 hour. Count the bars moving in the opposite direction of the trend. This tells you when to expire the binary options trade, as long as the market does not make any expected move.
Risks to traders
This technique is easy and works well ONLY if the trend lasts throughout the trading period.
Traders may lose their capital if they attempt this approach on a sideways trending market or a false trend. The trick is to watch the pullbacks. The ones that last longer periods, such as 5 hours or above are more reliable with this strategy.
A shorter pullback period means the trend is strong and the next pullback is not predictable.
As we have mentioned, this technique is an estimation of how long the price would move in a certain direction in a downtrend market. It is not a perfect guarantee. Using the approach may increase your chances of a winning trade. But remember that the market is ever-changing and can move against your bet anytime.
Additional strategies
There are other strategies to trade lower lows with binary options. Traders have profited from these approaches, so they are worth considering. We list a few of them below:
1. Trading the news
With this approach, the trader keeps abreast of economic releases that relate to their asset of interest. For instance, for forex binary options, struggling economies would have lower exchange rates against their pairs (News Trading). That is, their currencies tend to drop in value. An informed trader uses this information to speculate on such forex pairs and make gains.
2. Pinnochio trading strategy
This technique involves betting against the prevailing trend in the asset. It requires a good knowledge of the market. The trader needs to see that the trend is reaching a reversal before they place such binary options trade. Trading lower low using this strategy ONLY works in an uptrend market. Here, you believe the market is about to go bearish so you place your trade accordingly.
Conclusion – Trading lower lows can bring you massive profits
Trading lower low with binary options looks easy, and it is. As long as you understand how to identify this market trend. The strategies mentioned here are useful, and if employed correctly, could generate gains for the user.
Frequently Asked Questions:
What does a lower low indicate in a bearish market?
A lower low indicates that the price of an asset has fallen below its previous low, signifying a continuation of the bearish trend.
How do traders trade lower lows in binary options?
Traders can trade lower lows by entering a SELL or PUT trade when the price reaches a new low, considering pullbacks to determine the trade’s duration.
What are the risks involved in trading lower lows?
The main risk is that the downtrend may not last throughout the trading period, leading to potential losses, especially in sideways or unpredictably reversing markets.
What are some additional strategies for trading lower lows?
Additional strategies include trading based on economic news and the Pinocchio strategy, which involves betting against the current trend in anticipation of a reversal.