What is a Trending Market in Binary Options and Forex
A Trending Market is one where the price of a currency pair, an asset, or an index moves in one direction. The trend can either be upwards or downwards. Charts on exhibit are courtesy of NetDania
If we look at the chart below we recognise that we are looking at a market which is on a downtrend. The zig zags along the way are called retracements, meaning that the price pulls back a little bit and goes somewhat against the market trend.
Trends also have what are known as the “higher points” in an uptrend also called the “higher highs”, and the “lower points” in a low trend marked with “lower lows”.
When opting to trade Binary Options or Forex using a trending market, it is ideal to pick strong currencies. These are also known as liquid currencies because they are traded heavily. Major currencies would include, Dollar, Euro and Sterling.
You may be asking why should one pick a liquid currency? The answer is very simple, and that is because you need volatility and strong movements in one direction in order to trade safely and either gain some pips in Forex or have the direction you chose in Binary Options end up in the money. The stronger the movement in one direction, the more chances a trader has of concluding a winning trade.
Therefore having a trending market, clearly moving in one direction is a much safer market than a quiet market which is slowly hovering around the same price range. This is called a ranging market. A ranging market offers no opportunity for trading either Forex of Binary Options. In Forex you are not gaining any profitable pips in a ranging market, and in the Binary Options the direction will keep playing around an ITM and OTM every couple of seconds. A very risky situation indeed.
A ranging market usually occurs before a trading session (early in the morning) or after a trading session (late the afternoon and evenings) Days of particularly slow performance would also be Monday morning and Friday afternoon, where traders are either too sleepy after a weekend, or too tired after a heavy week. News and Economic updates are also rarely announced on Monday mornings and Friday afternoons, therefore presenting no excitement in the market.
How can a Trader benefit from a Trending Market?
Apart from watching the charts like a hawk and tracing lines with your eyeballs, you can also make use of tools. One such tool is the Average Direction Index Indicator also known as ADX in short.
This indictor or tool uses a value between 0-100 to measure whether a price is moving strongly in one direction and therefore showing a trending market or whether it is slow and sluggish and exhibiting a ranging market.
If the ADX is showing a value which is higher than 25, then you are already looking at a trending market with strong trend movements. Naturally, any value higher than 25 indicates a stronger trend.
One must bear in mind that the ADX is only measuring the strength of the trend. It is not a directional indicator. Therefore the ADX does not recognise whether the trend is upwards or downwards. It only measures the volume.
Another Great indicator to use when trying to establish whether you are looking at a trending market is by using Simple Moving Averages or SMA as it is also known.
This may be a little bit more complicated to use because you will need to select different periods for the SMA in order to get a clearer picture.
The periods chosen here in our example are 10, 20 and 50 period and plotted on the chart. As we can see the three lines fan out.
When the 10 period SMA displays on top of the 20 period SMA, and the 20 period SMA leans on top of the 50 period SMA then you have a confirmed uptrend.
On the other hand if the have your 10 period SMA displaying below the 20 period SMA, which lies even lower than the 50 period SMA, you have a confirmed downtrend.
In order to get a reconfirmation of whether a trend is clear, it is always best to look at different charts values. Looking from a five minute chart, to a fifteen minute chart, and all the way to an hour chart, can give you a confirmation on the trend.
Naturally, if you are trading Binary Options, you need to be looking at charts with a lower time frame than if you are looking at Trading Forex. The difference is that if you are trading Binary on a ten minute expiry, then you should be looking at the 5minute, 10 minute charts, all the way to 15 minute charts. But looking at 1 hour charts will not give you the information you need to see because the time frames are too far away from the time you will take your trade.
With Forex, if you are looking at trading end of day, then need to be looking at longer term charts, starting with an hour and going all the way to 12 hours and daily.
There is no doubt that understanding what is a trending market is imperative in trading binary options and forex. We have established that we do not want to trade during a sluggish and sleeping market which is called the Ranging Market as this is considered the “No Man’s Land” market and will not give us direction or profits.
Remember also to check the Economic Calendar for Economic updates, which may upset a trending market, and deliver price spikes that would upset the confirmed trend.
We hope that this post has helped you with understanding the basics on clearing identifying a ranging market as well as selecting the indicators which can establish confirmation of the trending market as opposed to a ranging market.
If you are new to trading we recommend that you open an account with a Regulated Broker and receive a DEMO ACCOUNT which will help you trade safely and without any risk exposure, until you have established a winning pattern.
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