Category Archives: stochastic

Market tides can be predicted.

Ebb And Flow Strategy For Binary Options

Like an ocean, the markets are also affected by tidal factors, ebbing and flowing along with the trend. The trend is like the tide of the ocean itself, surging ahead as another wave crashes onto the beach, then pulling back, only to get ready for another advance. So is the motion of the markets. As the trend advances it does not do so in a straight line. The market tide surges forward on good news and then draws back as fear mounts or bad news is delivered. Timing these ebbs and flows of the market is one way binary options traders can profit.

I try to avoid the ebbs and to focus only on the flow of the market. The ebbs, which are the pullbacks during a bull market or the bounces during a bear market, are too short term when compared with the flow and much harder to predict. The flow of the market is the longer term movements that are in line with the underlying trend. Since the trend is your friend I always trade with the trend.

Benefits of this strategy include:

  • This strategy is appropriate for all types of trading including spot binary, NADEX binary options, 0-100  binary options and forex binary options.
  • This strategy seeks to weed out the noise of shorter term corrections, pullbacks and relief rallies focusing instead on the longer term trend following moves.
  • This strategy uses multiple time frame analysis
  • This strategy uses more than one indicator
  • This is a binary options strategy that works! I know because it is how I trade.

One Theory Behind Market Movements

One basic theory behind market movement is that for every rally there is a correction and for every bear market there is a relief rally.Another theory is that no trend moves in a straight line; there will always be pull backs and corrections. Technical analysis assumes that the rallies and correction are repeatable and predictable but what does this mean and how can binary options traders profit from it? It means that during any rally there will be peaks and troughs, rallies and declines that traders can profit from. The key is to time the markets and profit from the ebb and flow of the market as it moves through the peaks and troughs.

In this first chart (S&P 500 weekly price candles) we can clearly see that the long term primary trend is up. This is the tide and flow of the market. We can also clearly see that there are periodic dips, or ebbs, in the flow of the market as it moves higher.  Recognizing the pattern of ebb and flow is the key to using this strategy properly. Any time there is a dip in the assets prices is a good time to enter into long term positions. It is important to remember that not all assets will behave in exactly the same way, especially if they are range bound, so it is useful to add a couple of other indicators to your analysis to time your entries.  Two tools that I find useful to help pinpoint the dips and my entry points are the MACD and stochastic indicators. Notice how they both make dips in synch with price action.

Ebb and flow strategy for binary options

Ebb and flow strategy for binary options


How To Apply The Ebb And Flow Strategy To Binary Options

You can trade off of the monthly charts but the signals take a long time to develop, usually a month or more. Not all broker offer options with enough expiry to cover the time needed and you most likely don’t want to wait a month, two or more for a trade to close.  So, how to apple Ebb and Flow strategy to short term binary options trading. First, start with the charts as shown above. Use candlesticks of weekly price action with stochastic and MACD set to the standard settings. Any time that you can confidently say that the market is ebbing or flowing it is time to look for a signal. To find a signal move down to a chart of daily prices. This is where you will find entry points for trades with one week to one month expiry horizons.  When the market is in a flow period on the weekly charts you will look for bullish signals on the daily charts, any time the market is in an identified ebb period bearish trades will be taken on the daily charts.

Using the chart above as an example we can see that the asset is in a period of flow. The long term trend us up and the indicators are currently bullish so that means that only bullish signals will be taken. To find a signal move down to a chart of daily prices, shown below. The chart  shows that the asset is in a short term ebb period. Take note that this ebb is not a full blown pullback but a sideways consolidation; not all ebbs will result in a pull back or correction. Since the market is in an ebb the ideal thing to do is to wait for the MACD to cross or at least come to the zero line, indicating that market flow has begun again. Once the flow of the shorter term daily charts synchs up with the flow of the longer term weekly charts it is safe to begin entering positions. The ebb in early October shown on this chart resulted in a bullish flow with 15 days of trading where positions opened with the market open profited at days end.

spx daily ebb and flow


This technique can be taken down to a shorter time frame than the daily charts. If you use charts of hourly prices then hourly and end of day expiry are more appropriate. The caveat is that the shorter the time frame you are using the less reliable the signals. This is because short term movement is more susceptible to random market noise than longer term movements. To do this use charts of daily prices to set the ebb and flow of the market, then move down charts of 60 minute or 30 candlesticks to find a signal.

Limitations Of This Strategy

There are some limitations for this strategy. First, if you wait for the MACD to hit zero or to actually cross back over to the bullish or flow side before taking the signal the move has already begun. At this time you may have missed up to half of the really good entry points. In order to catch a higher number of profitable entries you have to anticipate the flow before it really starts. If you look at the chart of daily prices you can see that when prices begin to flow back upward the bearish MACD is declining. Watch the bearish MACD for peaks when the underlying market is rallying. The decline in the bearish peak can be used as an early signal that market flow is reversing back to trend.

Another limitation is resistance. Without some form of resistance analysis this strategy is left open to potential losses from unanticipated market reversal. This can be avoided by simply drawing potential resistance lines on a chart at least on time frame higher than the one on which you are taking your signals.  Fibonacci Retracements are another great way to predict potential areas for resistance and support that could adversely affect trades made using this system.

 Additional Resources For Using The Ebb And Flow Strategy

Stochastic oscillator is a great tool for binary options.

Stochastic Strategy For Binary Options

Winning Stochastic Strategy For Binary Options

This strategy works in multiple time frames and will lead you to numerous trades. I use this strategy in three time frames based on weekly, daily and hourly candlesticks. It can be used with other time frames, the key is to use longer time frames to signal trading direction in shorter time frames. Once a signal is taken in the longest time frame then trades can be taken in the shorter time frames. In each instance it is necessary for a signal to be present in the longer time frame in order for signals to be valid in the shorter time frames.

What Is Stochastic?

Stochastic is a technical indicator oscillator based on trend analysis of random movements. It utilizes two indicator lines based on the magnitude and direction of price movements. It assumes that over time the day to day or minute to minute movement of asset prices is random but over time that randomness will produce a pattern indicating underlying trend. What this means for binary options traders is that it weeds out a lot of the noise found in the markets and produces an indicator which reveals the underlying trend.

Stochastic oscillator is a great tool for binary options.

Stochastic oscillator is a great tool for binary options.

Stochastic is a popular indicator for forex, stocks, futures and options and is now being applied to binary options trading. It works in any time frame and can produce a number of signals including entry, support/resistance and impending market reversal. The best signals are those that occur in more than one time frame which is what I am focusing on here today.

What Time Frames To Use With Binary Options

I use three time frames for my signals. This provides me with signals for monthly, weekly and daily options. The long term time frame is charts of weekly closing prices. I use charts of 2,3, 5 and 10 years with weekly candlesticks to determine long term trends and areas of support and resistance. The short term time frame I use is daily closing prices. I daily candlesticks with 6 month, 1 and 2  year charts to determine short term trends and areas of support and resistance. As for the near term I use charts of 60 and 30 minute bars, depending on the asset. Heavily traded assets are better in 30 minute bars, less liquid assets in 60 minute bars.

How To Trade Stochastic Signals With Binary Options

Long term stochastic signals work well with weekly and monthly expiry's

Long term stochastic signals work well with weekly and monthly expiry’s

Signals are easy to see and come with a top-down organization. The first signal I take will always be on the long term charts. On this chart if the trend is up I am bullish and if it is down I am bearish. A signal occurs in a bull market when the %K line crosses the signal line from below. The reverse is true in a down trend. A signal occurs when the %K line crossed the signal line from above. The long term signal indicates a long term position such as an option with a monthly expiration. Only enter new long term positions during the week the signal forms or the week after if prices are not running wildly higher. This signal also indicates that trading short term in the direction of the trend is allowed. This secondary signal is valid so long as the %k is above the signal line and it is pointing up on the long term chart.

Weekly Stochastic Signals For Binary Options

Shorter term signals can have one week or less until expiration

Shorter term signals can have one week or less until expiration

Shorter term weekly positions can be taken with signals from the daily charts. When you have identified a bull or bear signal on the weekly charts move down to the daily. Then look for the exact same signal on the daily chart. This means that if the weekly chart signal is bearish you are looking for a bearish signal on the daily charts. Only trade in line with the long term trend in order to get best results. It is possible to trade on divergences and support/resistance bounces but those signals are not as reliable. You may be able to identify several shorter term signals on this chart, so long as the long term signal is still bullish any new bullish signal on the daily charts is tradable.


Short Term Binary Options Stochastic Signals

Near term signals for one day or one hour positions.

Near term signals for one day or one hour positions.

The beauty of stochastic is that it works in multiple time frames and the more time frames that converge with identical signals the stronger the signal is. Trading short term signals for hourly and daily binary positions is easy with stochastic. For these signals I use charts of hourly or 30 minute prices, it depends on the asset. The more volatile assets work well with 30 minute charts and hourly expirations, less volatile assets with hourly charts and daily expirations. The same rules apply as with the long term and short term signals. When the long term signal is bullish and the short term signal is bullish then you can trade near term signals that are bullish with a high degree of success. The exact same is true in the bearish case. When the long term signal is bearish and short term signal is bearish then you can trade near term hourly and daily puts whenever a bear signal occurs.

“The Stochastic Triple Cross” or “The Binary Super Signal”

The stochastic triple cross is when you can identify an active buy or sell signal in all three time frames simultaneously. What I mean is that the stochastic cross is happening on the current bar at the current time. This is even stronger a signal than an ordinary near term signal. A near term signal can occur at any time during the course of a long term signals life. There are many short term signals during the long term. A super signal occurs at or near the beginning of a new rally or bear market or just after a correction or relief rally. These signals have the strength of the long term trend, the short term trend and the near term trend. This signal is the only time that I would enter in all three trades at the same time …. or even consider making a larger trade than usual. One possible trade idea would be to place a 2X position on an hourly or daily position, a 1.5X position on a weekly position and then a regular size trade.

bull bear eva k wiki cc asa 2.5

Good Binary Options Strategies

Technical Analysis And The Best Strategies For Binary Options

bull bear eva k wiki cc asa 2.5I have often wondered what the best strategy for binary options is and the only answer I can come up with is the one that works at the time. Technical analysis and binary options trading is not an exact science, it takes patience to master and even them comes with risk. No technical indicator or trading system is infallible, traders should never be surprised at an unexpected loss. The best strategy is to be as prepared as possible for all kinds of market conditions by learning to utilize an arsenal of trading tools and techniques.

Binary options are a great way to speculate financial markets. One of the benefits of choosing binary options is the ease of analysis. With futures, forex or equity options you need to know when, where It is less important to know exactly when, how much or how fast an asset is going to move in price than it is to know simply that it is going to move. Becuase of the simplified nature of the analysis many technical indicators, trading strategies and systems commonly found in other forms of trading are easily applied to binary options trading. I have found that my favorite technical indicators and analysis from equity options and stock trading work very well for binary options.

What Is Technical Analysis

Technical analysis is the scientific and objective study of financial markets and price patterns with the intention of speculation. In practice technical analysis is a form of applied social science. Technical indicators, along with trend lines, moving averages and a host of other tools are used by technical analysts to measure, track and predict market movements. Technical analysis is the core of any trading or binary options trading system. Using TA traders and speculators can predict direction, duration and magnitude of movement allowing for pin point entry and exits. Without TA traders can do little more than guess. There are some great books, videos and other resources available across the internet. The best binary options broker tools, education and resources is at 24Option.

What Is A Technical Indicator

Technical indicators are mathematical models that track price movements of financial products. Indicators are used on stocks, bonds, commodities, currency, indexes and other types of derivative instruments. The models are charted alongside or just under the chart of the underlying asset and are intended to give a deeper view of market strength, direction or volatility. Some indicators use a combination of moving averages while others use price and absolute price changes. Still others may use a combination of data to produce results. Each indicator gives off its own unique signals but they usually fall into one of several categories. These include confirmations/failures, buy/sell signals and convergences/divergences.

Common Types Of Strategies Used In Binary Options

  • Trend Following- Bull/Bear, High/Low options, Touch/No Touch
  • Range Trading- Straddles, Range Options, Touch/No Touch
  • Reversals and Contrarian Trading –  High/Low, Touch/No Touch, Range Options
  • Hedging and Risk Management- Calls/Puts, Options Builder

Trend Following Strategies For Binary Options

Trend following strategies may be the best for trading binary options. Think about it, binary options pay on the basis of whether an asset moves as predicted or not. What is better than a strategy that follows a clearly trending market? If you know which direction the market is heading and are reasonably sure there is no market stopping resistance ahead trend following strategies are no brainers. Simply take signals in the direction of the trend using your technical analysis to determine the length of time needed for the move to occur. If you are trading signals on a chart of daily bars an end of week or end of month binary option may be the right choice. If you are trading off a chart of hourly bars perhaps an end of day or end of week, if you are using a shorter time frame then intra-day, hourly and 60 second options come into play. The best thing about trend following strategies is that they work well in multiple time frames and can be used for day trading.

My two favorite indicators for trend following are stochastics and MACD. These are two oscillators who got their start in the currency and futures markets. Over time their effectiveness in a wide range of markets has been proven time and time again. Now they are both widely used by traders of all types of financial products in multiple time frames. These indicators are simple to use but do take time to master. They are both effective individually but when used together can produce some really powerful signals. Stochastic is one of the more traditional oscillators and is charted in a range from 0-100 with overbought and oversold levels. MACD can also be charted this way but is more often displayed as a histogram.

Trend Following Indicators For Binary Options Trading

Stochastic Oscillator - The word stochastic derives from the ancient Greek and means “random” or “up to chance”. The indicator is based on Random Walk and Chaos Theory. It assumes that while the nearer term direction of the market is hard to determine you can use that movement to determine the overall trend. Imagine this, a man is walking his dog down the street. The man is in control of the dog by the leash. The dog may bounce around, walk from side to side and try to pull the man of his chosen path. The action of the dog is not predictable but based on the trend of his movement we can see that the mans path continues down the street. The same can be said of the market. The day to day reaction of the markets to news and events is hard to predict but over time we can measure that movement and use it to predict which direction and how strongly a market is moving. The stochastic oscillator can give off many kinds of signals. It can generate buy and sell signals in a trending market, it can predict market reversals through divergence, it can confirm breakouts or failures of support and resistance, and determine overbought/oversold conditions. It is also possible to apply chart patterns like head and shoulders or double tops to stochastic.

MACD Histogram – MACD (Mack Dee) stands for Moving Average Convergence Divergence. It is a measure of the converging and diverging of two moving averages. Typically MACD is set to 12,26,9; this means formula consists of the difference between a 12 bar and 26 bar moving average smoothed by a 9 day moving average. The results are displayed in a histogram that produces signals in several ways, zero line crossovers and convergence/divergence are my two favorites. MACD is a momentum indicator and is used to measure the strength of a market.When a market is bullish the short term MA will be above the long term MA and produce bullish peaks, the reverse is true when the market is bearish. This does not mean that there will not be bearish peaks in a bull market or bullish peaks in a bear market just that you should pay more attention to the peaks in relation to the trend.

A series of bullish peaks with each higher than the last is a sign of strength and that the market is likely to keep moving up. This is known as convergence.  If the series of MACD peaks were to get lower while the market was making new highs that would be a sign of weakness and possible reversal, also known as divergence. While the market is trending, regardless of the size of the peaks, trades may be taken in line with the trend whenever MACD crosses zero. In a bull market MACD must cross zero from below and in a bear market it must cross from above. If MACD is diverging caution is needed but if it is converging then more aggressive trades could be place.

Support/Resistance Lines - Support and resistance lines are areas where price movements are likely to change or continue. Market peaks, troughs and congestion areas are good places to draw these lines. Up and down trend lines can also be support or resistance and should be included in this part of analysis. I draw my first set of lines on the charts of weekly bars to determine long term trends and possible areas of support and resistance. The most effective lines connect three points but two is usually enough. I often draw lines from congestion areas, market tops and significant technical levels like necklines and shoulders. I always draw these lines with the right edge projected out to the future.

After I use the weekly charts I drop down to daily bars. If any of my long term lines are still present I know that they are going to be the most likely target for support and resistance. I also look on this chart for other likely areas of shorter term support/resistance and draw lines here as well. It is helpful to use different color lines for each time frame to keep them easily identified. The second set of lines are especially helpful if they coincide with a longer term line, moving average or other technical level. These levels are good targets for bounces, beak outs, break downs and reversals.

What Is Range Trading

A trading range is when an underlying asset is trading between an identifiable upper and lower limit. Ranges are marked by multiple tests of both limits over a period of time. Ranges can occur in any time frame and thus are an attractive trading strategy for many professional binary options traders. There are many reasons an asset may be in a range. Traders and investors may have lost interest in the asset. There may be a rotation from one set of buyers to the next or there could be strong and opposing views of what the true value of the asset is. Whatever the case, ranges are great opportunities for big profits. The problem sometimes though is identifying the range early enough to trade on it. Anticipation is the key here and this is one area where utilizing multiple time frames comes in really handy. Binary options traders have a couple of tools for range trading that even include range binary options.

Markets do not have to be trending strongly in order to be profitable. Range trading is a group of techniques that helps traders take advantage of these market conditions. Skilled binary options traders can utilize ranges to produce combination trades that include calls and puts that are both in the money or apply there analysis to range and touch/no touch binary options. Technical indicators like MACD and stochastic are useful in ranges. However, when used alone they can produce a lot of whipsaws and false signals in a sideways trending market.

To help alleviate unnecessary losses a couple of other techniques can be used to help determine support/resistance and where the range boundaries are likely to be. Support/resistance lines, Fibonacci Retracements and Channels are only a few of the means available. I primarily use support/resistance lines, trend lines moving averages and Fibonacci. I have found that if I try to include to much the charts get messy and become hard to read.

Market Reversals, Divergences And Contrarian Trading

With most forms of derivative trading market reversals, divergences and contrarian trading are attractive because of the huge potential for profits. Imagine if you were short S&P 500 futures when the market dropped an unexpected 36 points? Since binary options only pay a fixed amount this type of trading is not as attractive. There is no chance of a huge gains and it carries more risk. Trying to predict tops and bottoms is like trying to catch a falling knife. It is much better to wait for the bottom than try to guess where it is. Even with the added risk market reversals, divergences and contrarian views are still highly tradable but I do not recommend them for novices.  One touch options are good vehicles for capturing this type of move.

Market ReversalsFinancial markets don’t trend in a straight line and they don’t reverse in a straight line either. Reversal patterns like the Head&Shoulders, Double Tops, Island Reversal and Blow Off Tops don’t happen in one day or one candle. When these types of patterns begin to appear, especially in conjunction with support or resistance, they can be used to accurately predict market direction. Reversals can occur in any time frame and are useful tools for day trading and range trading. The shorter the term of the chart the shorter the significance of the reversal so be sure to utilize multiple time frames to identify the longer term support/resistance levels.

Divergences - Divergences, as I described earlier, are when an indicator such as MACD or stochastic fails to make a higher peak when the underlying asset makes a higher peak. This lower peak is a sign of weakness, slowing and potential reversal. The caveat is that divergences don’t mean a reversal is coming now or tomorrow, just that the market is weakening and one is possible. It is common for a strongly trending market to diverge with an indicator for multiple peaks as it slowly loses steam. The best way to trade divergences is when they appear in multiple time frames at once, what we call a “convergence of divergence”.  Divergences can be used to predict reversals and ranges when used along with some form of support/resistance tool. If a divergence appears while the underlying asset is approaching a potential area of support/resistance that is a strong candidate for reversal it increases the likelihood of reversal.

Contrarian Trading- Contrarian trading utilizes a combination of all these techniques to come up with a signal to trade against the market. Trading against the market is one of those things advisors will always tell you not to do and they are usually right, except when they are all right. This is true of the market as well. Contrarians use oscillators, trend lines, support/resistance, Fibonacci’s and a lot of experience to predict when a market is going to reverse. Entries are based on the assumption that the last possible market participant has entered the market and that there is now no where for the market to go but in the reverse direction. If there are no more sellers than the market will go up, if there are no more buyers than it will go down.