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.
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.
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
- Information on candlesticks for binary options
- Information on 0-100 binary options
- How To Use Stochastic With Binary Options