Technical Indicators for Binary Options Trading

There is an adrenaline rush to binary options.  💨

The stakes appear so high for every trade—you either lose it all or win utterly. This can make them very addictive and, since they are often very short-term, can incite you to act before you think.

Humans are pattern-seekers, and since charts and other data are readily available, it is easy to quickly identify trends and figure out where the prices are going. Just… it isn’t that easy, and there is both a skill and a method to understanding data that goes far beyond just glancing at it. 

Compounding these issues are allegations of fraud and lawsuits against options platforms that seem to be ever-coming, it is easy to understand why Australia has banned binary options trading for retail investors, thus joining numerous other countries in a crackdown on the practice. 

Still, binary options should neither be so easily dismissed nor condemned. While registered with the gambling commission in the UK, they are considered a game of skill rather than chance. A big reason behind this distinction is the existence of technical indicators.

But what are they, why are they important, and how can you use them to stop gambling and start trading?

Let’s find out. 👇

What you’ll learn

• Understanding the Indicators
• Different Types of Indicators
• Top 8 Technical Indicators
• How to Test These Indicators
• How Reliable Are Technical Indicators?
• Conclusion
• FAQs
• Get Started with a Binary Options Broker

Understanding Binary Options Technical Indicators 💡

Since humans are built to recognize and make sense of patterns, technical indicators might appear redundant—market movements are clearly discernible just by looking at the charts. However, we should never forget that, as H.L. Mencken wittily put it, there is always an easy solution to every human problem—neat, plausible, and wrong.

By all account, technical analysis has been introduced in the vibrant financial climate of the 17th-century Dutch republic to mitigate the shortcomings of innate human pattern recognition—trading-wise at least.

Technical indicators constitute an important element of analysis in stock trading and are indispensable when it comes to binary options due to their all-or-nothing nature.

In a nutshell, technical indicators are mathematical formulas applied to prices and price fluctuations of an option, currency, and mostly anything of the sort. Their goal is to shift what would otherwise just be the trader’s hunch into concrete and relatively objective data.

Since there are countless types of indicators, there are countless things they indicate—though they all do tend to fall under a limited number of categories. First, there are leading—those that try to peer into the future—and lagging indicators—that draw lessons from the past.

Most of these indicators try to discern what the trend, momentum, resistance, volume, volatility, and support is. Of course, we will be delving deeper into all these types of indicators and providing examples for some of the best, and most popular ones.

Why Indicators Are Crucial for Binary Options Traders 🤔

When facing a decision, and an overwhelming amount of data relating to that decision, you have two main options—ignore or utilize the data. Now, while ignoring the data is certainly the more straightforward way, it is hard to argue that—especially in binary options trading—it mostly amounts to gambling.

Considering the amount of information thrown at the trader, even trying to make sense of it all can be futile if too many cooks spoil the dish. Data is useless if you can’t make sense of it and leads to decisions just as bad as those made blindly.

However, technical indicators are true game-changers here, literally, as they turn this game of luck into a game of skill. And, since good binary options brokers tend to come with built-in analysis tools, you don’t even have to go through the process of calculating the necessary equations.

This combination of automation and predetermined points of analysis makes technical indicators truly shine in a binary trading scenario. By giving you an outline to follow and superimpose on a chart, you can quickly deduce whether your hunch about a price going up or down is a faulty guess or a smoking gun.

So just summing up, technical indicators are fast and reliable tools that help you make sense of the charts and streamline the otherwise unmanageable amount of information. They help you not only confirm your conclusions but also reveal opportunities that would probably otherwise be hidden behind an unreadable amount of data.

Types of Technical Indicators for Binary Options 🗂

While all technical indicators try to measure the market in a way useful for binary options trading, they have some variation. Firstly, as we’ve mentioned, there are lagging indicators that look at what was happening with the market in the past, and leading indicators that attempt to make predictions for the future.

These indicators are further divided by what exactly they are trying to determine. Indicators that measure support and resistance are looking for signs that the prices have reached a peak or a bottom—when the prices are going to stop dropping and start rising and vice-versa. Fibonacci retracement and Pivot Point (PP) are such indicators.

Bollinger Bands and Average true range are indicators measuring volatility. These indicators are especially valuable for traders going for options with target prices such as one-touch options.

Ease of movement and Force Index look into the volume of options. Just like with stock volume, this determines the number of shares bought and sold and, thus, how bearish or bullish the market is.

Trend indicators try and determine how decisive the current trend is—how much you can rely on the way the market is currently moving when making decisions for the future. These include Ichimoku Kinkō Hyō, and, perhaps more famously, Moving average convergence/divergence (MACD).

Finally, momentum indicators look at how decisive the force behind a trend is. Relative strength index (RSI) and Stochastic oscillators are momentum indicators.

Leading and Lagging Indicators 📊

While the value of leading indicators is usually instantly obvious to most traders—trying to predict the future and profit from your clairvoyance is the entire game—lagging indicators certainly shouldn’t be overlooked.

The biggest strength of lagging indicators is that they are based on facts. That is to say, they look at things that objectively did happen and are happening up to the present time on the market. The leading indicators take this a step further and not only tell you what happened but try and predict what will happen.

Still, neither of these types of indicators should be viewed as anything approaching a crystal ball. Their goal is always to separate weeds from the crop within data and help you better understand what you are looking at.

On the other hand, due to the popularity of some of the technical indicators, they can become a kind of self-fulfilling prophecy. Since a lot of traders are hinging their bets on technical analysis, they tend to nudge the market in the direction indicated.

The 8 Crucial Indicators for Binary Options Traders 💸

Okay, so far we’ve talked a lot about the general principles of technical indicators and how they relate to binary options trading, so let’s look at the details. We’ll be going through some popular and important indicators from each major category—volatility, volume, support/resistance, trend, and momentum.

1. Average True Range (ATR) 💰

Average true range is a volatility indicator—it determines how stable the prices are. This indicator requires only historic data to be calculated and to generate trade signals. It tends to be applied for 14-day periods but can be altered to analyze any amount of time.

The number of signals tends to be higher the shorter the time chosen is. The range is calculated by subtracting the low from the high of any chosen timeframe. True range is represented by the largest of:

• Most recent high minus the most recent low;

• The absolute value of the most recent high minus the previous close;

• The absolute value of the most recent low minus the previous close.

The average true range is usually employed to determine when to enter or exit a trade but can also be used to inform you of the size of the trade you should make. Simply put, a low average true range means that the volatility is low, while a high result indicates that the prices are unstable.

The two main limitations of this indicator are that it isn’t inherently definitive—its results are open to individual interpretation—and that it doesn’t predict the direction of the price move, just how likely it is to happen.

These make ATR relatively weak when used alone and should always be employed in conjunction with other technical indicators.

2. Bollinger Bands (BB) 🔎

The Bollinger bands are another indicator of volatility. It was created by financial analyst John Bollinger—whom you might have recently heard talking about the future of cryptocurrencies.

Bollinger bands consist of three averages—mid, low, and high—that together create bands that show how the current price relates to the moving averages within a specified timeframe. Bollinger bands have two central concepts—squeezes and breakouts.

Squeezes simply imply the level of volatility. The closer the bands are to one another, the less volatility there is, and vice-versa. Squeezes aren’t trading signals since they simply demonstrate the current state without indicating when it will change.

Breakouts happen when the actual price goes above the upper band or under the lower one. This state is relatively unstable—meaning that the prices are probably quickly going to reenter the bands. Thus, many people consider breakouts to be trading signals—which isn’t entirely correct.

While the prices will often, as we’ve said, reenter the bands, there are no guarantees. Breakouts are major events but they do not truly guarantee or even indicate whether it is a major break from the price trend up to that point or more of an anomaly that will swiftly correct itself.

For this reason, John Bollinger himself recommends combining BBs with other, uncorrelated indicators.

3. Fibonacci Retracement (FR) 🏛️

Since we are advocates for using multiple technical indicators, and Fibonacci retracements don’t require calculations this indicator can serve as an at-a-glance alert that you should start a serious technical analysis of certain shares as an opportunity might be arising.

This indicator is based on the famous Fibonacci sequence which is often found in nature—and many believe in economics—and is a string of numbers where the next one is the summation of the previous two starting with 0, and followed by one.

So, the sequence would go 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on ad infinitum.

This translates in Fibonacci retracement into percentages: 23.6%, 38.2%, 50% 61.8%, 78.6%, 100%, 161.8%, 261.8%, and 423.6%. These are then used as support and resistance indicators, often with 50% being on the list despite not being a Fibonacci number.

The simple—and arbitrary—nature of this indicator comes from the fact that the numbers are fixed, and the price points measured are decided at will. For example, the value of a stock might go up by $10 in X days and you could decide that this rise, say from $20 to $30 is where you apply the retracement.

The idea is that if the price drops by any of the Fibonacci percentages during an uptrend, or drops during a downtrend, it indicates that it is time to sell or buy as it is likely to retrace—or reverse—to the previous value and go beyond it in the previous direction.

The idea is that you could apply this indicator on stocks you are interested in and at a glance see when they are behaving in a way whereby Fibonacci retracement would indicate time to buy or sell, and then do a more thorough analysis before either placing or not placing a trade.

4. Ease of Movement (EOM) 🥧

Ease of movement is a volume indicator that is also useful for determining trend strength. This metric subtracts yesterday’s average with today’s and divides the result by volume. This creates an oscillator that can give negative values.

A large positive value indicates price increases on low volume—meaning that a smaller positive result shows price increases on high volume. A large negative value hints towards price drops on low volume—and small negative numbers demonstrate a lowering price on large volume.

This indicator is designed to show how easy the current trend is—the easier it is, the more likely it is to continue. Usually the greater the number is, the stronger the trend is. So, for positive results, it indicates a rise in prices—bullish—and for negative a downtrend—bearish.

The results of EOM don’t give real trading signals on their own and are often used in conjunction with Average True Range superimposed together on a price chart. Furthermore, they are generally best used to confirm the results of another indicator than on their own.

5. Force Index (FI) 📈

Force index was created by Alexander Elder—a psychologist and trader—and published in his 1993 book Trading for a Living. It is considered a volume indicator and attempts to gauge the strength of a movement displaying its results as an oscillator.

Force Index is calculated in multiple steps and is a lagging indicator that can cover various time frames. It takes the current closing price, the previous closing price, and the volume for that period.

This is called a one-time force index and you’d have to make the same calculation for as many days as you want the indicator to analyze thus creating an exponential force index. These calculations can yield both positive and negative numbers.

A higher positive number usually indicates an uptrend featuring high volume. The same goes for negative numbers just for downtrends. Similarly, the force index tends to display less growth than the prices if the volume is comparatively low despite the rise in value.

FI is also good at confirming whether breakouts are likely to succeed or fail. As such, it could be worth a watch when something like a massive breakout for electric vehicle companies is expected, or in case of another of many governmental debt ceiling reliefs that usually spur the stock market.

If a breakout occurs without the FI jumping along with it, it can indicate that the movement will fail. If both jump, a significant, longer-term rise in prices is likely.

Still, since the force index is a lagging indicator it can often take a relatively long time—too long—to catch up with the market and can thus be of limited value. This fault becomes increasingly true the longer the period calculated is.

On the other hand, a short-term FI tends to show an aggressive zig-zag pattern that can be hard to read. Furthermore, the force index tends to grow in reliability the more days it covers.

6. Moving Average Convergence/Divergence (MACD) 📉

Moving average convergence/divergence is a rather popular technical indicator that is very good at identifying new trends and—somewhat surprisingly—has its accuracy peak during times of high volatility. It analyzes two distinct periods—one longer and one shorter—which can vary in length.

MACD actually compares two moving averages which are themselves indicators used in technical analysis. The main tool of MACD is the difference between the longer period average, and the shorter one.

If the shorter average is above the longer one, the indicator points to a rising trend. The longer one being higher hints at a drop. This indicator can also tell you the strength of the trend, and—in case the lines are switching directions—can warn you of a reversal.

However, just these reversals are the biggest weakness of MACD. It can often give false positives as a slowdown of a trend can show as a reversal on the chart. Furthermore, it isn’t able to reliably predict all actual reversals—making it, much like any other indicator, somewhat unreliable when used on its own.

7. Relative Strength Index (RSI) 💪

The RSI tries to determine whether something is being overbought or oversold, and is a fairly versatile indicator. Whenever you find an article claiming that an asset, product, or anything of the sort is being oversold, or overbought, it will usually at the very least mention RSI.

Two prominent examples of items becoming overbought in 2021 could be both cars as Matt Maley said on his on-air appearance at CNBC and GoPro in early October of the year. So, now that we know it is widespread, what is RSI?

The relative strength index puts a security on a scale between 0 and 100 with a figure above 70 indicating too much buying and one below 30 pointing that is being sold a lot.

It gets its final number by first calculating the average gain and the average loss and then dividing the former by the latter. The average gain is calculated by adding together all the periodic gains in closing prices and then dividing the number by the period.

The average loss is calculated in the same way just by adding and dividing the losses. The common wisdom says that you should enter a long position when the result is around 30 or lower as it is being oversold, and a short position when around 70 or above—it is currently being overbought.

RSI isn’t terribly good at spotting reversals and generally provides the best trading signals when the current trend is long-term. On the other hand, a long trend can cause it to lag with spotting the end of a bearish or bullish trend. Perhaps a bit ironically, this makes RSI most useful when the prices are oscillating somewhat regularly.

RSI can also create self-fulfilling prophecies due to its popularity. This occurrence could become more commonplace in the future with the proliferation of mass communication—as we’ve gotten a taste of during the GameStop Craze.

8.  Stochastic Oscillator 🚀

A stochastic oscillator is a momentum indicator that compares a particular closing price to a range of prices of a certain security over a given period. Stochastics are similar to RSI in that they are represented on a scale of 0-100.

Unlike RSI, you’ll often see two lines on a stochastic oscillator—one of these lines, the fast stochastic is a moving average. The slow stochastic is usually represented as %K and the formula would be:

%K = ( (Closing Price – Lowest price in the chosen period) / (Highest price in the chosen period – Lowest price in the chosen period) ) x 100

A stochastic oscillator is another indicator of whether something is being overbought, or oversold. However, its common wisdom buying and selling thresholds are a bit different from RSI. 80 and above indicate selling time, and 20 and below indicate you should buy.

Following the trend of the last couple of indicators, the main weakness of the stochastic oscillator is that it produces false positives—false trading signals in this case. Unlike MACD which tends to do well in times of high volatility, stochastics usually produce most false signals during such periods.

How to Practice With Indicators in Binary Trading 🧠

While any search for binary-options-related news might lead you to feel a lot of doom and gloom, we’ve seen that there are ways to make them into legitimate trading. Furthermore, they are far from the only form of trading prone to fraud as became very evident with the “Evolved apes” NFT scam.

Furthermore, while there have been some who have proclaimed binary options dead and celebrated their passing back in 2018 amid pressure from the lawmakers, they are still alive and kicking. They have, along with Forex, that has actually risen in popularity during the covid-19 pandemic, especially among the young.

Since trading, in general, can be risky, and technical indicators are shared by binary options, forex trading, and several other investment vehicles, they are certainly worth getting well-acquainted with. Practice makes perfect.

Generally, you’d want to start small and find a reliable broker. Note however that while all brokers claim to be regulated, this isn’t always the case. It is a bit easier to find a good broker in the UK and Europe as institutions are somewhat more vigilant there.

The US is a whole other game, and the top binary options brokers in America are relatively few and far between—Nadex is the only one that is fully regulated by the CTFC.

One more thing you should definitely look out for when picking a broker is whether they have a demo account option or not. A demo account is in many ways a perfect way to start practicing as it is done with virtual money—you don’t risk anything while gaining valuable experience.

Then, your brokerage platform should give you access to all the charting tools and indicators you’re going to need. Even though most brokers offer these, it’s best to check them out before buying in—one more reason to start with a demo account.

How Reliable Are Technical Indicators in Binary Trading? 💭

While technical indicators are great, they indicate, not guarantee outcomes. This means you should always take things with a pinch of salt and will have to make judgment calls repeatedly—putting things on autopilot is never a good idea when dabbling in binary options trading.

This is why we put so much emphasis on practice, and a big part of practicing is coming up with a good strategy for binary trading. There are multiple ways you can maximize the positive effects technical indicators have, and avoid their shortcomings and we’ll take a closer look at some of them.

Staying Vigilant 💂

You could view technical indicators much like birds used for auguries in ages past. They can’t exactly deliver the true will of the gods with complete accuracy but can give valuable insight into things to come. They fly low and rain might be coming, or land might be near if you are an ocean-going captain… or Noah.

And this is probably the healthiest philosophy when it comes to avoiding the pitfalls of technical indicators. Remember their limitations and remember that nothing happens in a vacuum. Case-in-point, the end of Angela Merkel’s term in Germany led to the expected market volatility of 2021’s autumn as much as any particular strictly financial factor.

A very concrete step to mitigate the shortcomings of indicators is to always try and hedge your bets. For example, you might combine a touch option with an up/down option to ensure you walk out with some money at least.

Say your technical analysis indicates that the price of a security will rise by $5 within 24 hours. However, while all indicators point towards a rise in the price, they aren’t as conclusive about that exact $5 figure,

In this case, you could go for a touch option of the security going up by $5, and another one claiming it will simply go up. Employing this method you’d have a very good chance of winning both trades, and could be almost completely certain of winning at least one.

The More the Merrier 🤲

Apart from awareness, taking advantage of the fact that indicators come in so many flavors is a very, very good idea. Using multiple technical indicators, especially from different categories—trend, momentum, volume, etc.—can give you a far clearer picture of things to come than relying on just one.

A very common combo is looking at RSI and MACD together. They form an excellent synergy as they both look at how overbought or oversold a security is while falling under different categories—RSI measures the trend and MACD the momentum.

If they both point towards the same conclusion you can be fairly certain that the prediction is right and you are making a winning trade. Obviously, nothing is stopping you from adding more indicators to your analysis to gain an even clearer picture.

Combining Too Many Indicators ⚙️

However, we’d advise against combining too many indicators when you don’t have a more-or-less equal understanding of all of the ones you are using. The entire point of these tools is to make sense of all the data you are looking at, and if they give you the information you don’t understand you are, in a way, undermining the entire effort.

This isn’t to say you shouldn’t experiment. The more indicators you use, and the more often you employ them, the better your understanding will be ensuring you’ll be better able to fruitfully utilize them in future trades.

Another benefit of using popular synergies like MACD and RSI is that they are commonplace—since so many traders rely on them they can potentially generate the self-fulfilling prophecies we’ve already discussed.

Another indicator pair with good synergy is Ease of Movement and Average True Range as when ATR is applied to EOM it can generate trading signals otherwise lacking from the latter, and less reliable on the former alone.

Technical Indicators and the Outside World 🗺️

Another element you could include with technical indicators is simply to observe the bigger picture—nothing happens in a vacuum. Apart from checking out the potential political factors, we could look at what industry professionals and big-shots are doing.

This approach isn’t without its pitfalls either though and you should maintain a keen eye for the details. For example, the story of Michael Burry shorting Tesla came in mid-May of 2021, but the text reveals that he’s been at it since at least March.

If you tried to mimic him and short Musk’s company after reading the article you’d probably lose. Between March and May Tesla did experience significant price drops but kept steadily rising for the most part from mid-May through October of 2021.

Not to beat a dead horse but this also highlights the importance of technical indicators. Just following the big-wigs isn’t necessarily reliable. Furthermore, if you simply looked at the stock charts you’d have about equal chances to decide the trend would continue and that it would reverse.

Properly employed technical analysis would have looked at all the factors and would have given you the heads up that the trend was about to reverse with more certainty than any hunch or article.

Conclusion 🏁

Binary options seem to be threading an ever-darkling path—the endless backlog of The Times of Israel articles regarding binary options fraud is evidence enough. Particularly interesting among these articles is one of undercover journalism in an Israeli binary options firm. Still, rags-to-riches stories aren’t unheard of as well and this investment vehicle doesn’t appear to be going away despite the numerous people who have long given it its last rites.

Considering this situation, maintenance of discipline when trading—especially with using technical indicators to concoct a secure strategy—and not giving into the victory rush of a successful trade, are more than worthwhile. If you play your cards right you can potentially turn big and quick binary options winnings into a long position and a very secure financial future.

Get Started with a Binary Options Broker

Account Info

Min deposit

$0

$50

Min trade size

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$0.10

Max returns

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General

Assets and instruments

Stocks Indices, Forex, Commodities, Binary Options

Commodities, Crypto, Forex, Options, Indices, Stocks, CFDs, Binary Options

Payment methods

ACH (Bank Transfer), Paper Check, Debit Card, Wire Transfer (Telegraphic Transfer)

Visa, Bitcoin, Ethereum, Altcoin, Perfect Money

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Rating

8/10 Visit Nadex on Nadex's website

9/10 Visit BinaryCent on BinaryCent's website

Account Info

Min deposit

$50

$10

Min trade size

$0.10

$1

Max returns

95%

100%

General

Assets and instruments

Commodities, Crypto, Forex, Options, Indices, Stocks, CFDs, Binary Options

Forex, Stocks, Crypto, Commodities, ETFs, CFDs, Binary Options, Digital Options

Payment methods

Visa, Bitcoin, Ethereum, Altcoin, Perfect Money

AdvCash, Neteller, Perfect Money, Skrill, Visa / Mastercard, WebMoney WMZ

US traders?

Rating

9/10 Visit BinaryCent on BinaryCent's website

8/10 Visit IQ Option on IQ Option's website

Account Info

Min deposit

$0

$50

$10

Min trade size

$1

$0.10

$1

Max returns

Varies

95%

100%

General

Assets and instruments

Stocks Indices, Forex, Commodities, Binary Options

Commodities, Crypto, Forex, Options, Indices, Stocks, CFDs, Binary Options

Forex, Stocks, Crypto, Commodities, ETFs, CFDs, Binary Options, Digital Options

Payment methods

ACH (Bank Transfer), Paper Check, Debit Card, Wire Transfer (Telegraphic Transfer)

Visa, Bitcoin, Ethereum, Altcoin, Perfect Money

AdvCash, Neteller, Perfect Money, Skrill, Visa / Mastercard, WebMoney WMZ

US traders?

Rating

8/10 Visit Nadex on Nadex's website

9/10 Visit BinaryCent on BinaryCent's website

8/10 Visit IQ Option on IQ Option's website

About the author

Tim Fries

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Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.