Using Channel Identification in Binary Options Strategy
Traders dream about stumbling across an asset trading in a channel. It has all the advantages as trading with the trend, but also provides a bunch of signals which make trading really profitable. Channels are often hard to identify and carry a risk of breaking unexpectedly, which is why they often aren’t discussed in many binary option strategies. But when they do appear, they can give the opportunity for substantial profit in a short time, which makes them worthwhile to discuss.
A channel is basically when the market get’s confined between two trendlines. There are several reasons for why the market would behave like this, such as investor risk appetite, Fibonacci levels among others. But that’s really advanced, and is only useful to someone who spends all day tracking the market.
So how can you identify a channel? Well, this is what one looks like:
Channel identification
Notice how the market obligingly keeps between the two red lines, and each time it comes up to touch one, it backs off. Channels never last forever, so what you are looking for is to get in a few good trades while it lasts and always keep an eye out for what happened near the end when the channel ended. In this chart, you could have had up to 11 trades between puts and calls that would end up in the money.
As you can see, the principal advantage of a channel over trading a trend is that it gives you signals in both directions – whereas in trend trading you only get signals in one direction. This potentially doubles the number of trades you can make.
Catching a channel
Of course in that picture, it’s pretty easy to identify the channel once it has already formed. The idea is to catch it in the beginning stages. To do that, we turn to our handy charting software, and open a chart as a line graph. The reason is that the tops and bottoms of movements are easier to identify because a line graph only shows the close for each period. Here’s what that chart above looked like as the channel was forming:
Channel identification: Channel forming
Near the end it looks like there might be a down trend forming. A trend of course is a great opportunity to trade on its own merits, but if we want to see if the trend is sticking to channel, we need to find three pivot points.
Pivot points are where the market changes direction, and they are conveniently indicated with the arrows. Any trading software worth its salt will have a channel tool that you can apply to the graph. You want to trace the channel tool over the two points that are on the same side. In this case they are the two on top like this:
Channel identification: Tracing the channel
Note how the drawing points are placed on the points of the movements. If your software doesn’t have a channel tool, you can draw a channel with two trend lines. Just remember that they have to be parallel, which can be a bit tricky to draw.
Then you want to switch your chart to Japanese candlesticks. You always have to be alert for the possibility that the market will break out of the channel, but in the mean time, you want to watch for when the market comes down to touch one of the sides of the channel. As long as the market stays in the channel that means it the market will move in the opposite direction and is a great opportunity to buy an option.
If the market touches the top of the channel, you want to buy a put – expect the market to go down. If the market touches the bottom then you buy a call – expect the market to go up.
Typically you’d set your chart to the same timeframe as the expiry of your options. For example, if the options expire every 15 minutes, then you want to chart in a 15 minute period.
This strategy works in conjunction with other trend strategies, giving you an second set of signals to either confirm the trend or show retracement opportunities.