Key technical indicators for trading binary options

Technical indicators are used by traders as a prediction tool for market movements based on continuation patterns. They are used on graphs and charts, with the theory being that they may indicate patterns in the markets as they are forming, allowing traders to enter and exit trades with more insight into future market movements.

There are many technical indicators that can be used, but some may be more appropriate for trading binary options, which are the ones we will focus on here. 

What are technical indicators? 

Technical indicators are specific calculations that are applied to charts to analyze market movements. Each indicator makes use of data relating to price, volume or open interest, with the intention of revealing patterns or sequences that will help traders make decisions.

Technical indicators generally fall into one of four categories: 

  • Trend – these show market direction. You might also hear them called oscillators. 

  • Momentum – momentum indicators show how strong a trend is and signal where reversals might happen.

  • Volatility – volatility indicators show the extent of market movements and how much prices are changing.

  • Volume – these show the number of units being bought and sold. They are not needed when trading on Nadex, as volumes on Nadex’s markets will not influence the settlement value of your contracts. However, volumes in the underlying market (and hence its movement) have the ability to influence the price action of a Nadex contract.

Top 5 key technical indicators for trading binary options 

These are the top 5 technical indicators you can use when trading binary option contracts: 

  • Moving averages

  • Average true range

  • Moving average convergence/divergence (MACD)

  • Relative strength index

  • Stochastics

Learn a little more about each of these indicators and how they can help you become better at detecting trading opportunities for binary option contracts. 

Moving averages 

Type of indicator: trend

Moving averages are used to help traders confirm a trend using previous price action. They are known as moving averages because the data continually updates as soon as new figures are available. 

There are two types you need to know about: simple moving averages (SMA) and exponential moving averages (EMA). SMA are the simplest, giving the mean average of a set of figures. These figures are usually the closing price of a market, meaning that the average relies on past price data, which can make it slower to react. 

EMA also rely on past data, but they give more weighting to the most recent values; they account for a higher percentage of the average. This makes EMA more relevant for traders who are interested in short-term contracts. 

Moving averages are generally used alongside other indicators to give traders a fuller picture of what’s happening with the markets. You can apply various technical indicators to your Nadex charts at any one time. 

Average true range 

Type of indicator: volatility 

Average true range (ATR) is an indicator that shows volatility. The higher the ATR, the higher the volatility. To find the ATR, asset price range is analyzed over a set period of time – 14-day moving average is usually used when finding these values. ATR can be very useful when trading binary option contracts because it can indicate how much a market might move. 

What ATR can’t tell you is the direction of market movement and volatility. High volatility means lots of opportunity, but it also means you need to manage your risk as markets could move in either direction. Learn how to develop a comprehensive risk management strategy.

Moving average convergence/divergence 

Type of indicator: trend

Moving average convergence/divergence (MACD) consists of three trend indicators – a fast line, a slow line, and a histogram. The indicator is designed to show the relationship between the two moving averages. The main thing traders are looking out for with MACD is for the lines to converge, as this can indicate that a new trend is forming.

Once they cross over each other, this shows the trend has reversed and the line will begin to diverge. You can use MACD in your binary option trading to help you decide how much markets will move, and in which direction, so you can pick the best strike price available. 

Relative strength index 

Type of indicator: momentum

The relative strength index (RSI) is used to signal whether a market has been overbought or oversold. This can help traders decide whether to buy or sell, as a trend could be about to reverse. You can use RSI to help anticipate when to get into trades at the right time – in terms of binary option contracts, this means you can make an informed decision about whether to buy or sell a contract, and pick the expiry time you want. 

Stochastics

Type of indicator: momentum

This indicator is similar to RSI in that it can show whether a market is likely to have been overbought or oversold. It is set out slightly differently though, with two lines marking out trends. When stochastic lines reach over 80, it’s likely that a market is overbought and will reverse, creating a downtrend. When it reaches below 20, the opposite is likely – that the market has been oversold and an uptrend could follow. 

Tips on how to use technical indicators 

Technical analysis isn’t for everyone, but if used correctly, it can be a very good way of forming predictions and executing trades. Indicators are used to detect patterns and if you think these patterns might repeat, this could be a good method of analysis for you. 

Some of the key things you should remember when trading with technical indicators are: 

  • Be disciplined. Don’t rely on any method of predicting the markets 100%. Use your own judgement and have a trading plan in place.

  • Experiment. Do your homework and find the right technical indicators for you. Try some out to see which ones work with your trading plan and the markets you want to trade.

  • Put in the time. Trading requires commitment. Spend time learning about the markets and the different indicators, getting familiar with the Nadex platform and charts.

Key takeaways

There are five key technical indicators that can be especially useful when trading binary option contracts. These can easily be applied to your charts on Nadex to help you spot patterns, find trends, and make informed market predictions. 

In addition to these five, there are numerous other technical indicators you can explore, many of which can be useful when trading binary option contracts – this is just a start. As you trade, you will find your own technical indicator preferences that work for you and your trading plan

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